Industrial and Logistics Real Estate: The Ongoing Supply Chain Disruptions and 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, 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 lead to shipment delays 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 shipment delays, 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 significant ports like Vancouver and British Columbia.

Global supply constraints ripple across the world

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 chain disturbances proved anything, it was this: Trouble in any one place tends to ripple 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. This has forced cargo bound for other destinations to stop for loading and reloading at major hubs known as transhipment ports.

The largest ports, including Singapore and Colombo, Sri Lanka, are now overwhelmed with incoming vessels. Ships must wait at anchor for a week before going to the docks. The most significant concern is that floating jams could become a self-fulfilling prophecy.

Floating water jams could become a self-fulfilling prophecy

As importers absorb the reality of increased shipping prices and port congestion, they order 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 influence on imports and exports means that any hiccup in the global logistics chain can have oversized effects on its economy. Higher shipping costs and delays could stunt growth and exacerbate inflation.

A "covid-junior scenario is a real possibility

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 significantly impact the industrial and logistics real estate sector. One significant 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 leads to higher prices and a need for more 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.

Hoarding behaviour and "just in case" supply causes massive effects on warehousing

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 significantly impacted, facing fierce competition for available warehouse space. This competition drives up rental prices, making it more challenging for these businesses to maintain 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 critical 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 nearly 100%. There are only a few vacant industrial spaces available. Johannesburg and Durban need to catch up.

The scarcity of space and the urgency to stockpile goods have pushed prices upward, creating a landlord-tenant relationship in which tenants have little negotiating power.

This environment is particularly challenging for smaller logistics firms that may need more financial flexibility than giant corporations. The higher costs of securing and maintaining warehouse space add to these companies' financial burdens, further squeezing their margins and limiting their ability to scale or invest in other business areas.

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 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.

Industrial investors are the best placed investment sector right now

Moreover, the increased costs associated with warehousing will likely 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.