3 Ways Real Estate Investors Can Limit Supply Chain Losses

By Scott Roberts

A never-ending line of cargo ships has converged off the coast of California, each battling to dock at the Los Angeles and Long Beach ports. Every ship is waiting to unload thousands of cargo crates, many of which contain highly demanded materials for real estate construction. Even with 24-hour around the clock work, these ports are unable to keep up with the incoming barges. Faced with costly delays, growing demand, and spiking material prices, real estate is just one of many sectors feeling the pressure of the supply chain crisis. Looking into the future, it is important real estate investors consider the how the supply chain crisis will affect the efficiency and common practices of real estate. In this article, both hidden challenges and opportunities of the supply chain crisis will be explored. Looking into the future, if the supply chain crisis does not improve, it is imperative that investors alter their expectations and adapt their focus.

First and foremost, one monumental challenge that has emerged is the shortage of storage space. Many businesses are “shifting from a ‘just-in-time’ inventory strategy to a ‘just-in-case’ supply chain strategy.”[1] In other words, companies are more or less over-ordering materials, in order to hedge against the risk of future supply shortages. This “just-in-case” strategy is smart, but it comes at a cost. Because so many companies are aiming for a supply surplus, they are overloading storage facilities. According to real estate investment firm CBRE, “warehouse vacancy has reached 3.6%, and all time low in America.”[2] To put this increase into perspective, this means “storage this year has increased by 200 million square feet, pushing an additional 500 million square feet of storage to be developed.”[3] While this is an obvious challenge for companies racing to store much needed building materials, this shortage also serves as an opportunity for investing. For example, the stock of real estate investment trust Extra Space Storage (EXR) has increased by nearly 70% this last year. Furthermore, the stock of other storage leaders like National Storage Affiliates Trust (NSA) and Public Storage (PSA) have increased by 80% and 40% respectively. Clearly, given the high demand for storage and storage development, a real estate investment opportunity has arisen. Shifting the focus to storage projects could be a very profitable strategy for real estate investors.

Besides the storage shortage, real estate firms are feeling the heat when it comes to compensating for project delays. After a discussion with Joel Kodish of Axos Bank, I was informed many banks are profiting due to an increase in demand for commercial real estate loans. Since so many construction projects are being delayed due to the supply shortage, real estate firms are taking out more and more loans in order to cope with unforeseen costs and delays. This reliance on excess loans as a crutch could be a trend that is here to stay until the supply crisis subsides. While this trending reliance on loans will certainly cut into the profit of real estate companies, it means lending firms could be a strategic investment if this momentum continues.

Another hidden opportunity lies within the shipping process itself. As the demand for supplies continues to grow, so is the shipping industry. For instance, consider Genco Shipping & Trading Ltd. (GNK). This shipping company “generates revenue through time charter agreements, spot market voyage charters, pool agreements and spot market-related time charters,”[4] which has led to a 145% stock price increase this last year. Furthermore, consider Matson, an ocean transportation and logistics focused company. Throughout the supply chain crisis, their stock price has risen 58% due to the increased cargo traffic. By investing in companies like these, real estate investors can profit off the crisis instead of only suffering the damages. While it may be impossible to avoid costly shipping delays, there is nothing stopping investors from taking control and profiting from the very situation that poses a challenge.

While issues with the supply chain linger, the crisis will not last forever. Whether investing in storage real estate, lending firms, or shipping companies themselves, these unique investment opportunities have never been more strategic than right now. There are always two sides to an economic event like such, and it is important investors seek a stake in the profitable side in order to compensate for their losses. If they can do this while there is still time for potential profit, real estate investors can effectively limit their losses.

[1] Gail Kalinoski, “How the Supply Chain Crisis Impacts Industrial Real Estate”, Commercial Search, 2021, https://www.commercialsearch.com/news/how-the-supply-chain-crisis-impacts-industrial-real-estate/ [2] Victor Ordonez, “US warehouses running out of room amid supply chain crisis”, ABC News, 2021, https://abcnews.go.com/Business/us-warehouses-running-room-amid-supply-chain-crisis/story?id=80906199 [3] Victor Ordonez, “US warehouses running out of room amid supply chain crisis”, ABC News, 2021, https://abcnews.go.com/Business/us-warehouses-running-room-amid-supply-chain-crisis/story?id=80906199 [4] Charles Rotblut, “Shipping Companies”, Forbes, 2021, https://www.forbes.com/sites/investor/2021/11/03/shipping-genco-madson-star-bulk-supply-chain-disruptions-invest/?sh=4884d5981687