IAMC Members on the Front Line of COVID Supply-Chain Solutions
by John Salustri
By John Salustri
Arguably, the most visible sign of what President Trump calls this “invisible enemy” of COVID-19 is the rows of empty store shelves. What most consumers can’t see for all the missing bathroom tissue and white bread is the strain those shelves are putting on the supply chain. But corporate real estate managers, IAMC’s membership, see it, and they’re on the front lines of addressing the new--and hopefully temporary--normal.
Upfront, it must be said that the COVID-19 issue changes on a daily basis, as does the response from the public and private sector. Late in March, the administration signed into law a $2.2-trillion relief package, a record in both its size and speed to passage. But the private sector is left to puzzle out its implications and wait for how and when relief funding will become available.
“Things are evolving so quickly,” says James Keeley, PepsiCo’s senior director of Global Real Estate, “so we don’t have a full picture yet. But it’s clear that, as people are emptying supermarket shelves, there’s an obvious strain on the whole supply chain.”
At least for those producers who have what many see as their must-have products, such as PepsiCo’s supplemental water items. Otherwise, “If you’re in the widget-making business or any type of manufacture, things have come to a near halt,” says Chicago-based Steve Kozarits, SVP of Occupier Solutions for Transwestern.
Indeed. According to a recent member survey produced by the Institute for Supply Management, “nearly 75 percent of companies report supply chain disruptions in some capacity due to coronavirus-related transportation restrictions, and more than 80 percent believe that their organization will experience some impact because of COVID-19 disruptions.” What’s more, 16 percent of respondents say they’ll be adjusting revenue targets--in the wrong direction--by as much as 5.6 percent.
Not surprisingly, much of that downward pressure comes from product sourced in Asia. “Fifty-seven percent noted longer lead times for tier-1 China-sourced components,” says ISM. Lead times have more than doubled over 2019’s pace, a fact not helped by Chinese providers working at 50 percent capacity. (Fortunately, PepsiCo doesn’t need to rely on shipments between the US and foreign lands.)
But what of the empty shelves? The Purchase, NY-based Keeley, whose company represents some 90 million square feet of industrial real estate, says that, depending on the products, “there’s a major issue with maintaining our stock,” even though manufacturing is working overtime to keep up.
Which could have presented serious challenges to its storage capacity, demanding a potential retooling of its traditional supply-chain methodology. But, as Keeley explains, “It’s now clear that this is not an issue for PepsiCo, and we’re not looking for storage locations.”
There’s an equal strain on output as delivery schedules are maxed to keep up with demand. Keeley says it remains manageable: As of now, “we have no requests for additional storage for either ingredients or finished products. We’re managing with our existing leased footprint.”
Haves and Have-Nots
Not all manufacturers are as well-fixed as PepsiCo, and solutions are often based on the landlord’s disposition. “Some landlords are being proactive and reaching out to their tenants,” says Kozarits, a tenant rep. “We have one client who has asked their landlord for rent deferment--free rent for April, May and June, then half rent from June to December, which amounts to six months until the end of the lease term.
“It's a trickle-down effect,” he continues. “If the landlord is institutional, they’ll view this very differently than an individual who happens to own a building and has a mortgage. If the renter can’t pay and the landlord can't pay, then they’ll need to have a discussion with the lender. Can they mirror the same kind of deal restructuring that the tenant is asking for? It all depends on the disposition of the owner.”
But isn’t a virus an act of God? “Is it?” Kozarits asks. “Force Majeure is in every lease we do. That question might well be answered in a court of law, but it’s not going to happen this week.”
Short-Term Strain, Long-Term Gain?
Curiously, the short-term strain can lead to long term gains, as Prologis states in a research paper posted on its website.
https://www.prologis.com/logistics-industry-feature/prologis-research-covid-19-and-implications-logistics-real-estate
“COVID-19 represents a headwind to the lengthy global economic expansion that will likely affect real estate in the near-term,” it states. “However, logistics real estate is likely to prove resilient, owing to its essential role in facilitating daily consumption, as well as being bolstered by structural tailwinds such as rapid replenishment. In the medium to long term, supply-chain adjustments should generate positive demand via rising inventory levels, accelerating e-commerce adoption and redundant manufacturing locations.”
Keeley mentioned that PepsiCo can manage with its existing footprint. But when necessary, reassessment can be a long-term positive. “In the wake of COVID-19,” says Prologis, “customers are likely to reassess ideal inventory volumes and business continuity plans—which could translate to greater demand.”
Ditto the US manufacturing footprint. COVID-19 may push manufacturing “to new locations,” says Prologis. “Aided by industry trends that boost productivity, manufacturers have been evolving their global supply chain strategies, increasingly emphasizing near-adjacent locations (e.g., Mexico, Central and Eastern Europe) alongside reshoring . . . . This broadening of manufacturers creates second-order demand through both suppliers and networks that serve blossoming consumer markets.”
While so much of COVID-19 remains unknown, and while the situation (much like a virus) mutates periodically, one constant remains: This too shall pass, and with the possible, positive outcome of a market stronger than ever. “As it relates to fundamentals, logistics on the whole is better-positioned than other sectors given the potential boost to long-term demand,” Prologis states.
Kozarits thinks so as well, while agreeing that it's all too early to tell. “All indices were so positive when this happened,” he says. “Interest rates and unemployment were so low and plant capacity was well above 80 percent. When we figure this all out, the economy will kick in pretty quickly, possibly three or six months after.”
Then he throws in one last monkey wrench: “Remember it’s also an election year. It will all be very entertaining to watch.”