SAN ANTONIO—Many facets of the commercial real estate industryhave taken the brunt of COVID's wrath. Of course, the healthcareworkers on the front lines are leading the charge but one of theother key CRE components is the food supply chain.

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In the process, this segment has had its challenges.Just-in-time inventory strategies for food distribution are beingre-evaluated and refrigerated industrial space is being called intoservice to address the challenges.

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Neil Johnson, founder and CEO of Provender Partners, a USinvestor dedicated to food-related industrial buildings, recentlyshared his insights into COVID-related food supply chain challengesas well as reorganization solutions to help consumers during theseunprecedented conditions.

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"The United States, and particularly the US food industry, isfacing an extraordinary challenge from the coronavirus pandemic,"says Johnson. "Supply chains have become strained overnight andneed to be reorganized to fit the new dynamically changingenvironment."

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GlobeSt.com: How did the food supply chain fail duringthe pandemic?

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Johnson: To most people, the obvious failure isthe lack of food in grocery stores and the closure of restaurants,which wasn't really a failure of the food supply chain. So the nextnatural question is: assuming we are consuming the same amount offood, aside from hoarding, why is it that there are empty groceryshelves? The answer is two-fold. You may have seen milk and eggs inthe news being dumped as these products are the most sensitive tospoilage as there is no easy way to preserve them, i.e. freezing.Second, many of the farms producing product in bulk for foodservice companies, i.e. restaurants, schools, cafeterias,hospitals, etc. were not able to pivot to smaller individuallypackaged products that could flow through grocery store and foodbank channels.

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The shortages at grocery stores were compounded by grocers whoover the past several years have pushed inventory back ontosuppliers, in essence employing just-in-time inventory systems.This allowed them to carry less inventory at retail stores,expensive real estate, and other refrigerated warehousingalternatives that are also very expensive.

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GlobeSt.com: What are your thoughts on the recent meatplant closures?

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Johnson: Meat processing plants were developedwith economies of scale in mind as the infrastructure includingrefrigeration, conveyor systems, associated power, waste watertreatment, natural gas, etc. are extremely expensive. In part, thishas resulted in some plants individually making up a large portionof the US meat supply. This also results in large numbers ofworkers in close proximity to one another, making them moresusceptible to outbreaks and plant closures. This is becoming moreof an issue as capacity at the farm level backs up. For instance,when hogs get to a size that doesn't fit specific processingparameters, they require euthanizing.

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Prior to the pandemic, Provender Partners saw this trenddeveloping for a slightly different reason. Case in point, largerprocessors of food products or 'Big Food' have fractured assmaller, local, specialty diet, etc. processors have taken marketshare from Big Food. Unfortunately, many of these smaller usersonly have one processing facility for cost purposes. The largerbuyers of food products started to put pressure on vendors to haveredundancy in the form of at least a second plant, providingmanufacturing redundancy and geographic diversity. Theoretically,this would help keep shelves full in the event of another foodsupply chain 'disruption'.

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In response to this observation a few years ago, we startedstudying food processing space very closely, as we believed thatthe trends mentioned earlier would result in additional demand. Infact, this was the thesis around our recent acquisitions of avacant meat processing plant in Bolingbrook, IL and a school mealmanufacturing plant in Chicago.

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GlobeSt.com: Moving forward, how do you see the foodsupply chain adapting?

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Johnson: Every CEO involved in the food supplychain is going to be forced to provide a contingency plan for afuture disruption. Provender is a bit unique in that all we havedone over the last six years is food and food only. Additionally,we touch all the different players involved in the food supplychain including farms, processors, grocers and food serviceproviders. This is a short overview on how each major link in thefood supply chain will change in an effort to keep supply chainworking in the event of another disruption:

  • Food service companies and farmers have been the hardest hit asthey were unable to pivot from bulk product offerings toindividually wrapped items. Sure, some farms were able to godirect-to-consumer and/or package some products for grocerychannels, but that was just a drop in the bucket for the lossesincurred. We believe that they will form strategic alliances toensure that infrastructure for individual packaging isavailable.
  • Fortunately, food service companies were able to stop ordersfrom farms so they weren't stuck with perishable products, but thatdidn't change the fact that they were essentially put out ofbusiness. We saw several strategic partnerships formed on the flywith grocers relative to transport to help the over-burdenedgrocers. We assume that food service companies will seek moreformal arrangements with grocers going forward.
  • Regarding food processors, it wouldn't surprise us if the USDArevises worker density policy after things settle down. Redundancyand geographic diversity are the names in the game.

If I was a betting man, I'd think that grocers would hold moreproduct at the warehouse level. Nobody wants more expensive retailspace, not even sure that's possible, and move away fromjust-in-time to more traditional forms of warehousing.

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I'm not sure any or all of these contingency plans together willtruly make a difference, but it's where we are today and it isexacerbated by the lack of refrigerated space available in thecountry.

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While the pandemic intensified severe food supply chainchallenges, Provender Partners sold additional food-relatedindustrial building holdings, including a tri-temp distributioncenter in South Fort Worth totaling 1.12 million square feet. Thecompany also announced a 10-year lease to Dollar General of a285,476-square-foot freestanding grocery/foodservice warehouse,Provender San Antonio Food Center.

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Lisa Brown

Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.