This Is How A Cargo Ship Stranded In The Suez Canal Could Impact CRE
UPDATE, MARCH 29, 11:05 A.M. ET: The Ever Given has begun moving through the Suez Canal again Monday after being stuck for just shy of a week. Officials say it will take 3.5 days to get all ships stuck behind it through the canal.
A cargo ship stranded inside an Egyptian shipping channel could prompt companies to stockpile even more surplus goods in the future, potentially leading to hundreds of millions of square feet of additional absorption within the already booming industrial sector, experts say.
The accidental grounding of the Ever Given cargo ship Tuesday inside Egypt's Suez Canal, which handles about 10% of global trade, is reportedly costing the global trade market an estimated $400M an hour in lost value because no ships can pass through the canal — 15 were stuck behind the Ever Given as of Thursday morning — and the situation could take weeks to resolve.
For the U.S. industrial sector, the accident reiterates how important the extra storage of inventory, particularly consumer goods like toilet paper, is when supply chains face unexpected turmoil from events like the grounding of the Ever Given and the coronavirus pandemic last year.
"I think this really accentuates how end users need to diversify their supply chains," said Chris Brown, senior vice president of industrial REIT Duke Realty’s Southeast Region. "It's an example of why you don't want to be beholden to one shipping line or route."
Industrial leaders like Fraker and Brown observed a sudden change in the industrial supply chain when the coronavirus pandemic hit in March 2020, halting cargo ships and international trade.
"Grocery stores were wiped out of certain products because of the interruption of the supply chain and the hoarding that took place," Fraker said.
As a result, goods like toilet paper ended up out of stock, and industrial end users began to see a benefit in stockpiling more surplus inventory on U.S. soil. The great toilet paper scare of 2020 was just one of many catalysts last year that prompted industrial customers to rethink their storage requirements.
"Most major occupiers have built in what they call safety stock into their warehouse requirements, and we have noticed it is about 5% safety stock that’s being programmed into warehouse requirements by the occupiers," Fraker said.
This 5% surplus in product storage is a substantial change from the pre-coronavirus era when most companies kept little to no surplus in their warehouses.
The grounding of the Suez Canal cargo ship in tandem with massive disruptions in global trade these past few years could encourage industrial customers to store even more product on U.S. soil or begin manufacturing additional products at home, Fraker and Brown said.
“They may look at this unanticipated situation and change that 5% to 6%," Fraker said. "They may increase the importance of having safety stock inside the warehouse."
For the U.S. industrial market, any space added for surplus storage is money in the bank.
“If you extrapolate that 5% safety stock across the inventory of the United States and assume that safety stock requirement doesn’t just happen overnight — but companies are doing it over the next few years — it will add up to 400M to 500M SF of additional absorption that will take place in our country just because of the focus on safety stock," Fraker said.