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An unexpected countervailing force may halt the anticipated drop in demand for US warehouse and distribution space, making the current economic downturn less damaging to the industrial real estate market than anticipated, says a leading logistics expert. According to Curtis D. Spencer, president of Houston-based Foreign Trade Zone and supply chain consultancy IMS Worldwide Inc., a mounting necessity for major companies to assure “just-in-time” delivery of goods stemming from stepped-up port security will counteract the impact of declining consumer spending on industrial space demand. Spencer broached the subject in relation to the Southern California market at a recent broker networking event presented by the Los Angeles-based AIR Commercial Real Estate Assn. But in an exclusive interview with GlobeSt.com, the consultant maintains the observation applies throughout the nation.

GlobeSt.com: Can you give a brief summary of what you see occurring?

Spencer: We’ve had downward pressure on industrial demand based of the lack of consumer purchasing power. Yes, that’s happening, but there’s also an increase in wholesale inventory due to just-in-time concerns and the need to have more inventory on hand than was needed a year ago. So that’s a plus for industrial real estate. I think the two forces will counterbalance one another.

GlobeSt.com: Why is this happening?

Spencer: In the late 80s, the concept of just-in-time delivery was perfected by automobile and computer manufacturers. The concept then expanded to the supply chain in consumer goods, and the model is now completely ingrained in the US wholesale psyche. But while that model is easy to manage if all your manufacturers and vendors are in the US, it’s more difficult as you go to Canada and Mexico and even more difficult when extended to 20 to 30 days out to places where the sophistication level is much less than in the US. Still, as complicated as it became once manufacturing shifted to Asia, it was manageable. Till 9/11.

GlobeSt.com: Then what happened?

Spencer: New regulations by Customs & Border Security have put new strains on the supply chain, causing new delays and making delivery times less certain. And every time you get into a delay or uncertainty, you mess up that just-in-time philosophy. That’s only going to get worse due to new regulations to be imposed by the Department of Homeland Security. We’re seeing that manufacturers and importers are now looking to have more stock on hand to be able to maintain their just-in-time requirements. That means if they had 10 containers worth of goods on standby, it will now be 11 or 12. Repeat that enough times over and you’ve created demand for a lot more space. Manufacturers can’t afford to have a plant go down and retailers can’t afford to have shelves sit empty. So they’ve got to build in a margin of safety to compensate for delays due to security inspections.

GlobeSt.com: Do you see signs of this buildup?

Spencer: In 2007, we got very, very lean in this country because we were anticipating a reduction in consumer demand. So we let wholesale inventories get exceptionally low. The evidence that we’re hitting a turning point is that wholesale stock all over the US is growing even though retail inventories are not. On the manufacturing end, one manufacturer told me they’re going to add 20% more days in their safety stock. So if they had four million sf of storage across the US, now they’re going to need five million sf. This now has hit a zenith. A very serious note has occurred in this whole symphony called the supply chain.

GlobeSt.com: Is this confined to port markets?

Spencer: It’s happening all over. It will affect every place where you’ve got industrial product. My feeling is it will be as much a positive for the market as the recession is a negative.

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