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At the end of 2021, cargo ships began to pile up outside of the San Pedro Bay Port Complex off the coast of California waiting for a place to berth. It was a traffic jam like no other. In October, the queue swelled to more than 80 ships sitting in the harbor for as long as two weeks. It was a record for the massive port system, which is the ninth-largest in the world and handles nearly half of all cargo delivered by sea into the US.
The backlog of ships was a demonstration of the severe supply chain complications that erupted as the world re-opened following the pandemic. Commercial real estate developers have pegged supply chain disruptions among the top challenges the industry will face this year, and now the war in Europe is exacerbating pressure on an already overburdened system.
Developers are seeing substantial delays in materials and equipment shipments alongside inflated costs as a result of the disruption—but the supply chain crisis doesn’t have to kill deals. Sophisticated developers are learning about the issues plaguing the supply chain, planning for delays and investing in technology to seize opportunities, even in trying times.
Supply Chain Pain
Port congestion quickly became the symbol of the supply chain woes in the US—the reason why grocery store shelves are bare, Amazon shipments delayed and the PS5 is still on back order—but delays at the port are only one link in a broken chain. Trucking shortages, warehouse shortages and increased freight costs are all contributing to the crisis.
Labor shortages are at the heart of the problem. According to the American Trucking Association, the US is short 80,000 truckers to meet current demand to transport goods. This has left cargo at the dock waiting for an available truck, while ships wait in the harbor. From the port, warehouse space is the next link in the supply chain, and again, there is a shortage. Los Angeles and the Inland Empire—the two markets that serve the ports—have the lowest availability of warehousing space in the country with a record low .5% vacancy rate in both markets. All the while, businesses are navigating these supply shortages under the shadow of repressive freight costs. In September 2021, the cost to ship a standard 40-foot container from Shanghai to Los Angeles, a popular route, reached a record $12,400. In February 2020, the same container would have cost less than $2,000 to make the journey. While prices have fallen about 4% in the first quarter of 2022, Drewry data shows that the cost remains 400% above pre-pandemic pricing.
The broken supply chain is creating significant delays in materials shipments for developers. Contractors are waiting 35 to 45 weeks for steel joists, the standard wait time before the pandemic was six weeks; 180 days for roofing installation compared to 14 days prior to the pandemic; and six months for HVAC equipment. As a result, commercial developments are taking an average of three months longer to complete, according to Moody’s, while some construction companies have seen delays up to six months.
Navigating Development Delays
When prices increase, businesses usually pass the cost onto the consumer—one factor behind the current 7% inflation rate; however, after years of construction cost increases, an affordable housing crisis and record pricing for commercial properties, developers don’t have the luxury to increase rents enough to offset inflated costs or the increased carry expenses that come with development delays. Still, developers are forging ahead and evolving to meet this moment.
Technology is playing a key role in alleviating these pain points for developers. Mastering the supply chain requires an abundance of commercial real estate data. In an interview with Forbes, Greg Leung, CEO of Connect Homes, a California-based builder, said, “Supply chain management is all about information and decision making. In technology, over decades of management, there is a great deal of information, and stakeholders have learned to use data to make decisions on supply chain visibility and inventory, which means it can be managed better.”
Technology is making a difference by tracking and analyzing materials shortages. Shortages happen for a variety of reasons. Some contractors will stockpile materials in fear of escalating prices, which in turn creates a shortage and drives up prices. Data can offer insights into materials consumption patterns, empowering development stakeholders to make informed decisions about materials purchases and plan ahead for potential delays, if not mitigate them altogether.
As a technology company that harnesses the power of real estate data and analytics for its clients, Northspyre has already seen the benefits of information. These tools alone can help developers customize budgets and schedules in real-time to accommodate a wide range of outlying factors. This technology has been proven to drive down the cost of development and better manage construction timetables.
Automation and smart warehouses are also shaping the future of supply chain management. These tools can optimize the physical operations of a construction site, manufacturing plant and warehouse facilities. While developers can utilize automation on their own construction site, working with forward-thinking third-party vendors that are utilizing automation is another opportunity to mitigate supply chain delays.
Exploring New Opportunity
There is no doubt that the supply chain disruptions have created a headache for developers, but it is also creating opportunities. Industrial properties and retail storefronts both play a vital role in the supply chain, giving commercial real estate owners and developers an opportunity to play a role in the solution.
In the US, the industrial vacancy rate fell below 4% for the first time in history, illustrating record demand for storage space. Developers are ramping up construction activity across the country in response. The pipeline for ground-up construction hit 467 million square feet this year, and more than 20 individual markets have a construction pipeline greater than 8 million square feet. In addition to ground-up projects, the supply chain disruptions are also fueling the re-shoring of manufacturing jobs, creating increased demand for industrial facilities.
The demand helped push industrial rents up 11.3% last year to $7.11 per square foot, giving developers confidence that they can achieve pro forma rents even in the face of escalating construction costs. With the combination of fervent demand and rising rents, developers are finding ample opportunity to bring new supply to market.
And, that is so often the dichotomy of commercial real estate development, even in times of crisis, there is still opportunity—if you have the right team and the right tools.
Tag(s): Real Estate Technology
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