February 28, 2022

Can Industrial Real Estate Handle the Safety Stock Boom?

Can Industrial Real Estate Handle the Safety Stock Boom?

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At the height of the COVID-19 pandemic, retailers started to run out of inventory, and manufacturers ran out of raw materials to make more. As a result, stockouts among U.S. retailers jumped from 14% in 2019 to 35% in May of 2020. Nearly two years later, many retailers continue struggling to keep goods on the shelves in the face of increased demand. Many manufacturers still can’t get the essential components they need, such as semiconductors, steel, wood, and much more. These ongoing inventory shortages have led businesses to reconsider their procurement and inventory management strategies.

What is Safety Stock? And Why Didn’t Companies Always Do It?

While some organizations may have held some inventory in reserve for emergencies as a best practice, the majority of business leaders around the world have spent decades trying to squeeze every last cent out of operations through Just-in-Time (JIT) production and logistics practices. Just-in-Time is just what it sounds like—raw materials arrive within mere hours or days of when they are needed on the production line, and goods get produced and shipped out to distributors and retailers just in time to fulfill orders or stock shelves.

By keeping goods on the move or in the sales cycle instead of stored in warehouses, retailers and manufacturers alike could significantly reduce costs associated with holding inventory. So, it’s understandable how JIT got so popular, given that the practice has undoubtedly saved countless billions over the past few decades by helping companies reduce storage costs.

However, the pandemic demonstrated the fragility of Just-in-Time strategies to supply chain leaders around the globe. It has now become clear that extreme Just-in-Time practices pose a critical threat to business continuity in most industries. As a result, companies are looking toward “Just-in-Case” strategies to mitigate the risk of inventory shortages.

With Just-in-Case, a company holds essential inventory in reserve to ensure operational continuity in the event of a supply chain disruption. For a manufacturer, that could be a few weeks of steel or microchips, whereas a retailer might store an extra month of top-selling products. Of course, the exact amount of buffer stock may vary widely based on forecasting data, storage availability, and numerous other factors. Generally speaking, however, releasing the extra inventory as needed to fill gaps in a disrupted supply chain can help avoid production stops and lost sales.

The Safety Stock Domino Effect

The sudden transition to Just-in-Case inventory strategies has profoundly impacted industrial real estate. With industrial capacity already severely limited, both in the United States and globally, industrial real estate stakeholders must now also find a way to produce enough capacity to accommodate higher held inventory levels among manufacturers, retailers, and distributors.

Efforts to build and store an average of 10% safety stock, combined with additional efforts to address existing inventory shortages, may create as much as 800 million square feet of future demand in the U.S., according to Prologis. Meanwhile, vacancy in U.S. industrial real estate dropped below 4% for the first time in Q4 2021. New industrial inventory gets grabbed up as fast as it becomes available, as evidenced by the 100 million square feet of industrial absorption in Q1 2022.

Safety stock now joins e-commerce, reshoring, and restructuring supply chain as an industrial real estate demand driver. Even with 375 million square feet of new inventory in development this year—and various other creative strategies in play to produce usable space—there’s no doubt that industrial real estate demand will remain strong for the next several years at a minimum.

About Phoenix Investors

Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.

Since 1991, Frank P. Crivello has served as the senior advisor to the Trusts, and today is Chairman of Phoenix Investors. Given his extensive experience in all aspects of commercial real estate, Mr. Crivello provides strategic and operational input to the Trusts, Phoenix Investors, and affiliated companies. Mr. Crivello began his real estate career in 1982 focusing his investments in multifamily, office, industrial, and shopping center developments across the United States. In 1994, Mr. Crivello shifted his focus to the support of the Trusts. From 1994 to 2008, Mr. Crivello assisted Phoenix Investors in its execution of its then business model of acquiring net lease commercial real estate across the United States. Since 2009, Mr. Crivello has assisted Phoenix Investors in the shift of its core focus to the acquisition of industrial real estate throughout the country. Mr. Crivello received a B.A., Magna Cum Laude, from Brown University and the London School of Economics, while completing a double major in Economics and Political Science. Mr. Crivello is a member of Phi Beta Kappa. Outside of his business interests, Mr. Crivello invests his time, energy, and financial support across a wide net of charitable projects and organizations.

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