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Recent global supply chain disruptions are causing industrial real estate occupiers to once again hold more inventory to meet demand. In the aftermath of shortages and delays caused by the COVID pandemic, a wave of new disruptions has emerged from a combination of natural disasters, geopolitical conflicts and infrastructure failures.
Suez Canal
The Suez Canal between the Red and Mediterranean seas normally accounts for about 12% of global maritime trade. Since attacks on international shipping began in late 2023, more than 470 container vessels have been rerouted around Southern Africa’s Cape of Good Hope, adding up to 17 more days of transit time. This has significantly increased shipping costs and delivery times.
Strait of Hormuz
This strait between Iran, the UAE and Oman accommodates between 20% and 30% of global oil trade, as well as a large volume of goods shipping. Ongoing conflicts in the Middle East put the strait in danger of disruption. If these conflicts further escalate, the free passage of vessels through the strait could be at risk.
Panama Canal
This link between the Atlantic and Pacific oceans accommodates 5% of total global container volume and 46% of the trade between the U.S. East Coast and East Asia. The canal zone is experiencing a severe drought due to the El Niño weather phenomenon. Low water levels have resulted in a reduced number of canal transits and reduced cargo weights.
Figure 1: East Coast Port Volume
Port of Baltimore
The March 26 cargo ship accident that collapsed the Francis Scott Key Bridge completely shut down ocean-going traffic to and from the Port of Baltimore. The port handles approximately 3% of total container volume for the East and Gulf coasts and the largest volume of autos, in addition to natural resources like coal, gypsum and lumber. Cargo has been diverted to nearby ports, causing congestion and product delays. Early estimates are that the port will fully reopen for cargo traffic by the end of May.
Figure 2: East Coast Industrial Market Net Absorption & Construction Completions
Real Estate Implications of Baltimore Port Closure
The Port of Baltimore’s closure has increased demand for nearby ports such as New York/New Jersey, Philadelphia, Virginia and Charleston. Limited availability of warehouse space near these alternate ports leaves occupiers with few and costlier options. Port of Baltimore warehouse occupiers may elect to sublease or vacate buildings, especially if the port remains closed for longer than expected. The port’s closure highlights the vulnerability of relying on a single hub to transport goods. As a result, occupiers may favor markets with multiple transportation options.
Disruptions Prompt Need for Higher Inventory Levels
Global trade disruptions likely will cause a period of adjustment for the U.S. industrial market, as occupiers require more warehouse/distribution space to store more inventory. While some retailers have indicated a preference for “just-in-time” inventory strategies, frequent and ongoing global trade disruptions make this risky. The sounder strategy is to maintain higher inventory levels at port-market warehouses.