The new American supply chain: Covid-19 will empty malls but fill warehouses

Retail Real Estate's new challenge is a redux of Industrial and Manufacturing supply chains

Covid-19 has drastically altered the shopping habits of Americans and their global peers. Malls sit empty while online shopping and the demand for delivered goods explodes. This trend is not likely to reverse.

In China, where the benefit of time allows the impacts of Covid-19 on economy and real estate markets to be better understood, there are clear indications that consumers are unlikely to return en masse to a physical shopping experience.

The practical requirement of this shift to digital demand for the commercial real estate industry is that high dollar, glossy retail malls in highly-trafficked urban areas are not the most desireable asset class to hold or develop in the age of Covid-19. That's led thought leaders with Colliers, Transwestern, CBRE and others to independently come to similar conclusions.

For the next several quarters, commercial and retail real estate people in the U.S. are in the business of acquiring and developing light industrial sites, manufacturing hubs, shipping centers, and the related infrastructure to support them.

As Gregory Healy, the Colliers Senior Vice President who leads the Supply Chain and Logistics Consulting team in the U.S. wrote last week: "Looking forward, new retailers may find it a better investment to sell exclusively online and find a third-party logistics partner for distribution rather than invest in a physical retail store."

Of course, the Chinese e-commerce market has been ahead of the U.S. market for sometime, even in a pre-coronavirus world. Influenced by the SARS pandemic of 2003, when staple items were very difficult to come by in traditional stores, consumers in China have been on a fast track to online shopping for several years -- by the end of 2021 online shopping was predicted to overtake physical shopping in China. Covid-19 has likely accelerated that.

North of the border, our friends in Canada face similar supply chain issues, according to the recent JLL report COVID-19: Global Real Estate Implications. "Disruption has already started in sectors such as automotive, aviation, chemicals and consumer goods, and the full effects have yet to filter through. Conversely, pharmaceuticals and healthcare are most likely to experience a surge in demand." For the retail market specifically, the JLL report offers this advice:

Retailers with robust infrastructure to fulfill online orders could be longer-term beneficiaries, placing a greater emphasis on the shift towards a flexible omni-channel retail model.  Ensuring continuity of operations by rethinking supply chains will be key to mitigating the risk of future shocks.

It's that 'mitigating the risk of future shocks' part that gets my attention. To be clear, these are not temporary market issues that JLL, Colliers, Transwestern, CBRE and a lot of other very smart commercial and retail real estate people are discussing. There is no inference in any reputable analysis I have read that Covid-19 is a minor blip on the retail or CRE landscapes.

The way America and the world shops is forever changed. We won't need (or want) to leave our homes as much when our clothes, our food, our housewares, our work and our entertainment come to us. We will shop online more. We will order meals in.

Low inventory in the supply chain will lead to higher prices, which will knock some U.S. and foreign retailers out of the market. Fashion brands that rely on bricks and mortar or regular seasonal cycles will perish. Food and beverage retailers must act quickly to master the very complex delivery business, or they will disappear. And traditional retail supply chains will fail, because they no longer service demand in a post-pandemic world.

What replaces those old supply chains will be a series of light industrial sites where domestic businesses will create more retail products, such as fashions, that were previously imported from overseas. There will also be a great need for manufacturing hubs. Can old hubs in dying towns, such as Flint, Michigan be resurrected, or will new land and new development be the preferred path to sustainable recovery?

Last, but not least, America will need more warehouses, packed to the brim with everything the country needs to survive another pandemic, because that will be the definition of meeting demand in America go-forward.

That demand is predictable. What's not yet predictable is the retailers and commercial real estate firms with the war chest, analytics, partners and strategy to claim the mantle of progenitor of the new American supply chain.

Scott Valentine, Editor

Scott is a prolific editor specializing in B2B tech. His work has appeared with Forbes, the WSJ, Thomson Reuters, the Guardian, VentureBeat, the CBC and many more. Scott's clients include top retailers, analytics companies and investors. As a marketing and communications executive, Scott has been part of $1.5 billion in exits, and counting.