Dealing Head-On with the Realities of Inflation
By John Salustri
“We have to accept what we’re dealing with and do the best we can.” Thus, Dmitry Dukhan wraps up the essential truth of the current inflationary economic environment. The Medline Industries VP of Real Estate, Facilities and Security takes a sort of laissez faire approach to the issue, categorizing it as “one of those geopolitical issues I have no control over.”
Too bad, because the problem is escalating. The interest rate on federal funds is expected to undergo a half percentage-point increase in the next two Federal Reserve meetings, according to Kiplinger, with five more increases lined up through the rest of the year. When the smoke clears, the interest rate will hover around 2.5 percent.
https://www.kiplinger.com/economic-forecasts/interest-rates
As if things weren’t challenging enough. With the world’s largest port–Singapore–still closed for business, shipping alternatives have done little to relieve ongoing supply chain issues. In a recent video report, John Chang, SVP and national leader of research for Marcus & Millichap, reports that international shipping costs have jumped 10 times what they were pre-pandemic, and average deadlines for delivery have gone from 48 to 80 days.
https://www.marcusmillichap.com/research/videos/how-supply-chain-issues-impact-cre-investors
And wait. There’s more. Even when goods do land, transportation costs from fuel prices to increased wage demands continue the economic squeeze. “To keep drivers in their seats, you have to pay them top dollar,” reports Omaha-based Patrick Morris, corporate real estate manager for DRT, LLC. “You need to do it because everyone else is, and as one of the larger transportation companies in the nation, we ensure we remain competitive on wages.” Nevertheless, the wage hikes aren’t luring a sufficient number of younger drivers, so “the field continues to get older,” impacting both hiring choices and wage control.
Hedging the Inflationary Bet
Of course, unlike global pandemics, the threat of inflation is nothing we haven’t dealt with before, and there are ways to bake into plans–especially long-term plans–essential hedges.
“Dealing with unknowns is part of every business plan,” says the Chicago-based Dukhan. The formula is to calculate what you have to pay for labor, transportation, equipment and capital expenses, knowing that a build project takes, “let’s say, three to four years, with paybacks anywhere up to 10 years.”
Map out those timelines, all the while assuming cyclical inflationary pressures, remembering, of course, that “The solution is never one thing,” he says. “It’s a hundred different things. It’s working more closely and getting more strategic with suppliers to get economies of scale. It’s different choices about the materials we’re using. It’s realigning your territories and making choices of where you receive product.”
Being more strategic with vendors is key, as is prioritizing needs. But speed is also part of the hedging picture, as Morris points out: “You need to be nimble and move fast, because the bid you got today won’t be good next week.”
Leasing to Your Advantage
Re-strategizing on lease terms is also key, although it is a double-edged sword. Longer lease terms can trade frequent hikes for larger jumps. Shorter terms mean (hopefully) smaller increases, but obviously they’ll occur more often.
“If you haven’t renewed your rents in the last three to four years,” says Dukhan, “you might be facing as much as a 200-percent increase.” He tells of a New Jersey landlord he approached recently after six years of paying $9 a foot. The renewal comes up in two years. “The proposed rental was above $20.” He reports that his firm is currently reevaluating all their leases to determine what needs to stay or expand, what needs to be eliminated or consolidated. “
Owners, of course, are better situated than renters. “We own most of our real estate, including all of our office facilities,” says Morris. “That’s one way we hedge against inflationary lease rates.”
But ownership isn’t an option in some cases, and then DRT’s leases are typically short-term, “in order to give ourselves maximum flexibility.” It is also driven by government contracts; DRT does a lot of work for the U.S. government, which adds at-will termination clauses. “Either of us can theoretically get out for any reason at any time with some sort of notice. So, we lean on the flexibility of shorter terms.”
Another advantage that comes from DRT’s government arrangement actually serves as a potential draw for transportation staff. “We have a bit of a retention advantage in that those contracts are very consistent,” he says. “Drivers always know what their routes are and when their breaks can occur.” Still, the ongoing war for talent remains an issue, as it does for all IAMC members.
Exploring the EDC Angle
It’s unlikely that any firm would uproot its operations solely as an inflationary hedge. But local and regional economic development corporations can still provide some help.
“One thing we’re seeing companies looking at is adjusting their supply chains for more local options,” says Antony Burton, principal researcher for the Charlotte Regional Business Alliance in North Carolina. “When things go haywire globally,” they can set up other suppliers to pitch in.
That’s where EDCs can be helpful,” he continues. “Local EDCs have relationships with manufacturers, and we can connect them.” He also recommends Manufacturing Extension Partnerships (MEPs), statewide public/private partnerships designed to enhance business growth and productivity and provide risk mitigation. Given their state-wide reach, they can also provide a wider net of suppliers than can local EDCs
If a relocation is in a member’s future, certainly that’s where most EDCs can shine brightest. Burton points to the cost delta that exists between sunbelt locations and those in the Northeast or West Coast.
Inflation? Our members have one overriding comment: Been there, done that. At least, it is more familiar territory than adjusting to the overnight challenges brought on by the pandemic.
Besides, no successful professional ever shied away from hard work. “We can’t afford to kick this can down the road,” says Dukhan. “We all need to be accountable, own our solutions and work extra hard to protect our companies, our employees and our customers.”