Corona Crisis May be Turning Point for ‘Just in Time’ Supply Chain Era, as Inventory to Sales Ratios Head Higher after Decades of Contraction

“Supply chains have been built to be very lean and efficient, but that doesn’t work in a crisis and it is not proving to be revenue maximizing. I think that we should have every expectation that the supply chains of our customers will carry higher inventory levels going forward,” Caton said in the latest edition of U.S. industry association Nareit’s REIT Report podcast.

Inventory to sales ratios, which measure how efficiently a company manages its stocks,  have been in a 30- to 40-year downward trend, but troughed in the last cycle and have since started to creep higher. Caton sees inventory levels rising in the medium to long term, but expects a ‘push’ in products coming through supply chains over the next few weeks.

“If we look at activity in the real estate logistics space, there was good momentum in January and February and real outperformance of economic activity. We’ve seen resilience in the second part of February and first part of March, but a little less happening in the rest of the month. A lot more will happen in April.”

After a decade of ‘outsized’ growth in ecommerce, Caton also predicts the rate of online market penetration will accelerate in the wake of the coronavirus crisis and the range of products purchased through the Internet will widen. Another longer-term trend he foresees is that Mexico, Poland and other countries in Central and Eastern Europe, will likely grow in importance as key logistics hubs. Manufacturers are evaluating a wider range of production locations and these countries are favourably situated, he said. Related second- and third-tier suppliers will follow, he added.

With logistics real estate supply already very tight and new development activity potentially curtailed in the wake of the coronavirus pandemic, warehouse vacancy rates could slip further beyond current historic lows, Caton said.  While the current financial market uncertainty is likely to be a headwind for all forms of real estate, logistics included, the warehouse sector has benefited from historic low vacancy rates, strong demand and disciplined supply.

“The responsiveness of supply to uncertainty in demand is higher in logistics real estate than in other categories, so we’re watchful for how the development market responds. That in turn may mean that vacancy rates may remain a bit lower than would be expected,” he said.

Notwithstanding the current ‘fluidity’ in the market, the long-term outlook remained stable, Caton added.

“We think the investment space is going to recognize the relative beneficial attributes of logistic real estate in terms of long-term demand and drivers against other categories that have more uncertainty. Investors are going to have the potential to look through the short-term volatility and reassess the logistics real estate space. That’s something that’s been happening over the last decade and I think it will continue to happen given some of the structural changes likely to come out of all of this volatility,” he concluded.

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