The Supply Chain Crisis’ Impact on Commercial Real Estate

In 2021, the real estate market went completely off the rails. By mid-summer, the housing market was low, costs surged, and properties were going under contract within hours.

In the last five years, most real estate investments have been almost a sure thing. As a result of current supply chain issues, property managers may face problems they have never encountered before.

The supply chain is one factor that contributes to the value of real estate in an unseen way. The prevailing supply chain limitations and the uncertain future of the supply chain have significantly impacted current real estate costs.

Commercial real estate, like all other industries, is experiencing an inflationary trend. Costs of raw materials, energy, and logistics are increasing without exception. Both landlords and tenants are experiencing delays in obtaining materials necessary to complete high-demand projects, many of whom have already signed leases.

The Sources of Today’s Supply Chain Disruptions

Many landlords are only now becoming aware of supply chain complications, but these have existed for over a year. In the same way, all problems begin, today it all started with COVID-19. Earlier this year, a COVID delta variant outbreak shut down Asia’s major manufacturing hubs, stressing global supply chains and elevating commercial real estate operating expenses.

Economies experienced worldwide lockdowns, staff absences, and government-mandated shutdowns due to the pandemic. A series of minor hiccups have resulted in a full-blown supply chain disaster.

The COVID-19 epidemic aggravated and accelerated supply chain issues and transformations already underway in the series of events. The root cause for the backup is difficult to pinpoint.

The convergence of several factors has led to a re-evaluation of the true impact of the supply chain. The domino effect will have a long-term impact on the entire commercial real estate industry. In an interview with CNBC, their analysts predicted that things would not return to normal until 2023.

As a result, commercial real estate faces some unique challenges, from building material shortages. A tenant improvement process can involve operators revising their production strategies and adopting just-in-time inventory strategies during the development phase.

In the aftermath of the pandemic, many real estate companies are reevaluating their dependence on one supplier and plan to bring production home. This will increase the need for manufacturing space at commercial sites increase rail and air distribution hubs across the country. This will, however, drive up costs for these services.

A Rise in Transportation Costs

The selection of sites today is primarily influenced by factors related to the supply chain. The total logistics costs include inbound and outbound transportation, labor, and inventory carrying costs.

Commercial property managers are facing a substantial spike in transportation expenses. They must then weigh labor costs, availability, and operational quality once they have narrowed down viable locations to a zone of indifference. They determine whether tenant upgrades are sufficient or whether an entirely new facility is needed.

Typically, transportation costs make up 50 percent to 70 percent of a company’s total logistics spend, while fixed facility costs (including real estate) only make up 3 percent to 6 percent. A 1% increase in transportation costs will require an increase of 8% in fixed facility expenses. By adding warehouse and distribution space, the method suggests that shippers could reduce transportation costs.

Challenges in the Labor Market

Undoubtedly, supplies aren’t the only thing lacking on property construction sites. A shortage of labor is also a growing problem. Occasionally, the labor shortage is of greater concern than the supply chain problems.

One possible option is to incentivize new workers to enter the building industry. Property experts believe that the industry is running out of time and has a backlog of new construction due to insufficient new trainees entering the field.