Friday, February 18, 2022

"Supply Chain Crisis Threatens To Trigger Commercial Real Estate Collapse & Bankruptcies"

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"Supply Chain Crisis Threatens To Trigger 
Commercial Real Estate Collapse & Bankruptcies"
by Epic Economist

"The U.S. commercial real estate collapse is being aggravated by the ongoing supply chain crisis as the national warehouse vacancy rate drops to the lowest level on record, shortages prevent builders from increasing capacity, leading commercial property rents to soar and businesses to take on massive loads of debt to afford for space that hasn’t even been built yet. The global supply chain crisis continues to wreak havoc on every sector of the industry. Now it is impacting commercial real estate construction at a time businesses and ports need it the most, with the worst potentially still to come.

While manufacturers and retailers struggle to restock their inventories, and consumers feel the pain of shipping delays and price increases, commercial real estate builders and landlords are losing a major opportunity to recover financially from the losses suffered over the past few years. That’s happening because most commercial real estate around ports and in metropolitan areas have already been leased and turned into warehouses, leaving vacancy rates at record lows at a time demand for space is soaring, which is pushing commercial rent prices significantly up.

Right now, there are approximately 5.6 million containers sitting at U.S. ports waiting to be picked up by truckers and delivered at warehouses to be distributed to stores all across the country. Construction companies and businesses are taking on massive loans to invest in the creation of more capacity, which includes warehouses and distribution centers, outside major U.S. ports. On a yearly basis, over 1 trillion dollars worth of goods arrives at the U.S. coast to be processed and distributed around the nation until they reach the end consumer. In that sense, it’s understandable why there’s a mad rush to build more facilities to accommodate all of these products.

However, a global shortage of raw materials is causing shortages of key construction supplies, expanding delivery times, and driving prices to unprecedented highs. That’s to say, companies are spending billions of dollars to create warehouse spaces that might take years to be built. By then, consumer demand will likely have shifted, and probably cooled off given that rampant inflation continues to compromise people’s buying power. Monetary tightening also means companies will have to pay higher rates on property loans, but slower consumer spending means that they will have less cash flow on their balance sheets. In essence, private landlords and construction companies are going to be left with a glut of commercial real estate, just as it happened before.

Warehouse vacancy in the country is currently at 3.6%, a record low, according to recent data from CBRE, an American commercial real estate services, and investment firm. "Three-and-a-half percent is effectively zero," explained John Morris, executive managing director lead for CBRE's industrial and logistics business in the Americas. "For the year, we have basically an effective shortage of space of about 300 million square feet."

According to the New York Times, the situation is getting so critical that warehouse space is the latest thing being hoarded by big retailers and corporations, further aggravating the sector’s crunch. But those expecting this new capacity to be a quick end to the supply-chain crisis are going to be bitterly disappointed. The first wave of the crisis was marked by port congestion, labor shortages, factory shutdowns, and shortages of raw materials. But the second wave looming on the horizon is going to be marked by debt. Most of these investments have been made through bank loans. Considering that since the last quarter, corporate earnings have been steadily dropping and a series of interest rate hikes is coming over the next few weeks, the commercial real estate sector is facing mounting risks of cross-debt default.

Over the past twelve months, companies have taken on more risk by pouring giant piles of borrowed money into projects whose profits are not guaranteed. In China, for example, that resulted in the bankruptcy of one of the world’s biggest property developers, triggering a commercial real estate and housing market collapse and depressing both sectors, which together, account for over 25% of the country’s GDP.

In simple words, as private companies’ access to capital goes, so does the resilience of the supply chain. At some point in the not-too-distant future, the mountain of debt made over the past year will need financing or refinancing, and many will be unable to raise liquidity at affordable rates, if at all. Cracks in the credit market are already starting to emerge. And once again, the ones who will suffer the most at the end of the day are going to be the consumers, who will end up having to pay for these companies’ debt through higher prices of goods."

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