By Meghan Hall
The world is more integrated than ever. Goods and services are not just traded across borders, but often produced in multiple countries, giving rise to carefully intertwined production lines and supply chains. The COVID-19 pandemic has underscored the connectivity of these supply lines, and manufacturers are needing to adjust in order to protect their business interests and maintain growth. Analysis recently released by Cushman and Wakefield takes a look at these trends and their impact on the rapidly evolving commercial real estate industry both in North America and abroad.
Cushman and Wakefield contends that the pandemic has had a “significant” impact on the manufacturing industry and recovery of the sector lies in two main factors: the International Monetary Fund’s GDP growth forecast and the percentage of countries’ populations who have been vaccinated. The IMF’s growth forecast–which measures global economic growth–will provide a baseline for how the world’s economies will fare. A strengthening economy means a stronger manufacturing sector.
Additionally, as vaccination levels increase, hopefully mitigating the impacts of the pandemic and allowing work to resume, the manufacturing industry is also expected to grow.
“These are huge indicators for the industrial industry in general,” explained Cushman and Wakefield’s Carolyn Salzer. “Vaccination rates apply mostly to labor; we’re seeing labor shortages across the world. There just isn’t enough of it. Once the GDP grows and the economy starts stabilizing…it makes it a lot easier to see that growth coming for the manufacturing sector.”
Nations with the highest vaccination rates include Canada and the United Kingdom, with nearly 70 percent of their populations vaccinated. China is not far behind, with just over 60 percent of its population. Germany and Spain round out the top five for vaccination rates with just under or about 60 percent of their populations vaccinated, respectively. The United States, by comparison, has 55 percent of its population vaccinated. However, worldwide, only 25 percent of the global population has been inoculated.
Despite these vaccination rates, however, the Americas–and especially the United States–are still facing labor shortages. Data indicates that at least through February of 2021, manufacturers were struggling to fulfill 46 percent of open positions, a 12 percent increase since 2018. Much of this shortage is a result of not just a mismatch of skills, but competition from the warehouse and distribution sector.
Much of the manufacturing sector’s growth, up to this point, has come not just from increasing trade and e-commerce, but growing populations, as well.
“As people want more stuff, populations are growing, therefore we need more manufacturing facilities to make that stuff. And within the commercial real estate industry, we need more places to store that stuff,” said Salzer.
In the Americas, demand for industrial space across the manufacturing and distribution industries continues to outpace supply. During the first half of 2021 alone, the industries have absorbed 200 million square feet of inventory. Vacancy rates for industrial space in the United States stands at 4.5 percent, Canada and Mexico sit at around two percent vacancy. The numbers are the lowest Cushman & Wakefield has ever reported, and the second quarter was the strongest reported for absorption. Record leasing levels were also recorded across European markets, totaling 337 million square feet over the past year, a 30 percent increase.
Salzara continued, “We are at record low vacancies for the first half of 2021. It’s crazy.”
How demand for commercial real estate space will evolve is a major question for those tied to manufacturing and distribution industries moving forward as businesses strive to protect supply chains disrupted by the pandemic. According to Cushman & Wakefield, manufacturers reduced reliance on just-in-time (JIT) practices by holding more inventory closer to factories and major population centers. While this business model can be more expensive, shifting away from a “100 percent” JIT model makes it easier for businesses to adjust materials flows.
For regions like North America, re-shoring or near-shoring are becoming of increasing priority as businesses seek to build resiliency within their supply chains. Cushman and Wakefield also emphasizes that for many companies, having “functional, well-located” real estate will be key. However, these changes, when they do come, are not likely to take place until several years down the line.
“It’s really, really difficult to completely change your supply chain overnight,” said Salzar. “It really depends on the type of company, and it’s probably going to be a few years out before we see any major structural shifts.”
However, Salzar also noted that real estate is one of the smallest costs within a supply chain, accounting for about only 5 percent of the total cost. “The actual physical space is probably the least expensive part of the whole thing,” she said.
For the manufacturing and distribution industries to grow, though, the sectors will need to overcome a number of challenges outside of those caused by the pandemic. Environmental pressures and natural disasters, geopolitical factors and trade agreements are just several of the factors that will continue to impact the sector long-term. Cushman & Wakefield believes however, through investment in technology, automation and other services, like trade programs and education, the industry can be more resilient–and that the U.S. and North America will be able to support more manufacturing and distribution-based jobs.
“If we are able to do that, it will make it easier for companies to locate their facilities within the U.S. or North America, which is great for the commercial real estate industry because that provides more demand for space in the market, which is what we like to see,” stated Salzar. “[Challenges] are not always going to be pandemic-related, but there will always be these curveballs thrown into the supply chain. It’s about building resiliency.”