Industrial and Logistics Real Estate: The Ongoing Supply Chain Disruptions and Their Potential Impact on Rental Surges

Significant disruptions to the supply chain were triggered late last year when Houthi rebels in Yemen initiated attacks on ships entering the Red Sea en route to the Suez Canal. This vital artery for vessels moving between Asia, Europe, and the East Coast of the United States saw ships avoiding the waterway, opting for the longer route around Africa, thereby extending their journeys by up to two weeks.

Meanwhile, a severe drought in Central America significantly dropped water levels in the Panama Canal, forcing authorities to limit the number of ships passing through this crucial conduit for international trade. This limitation could potentially lead to delays in shipments and increased costs for businesses relying on the Panama Canal for their supply chain operations.

In recent weeks, dockworkers have threatened to strike on the East and Gulf Coasts of the United States, while longshore workers at German ports have halted shifts in pursuit of better pay. These potential strikes could lead to significant delays in shipments, affecting businesses across various industries. Rail workers in Canada are also poised to walk off the job, imperilling cargo moving across North America and threatening backups at major ports like Vancouver and British Columbia.

The intensifying upheaval in shipping is prompting carriers to lift rates while raising the spectre of waterborne gridlock that could again threaten retailers with product shortages. If the pandemic's supply chain disturbances proved anything, it was this: Trouble in any one place tends to ripple out widely.

With container traffic through the Suez Canal dropping to one-tenth of its usual flow, most ships moving between Asia and Europe now circumnavigate Africa, burning more fuel.

At the same time, carriers have concentrated their fleets on the most lucrative routes, such as those connecting Shanghai and the Dutch port of Rotterdam, Europe’s busiest. This has forced cargo bound for other destinations to stop for loading and reloading at major hubs known as transhipment ports.

The largest such ports, including Singapore and Colombo, Sri Lanka, are now overwhelmed with incoming vessels. Ships must wait at anchor for as long as a week before pulling up to the docks.

The greatest concern is that floating jams could become a self-fulfilling prophecy. As importers absorb the reality of increased shipping prices and port congestion, they are ordering early. This could result in a surge of incoming cargo at major ports, exceeding the capacity of transport and warehouses.

The South African Context

These global supply chain challenges will significantly affect South Africa, a player in international trade. The nation's reliance on both imports and exports means that any hiccup in the global logistics chain can have outsized effects on its economy. Higher shipping costs and delays could stunt growth and exacerbate inflation.

The global supply chain disruptions underscore the interconnectedness of modern trade. As South Africa navigates this potential "Covid junior" scenario, the resilience and adaptability of its logistics sector will be tested.

Warehouses: A Precious Commodity

Global supply chain disruptions are significantly impacting the industrial and logistics real estate sector. One major consequence is the heightened demand for warehouse space as companies rush to secure storage for their goods due to shipping delays and unpredictability. This increased demand is leading to higher prices and a shortage of available space.

During the height of the pandemic, businesses quickly realized the importance of having adequate storage space to buffer against supply chain interruptions. With renewed disruptions in global logistics, companies are once again hoarding goods to mitigate risks, leading to warehouses filling up faster than they can be emptied. This hoarding behaviour is particularly pronounced as businesses prepare for critical shopping seasons, aiming to avoid the pitfalls of stockouts and delayed deliveries.

This trend is evident in the increased occupancy rates of industrial and logistics real estate in South Africa. Smaller logistics companies operating within Inospace parks are especially impacted, as they face fierce competition for available warehouse space. This competition drives up rental prices, making it more challenging for these businesses to maintain their operations without significant cost increases.

Industrial and Logistic Rental Surges

The surge in demand for warehouse space over the last five years has led to a sharp rise in rental rates. Industrial real estate markets in key areas such as Johannesburg and Cape Town are experiencing heightened competition, with prime warehouse spaces becoming increasingly scarce. In Cape Town today, industrial and logistics occupancies are close to 100%. There are hardly any vacant industrial spaces available. Johannesburg and Durban are not far behind.

The scarcity of space and the urgency to stockpile goods have pushed prices upward, creating a landlord's market where tenants have little negotiating power.

This environment is particularly challenging for smaller logistics firms that may not have the financial flexibility of larger corporations. The higher costs of securing and maintaining warehouse space add to these companies' operational burdens, further squeezing their margins and limiting their ability to scale or invest in other areas of their business.

Long-Term Outlook for Industrial and Logistics Real Estate

The current dynamics in the industrial and logistics real estate market suggest that these pressures are unlikely to abate soon. As companies continue to grapple with supply chain uncertainties, the demand for storage space will remain high. This persistent demand could lead to longer-term price increases and tighter market conditions, impacting the overall logistics landscape in South Africa.

Moreover, the increased costs associated with warehousing are likely to be passed down the supply chain, affecting the prices of goods and services. For consumers, this could mean higher prices and fewer available options, contributing to inflationary pressures in the economy.

To navigate these challenges, companies are exploring various strategies. Some are investing in technology to improve inventory management and optimise space utilisation, while others are considering shared warehousing solutions to mitigate costs. Additionally, there is a growing interest in developing new industrial real estate projects to meet the soaring demand.

The ongoing supply chain disruptions will continue to reshape the industrial and logistics real estate landscape in South Africa. The resulting demand and price surges for warehouse space present both challenges for tenants and opportunities for industrial property investors. Industrial and logistics real estate is one of the booming markets and, unlike other real estate sectors, is tied to international trade and events. This may indeed be the sector's Goldilocks moment.