Disruptions to global supply chains and shipping have consumer goods and logistics companies scrambling to increase their inventories and expand their warehouse space, creating opportunities for industrial and logistics property investors and owners.

Supply chain shifts and continued e-commerce growth will be major factors in global demand for industrial space, says CBRE’s latest Viewpoint on Supply Chain Disruptions Creating Opportunities for Industrial and Logistics Real Estate.

The report points out continued Covid-related disruptions have caused instability in the supply of key materials and components for global industrial production. Asia’s major manufacturing hubs were largely shut early last year by the Covid Delta outbreak, which constrained global supply chains and raised costs. It coincided with an unexpected boom in demand for goods and supply chain congestion intensified.

The lockdowns led to massive international demand for goods and resulted in shipping bottlenecks across the world. Ships have been queuing at Auckland and Tauranga ports as congestion and delays mount. Ports of Auckland spokesman Matt Ball says shipping schedules have been thrown into disarray and ships are arriving late. It has meant on occasions there might be five ships lined up in the channel waiting to get into port.

This has resulted in a freight rate super-cycle. Some importers have pointed the finger at the three major shipping alliances controlling 80% of the market. The average cost of shipping a standard large container (a 40-foot equivalent unit) has surpassed US$10,000 ($14,050), some four times higher than a year ago.

To compound matters, shipping companies are under pressure and container shipping giant Maersk, for example, is only offering contracts to its top 200 clients worldwide – essentially those sending more than 100 containers a week – leaving most New Zealand businesses relying on the spot price market, where there is no predictable pricing.

New Zealand has been one of the countries most impacted by the crisis. Not only is the country an island nation heavily dependent on shipping, but it is at the very end of shipping routes, meaning everyone experiences all the delays.

Even toilet paper brands Quilton and Savers closed in NZ last year, citing the high cost of shipping paper pulp from other countries.

Market Change

These problems also bring opportunities for small and large warehouse and logistics investors, developers and owners. The CBRE report is forecasting strong industrial space demand for markets near large populations, as well as seaports, inland ports and major air hubs.

It says the just-in-time paradigm, which allows for receipt of goods as close as possible to when they are needed, has been shattered by trade tensions, labour shortages and Covidrelated shutdowns. “It just isn’t part of the market now,” says Paddy Callesen, Savills industrial expert.

Early in the pandemic, many companies also decided to curb production in anticipation of a global economic crisis. When the boom in demand hit, production was already well behind. In response, companies along the supply chain are leasing warehouse and distribution space at a record clip to store more inventory while also meeting the needs of a growing online consumer base.

About one-third of respondents to CBRE’s EMEA 2021 Logistics Occupier Survey indicated a preference for this approach. Logistics companies say they are willing to explore non-traditional locations; urban logistics is becoming a high priority; labour costs and availability remain vitally important when selecting a location; Covid-19 will continue to generate additional demand for warehousing space and flexible lease terms and lease costs are increasingly important.

Logistics businesses are now the biggest client in the Auckland industrial market – looking for land to build and property to lease. “However, there is limited space,” says Callesen.

“Many logistics companies, investors and owners want six to seven hectare sites, which are impossible to find as Auckland industrial land is so fragmented.

“When Covid first hit everyone and everything stopped. People thought they were going to die. For six months nothing happened. The bigger industrial property companies put a hold on everything. Builders worried they might not have any work. When click and collect started again, companies began bringing in more inventory — instead of two containers they might bring in 12 and most of the inventory needs storing. It’s a never-ending issue for logistics and warehousing companies. They need space in a hurry.”

While there has been a resurgence in industrial property development, Callesen says it has not really caught up. He puts it down to a lack of foresight by Auckland Council which has prioritised rezoning land for residential development, forgetting about business land.

Economic Rents

Affordability is also a major factor and businesses are having to look further to Drury South, which is basically sold, Pokeno and even Hamilton North. “It takes a couple of years to build a large shed and during that time costs surge and rents can only be pushed so far, so deals are not stacking up,” he says. “

Because of the land shortage, land and surging construction costs, rents are rising, some logistics and warehousing businesses are paying what are termed economic rents for any space they can lease — rents they might not have paid in a market that has plenty of industrial vacancy — just to store their goods and these eventually turn into market rents. It’s good for industrial property investors, but perhaps not for the industry.”

Another aspect to the sector is many logistics firms have a business that is a client. The logistics company will lease premises on the client’s behalf and operate their warehousing and distribution and prefer two to threeyear leases, whereas industrial property owners, more often than not, want fiveyear leases.

“It becomes tricky,” says Callesen. There is also a lot of interest from logistics and warehousing companies in temporary storage and yard space as they race to find storage in a tight market. At the end of last year, Callesen says the market’s financials started turning slightly. “Because land and construction costs are rising rapidly, credit is hard to obtain and interest rates are rising, yields have come off, cap rates have softened and the logical conclusion of that is land prices will fall — it hasn’t happened. It is hard to predict what will happen in this type of market.”

Meanwhile, Colliers International’s predictions for the industrial market this year are:

1. Vacancy rates will remain stubbornly low adding pressure to a sector that has experienced a boost in tenant demand from the continual expansion in warehousing and logistics, storage, construction activity and manufacturing services.

2. While the addition of consented supply reaches near record highs, it is unlikely to provide the immediate relief in costs and options tenants desire.

3. Rents rose quickly last year and a higher inflation rate will keep rental growth rates high, which is good for investors