China's Zero-Covid Policy Is More Proof There's No Going Back For The Supply Chain

More than two years since the pandemic began throwing the global supply chain into chaos, continued instability is driving permanent strategic shifts rather than short-term adaptations.

The industrial market’s rise over the past two years represented an acceleration of society’s ongoing adoption of e-commerce. But the dramatic and unpredictable slowdowns China’s zero-Covid policy is imposing on its manufacturing and shipping sectors have contributed to a paradigm shift, changing how companies of all stripes source materials, assemble products and ship them to consumers.

Many logistics experts and economists doubt China will be able to stomach the economic impact of continuing to shut down factories and ports at the barest hint of a coronavirus outbreak. At this point, though, the consequences of a global economy getting used to an unreliable supply chain have begun to emerge.

“The fact that we’re two years into chronic supply chain congestion has effects from the consumer on up to industrial developers and occupiers,” Newmark National Industrial Research Director Lisa DeNight said. “It’s almost a normalized state of supply chain congestion.”

Apple, the largest company in the U.S. by market capitalization, has instructed its manufacturing contractors to look into building long-term production infrastructure in India and Southeast Asia, a notable shift from previous instances of using non-China markets for stopgap or overflow measures, The Wall Street Journal reports. The past year-plus has seen a series of commitments to major factory complexes to build electronic vehicles from specialty automakers such as Rivian to legacy companies like Ford.

These are not the decisions of companies expecting a return to pre-pandemic dependence on China.

“I think we’re at the inflection point,” said Doug Ressler, director of business intelligence for industrial research platform CommercialEdge, citing newly announced EV plants and Samsung’s decision to place a chip-making facility in the small town of Taylor, Texas. “If you connect the dots, you’ve got a paradigm shift.”

The vast majority of companies lack the influence or control over their supply chains to push suppliers out of China. That hasn't stopped them from looking for ways to reduce dependence on the Pacific Ocean shipping corridor and the choked West Coast ports of Los Angeles and Long Beach anyway, multiple experts told Bisnow.

For some, it may mean stockpiling more inventory domestically, which many companies have been attempting to do since the pandemic began but have been unable to find or afford suitable space for it.

Despite the economy contracting in Q1, demand for warehouse space continued to significantly outpace the construction pipeline for new supply, promising to continue driving rents higher in the next year, according to CommercialEdge’s quarterly report. Though Amazon and its largest competitors are realizing that they may have expanded too fast, the warehouses they could either sublease or give back open up opportunities for the users that were outbid on those spaces initially, Tenant Risk Assessment CEO Brad Tisdahl said.

“If large users are able to provide some supply by subleasing or giving back space, research says there are plenty of users ready to absorb that supply,” Tisdahl said. “There might be more than enough to offset that [increase in] supply.”

To the degree that small and midsized companies can adjust their supply chains, they have been doing so, from seeking out existing suppliers of materials and parts in the U.S. and Mexico — no small task — to shortening the time it takes for inventory to make it to American shores by shipping components to be assembled domestically, rather than importing finished goods.

“We do see a resurgence in small companies assembling parts over here, whereas in the past, everything was being done in China and the domestic side was pure distribution,” said SVN Commercial Advisory Group Senior Advisor Sid Bhatt, who advises on lease deals and investment sales in Florida.

To the degree that any manufacturing or assembly business is returning to U.S. shores, it fulfills one of the most common political promises of the past decade, including from President Joe Biden and his predecessor, Donald Trump. Several ports on the East Coast and north of Los Angeles and Long Beach are underway on projects to boost their capacity, adding berths and deepening waters so that larger boats can dock, DeNight and Ressler said.

“Development is going on at East Coast ports on things for which Los Angeles and Long Beach have a 30-year head start,” Ressler said, citing work done in Baltimore’s Inner Harbor as an early example of heavier infrastructure being met with immediate leasing success at the nearby distribution hub known as Tradepoint Atlantic. 

Funding from the bipartisan infrastructure bill figures to accelerate such projects; the widening of the Suez Canal — expected to be completed next year — could increase the ability of importers to accept longer sea shipping routes in exchange for cheaper and less congested ports on the East Coast, Ressler said. 

Land for industrial development is plentiful near the ports of Savannah, Georgia; Charleston, South Carolina, and Norfolk, Virginia, when compared to the dense industrial markets of Northern New Jersey and California’s Inland Empire. Near historic industrial hubs like Baltimore and Philadelphia, warehouses from generations ago, or obsolete suburban office buildings are already popular targets for redevelopment. Those trends are already prevalent in California and will only accelerate as East Coast ports gain capacity.

“Hilco’s refinery redevelopment in Philadelphia is a great example of this kind of generational reimagining of what the next 10, 15 years is going to bring to a market,” DeNight said, referring to a project that could bring over 10M SF of industrial space to a site close to Philly’s urban core. 

With the popularity of industrial real estate among both tenants and potential investors, capital has been plentiful for funding bold reimaginings of corporate supply chains in the past two years. Yet with inflation still at historic highs and the Federal Reserve’s monetary policy growing more hawkish to bring it in line, that dynamic looms as a larger danger than any coronavirus-related logistics challenge for its potential impact on both the cost of capital and consumer behavior.

“It seems that the desire to paint our current economic condition as transitory has been borne from the idea that our challenges are more supply-oriented than demand-oriented,” Tisdahl said.

“But as supply challenges persist, inflation could then potentially create and compound demand challenges, which would affect companies’ ability to afford new factories and to change their supply chains.”