Impact of the gross imports and exports of goods on warehouse demand

Executive Summary

CBRE Econometric Advisors (CBRE EA) analyzed the intricacies of trade flows, focusing particularly on their effects on warehouse space requirements—a subject pertinent to industrial real estate investors and occupiers. In doing so, we challenge a popular belief that domestic production via onshoring unequivocally benefits all sectors of the economy. We identified a cyclical pattern of warehouse space needs in relation to trade, a narrative far more nuanced and time-dependent than commonly believed. We highlight the often-unexpected impacts on warehouse space requirements brought about by the ebb and flow of the import and export of goods.

Additionally, using Los Angeles as a case study, we shed light on regional aspects of these global events. This analysis uncovers some of the unique characteristics and potential roadblocks that can affect trade patterns and warehouse demand in a particular area, highlighting the significance of local considerations within the larger context.

Our analysis uncovers a more evolving understanding of how domestic production or onshoring influences the industrial real estate market. It challenges sector stakeholders to abandon broad-stroke assumptions and further examine the impacts of shifting trade dynamics on warehouse demand.

Navigating Industrial Real Estate Landscape Amid Shifting Trade Dynamics

In an era of rapidly shifting economic landscapes and geopolitical turmoil, the debate on onshoring versus offshoring has reached a fever pitch. Advocates of domestic production extol the benefits of bolstering national manufacturing base and reducing reliance on foreign supply chains. However, through the lens of industrial real estate stakeholders, a more complex picture emerges.

Figure 1: U.S. Trade Balance: Goods, Balance of Payments

Source: CBRE Econometric Advisors, Federal Reserve Bank of St. Louis, Bureau of Economic Analysis.

The historical perspective reveals an intriguing link; the Global Financial Crisis and the Covid-19 pandemic marked volatile swings in the U.S. balance of trade that paralleled a corresponding shift in warehouse absorption (Figure 1), highlighting the considerable influence of directional trade on warehouse and distribution demand. It's important to note that a change in trade balance, as observed in Figure 1, is merely the difference between a country's exports and imports. Therefore, a change could be due to either a decrease in imports or an increase in exports, or a combination of both. For this analysis, we model purely the isolated effect of the gross imports and exports of goods. It becomes clear that the impact of both on warehouse demand is intricate and multifaceted. These findings underscore that both imports and exports play significant but varying roles in shaping warehouse space requirements.

Cyclicality of long- and short-term demand shifts

We employed a statistical method known as a Vector Error Correction Model (VECM) to assess the ongoing effects of the gross imports and exports of goods on the demand for warehouse space. Simply put, the VECM helps us examine the relationship between these aspects when they are constantly changing yet maintain some sort of long-term connection—a concept known as “cointegration.”

The beauty of the VECM lies in its ability to let us explore how imports, exports and warehouse demand relate to one another in equilibrium or balance, allowing us to understand their longer-term relationships. At the same time, it captures short-term shifts, revealing how these aspects adjust and return to their long-term equilibrium or balance when short-term changes occur. Using this method, we can analyze how sudden changes or “shocks” in the gross imports and exports of goods influence the demand for warehouse space.

The analysis reveals a somewhat counterintuitive, cyclical pattern. The short-run dynamics of the model show that a shock in imports has the opposite initial impact on warehouse absorption as that of a shock in exports. We see absorption rise in response to an increase in imports, while absorption initially falls in response to an increase in exports, all else equal. The initial response to rising imports makes sense; as imports increase, companies require additional warehouse and distribution facilities to accommodate the influx of goods. This need arises from the necessity to store, process and distribute the imported products to their final destinations, ultimately resulting in a more extensive logistics network. The short-run response to rising exports, however, is a little more surprising, and can be attributed to a few key elements:

• Efficiency in Export Logistics: As soon as goods are produced, they are quickly moved to the ports for shipment rather than being stored in a warehouse, reducing the need for warehouse storage in the short term.
• Just-In-Time (JIT) Production: Many companies use just-in-time production methods in which they produce goods based on the demand and ship them directly to the port for exports, reducing the need for warehousing.
• Export Nature: Exports are typically bulk shipments of homogeneous goods, which can quickly be loaded and shipped without the need for significant warehousing.

The short-run dynamics are of course, short-lived. The long-run impacts of increases in both exports and imports are intuitive: all increases in trade increase the need for warehouse space. Below, we illustrate the short- and long-run effects of increases in imports and exports on warehouse absorption, holding other factors constant. We've calculated the reaction of warehouse absorption to a one standard deviation increase—or “standard shock”—in either imports or exports. In other words, we are examining the average reaction in warehouse demand to a typical or “standard” change in imports and exports. This offers insights into the cyclical fluctuations of warehouse demand in response to these standard shocks in trade dynamics. There appears to be a cycle to the ramping up or down of absorption in response to imports or exports.

Note: Absorption, imports, and exports are all integrated of order one per the Augmented Dickey-Fuller test. All results are based on two cointegrating equations, as suggested by Johansen’s trace test.

Figure 2: Response in Warehouse Absorption to a One Standard Deviation Innovation in Imports vs Exports

Source: CBRE Econometric Advisors.

We see that the initial decrease in absorption due to increased exports fades and then surpasses the impact of an increase in imports after six quarters, as is illustrated in Figure 2. At first, the line representing the impact of increased exports on warehouse absorption dips, indicating a temporary decrease in demand. However, after about a year and a half (six quarters), this line ascends, crossing the 'imports' line and reflecting a stronger demand for warehouse space due to increased exports. The underlying reasons for this shift include:

• Inventory Buffer: To manage potential uncertainties, delays or disruptions in the supply chain, companies may choose to keep a buffer stock, thus increasing the need for warehouse space.
• Diversification of Goods: As the export volume grows, it's likely that the variety of exported goods also increases, necessitating more storage space and complex logistics.
• Production Capacity: If production capacity cannot keep up with increased export demand, companies may need to produce and store goods in advance, thereby driving up the demand for warehouse space.
• Seasonality: For certain goods, there may be seasonal variations in demand. To ensure a smooth supply during peak seasons, companies might increase their inventory, thus requiring more warehouse space.

This suggests that acute onshoring initiatives provides logistical challenges that reduce absorption in the short term as supply lines compress, but that once these challenges are solved, export-driven absorption outpaces the effect of import-driven absorption. That is, until approximately 25 months out, when the longer supply line of imports provides more absorption while the longer-term impact of exports wanes.

Regional View (LA)

We apply our analysis to Los Angeles, a critical hub in the global supply chain network. As a representative case study, we delve into the regional dynamics and their interconnectedness with trade patterns and warehouse demand. Recent trends echo our broader observations—Los Angeles, with its extensive port and transport infrastructure, has seen a surge in import volumes (Figure 3) as a result of increased consumer spending due to the pandemic, which in turn spurred demand for warehouse space in the region.

Figure 3: Year-Over-Year Change in Loaded In-bound Containers

CBRE Econometric Advisors, Port of Long Beach, Port of Los Angeles.

While considering trade facilitation, it is crucial to understand that not all ports are created equal. Beyond the direct demand for foreign goods, a multitude of factors comes into play in determining which ports are best positioned for trade facilitation, such as:

• Port efficiency: Quality of transport infrastructure supporting port operations.
• Customs environment: Costs and transparency related to customs.
• Regulatory environment: The approach of the inbound country to regulation.
• Service infrastructure: The quality and extent of national business service offerings.

In Los Angeles, trade dynamics are shaped not only by the overall trends in import activity but also by region-specific challenges. Recent labor disputes, for instance, have brought potential disruptions to port operations, causing delays, reduced efficiency, and a drop in trade volume. Coupled with infrastructure limitations, these labor disputes could hamper future trade growth and, by extension, affect the demand for warehouse space. Looking at Figure 3, the decline in loaded in-bound containers for both the Port of Long Beach and Los Angeles tracks closely with the regional drop in net absorption.

It's worth noting, too, that even though increasing exports can be advantageous from a macroeconomic perspective in the long run, they might not always lead to an uptick in warehouse demand at a regional level. In fact, in a region such as Los Angeles, a surge in exports might imply a high degree of efficiency in outbound logistics. When local production capacity is high and goods are swiftly moved from factories to ports for export, the demand for warehouse space could remain relatively stable over time.

Final thoughts

While the current discourse encourages onshoring and domestic production, the impact on the industrial real estate landscape is variable. Our research suggests, by looking at demand responses to shifts in imports and exports, that the benefits of onshoring could be overstated, or at least misplaced. In charting the complexities of trade flows and their effects on warehouse demand, it becomes clear that the implications for industrial real estate stakeholders is far from straightforward. The intricate and sometimes unexpected interplay of factors – like effective export logistics, production methods, product diversification, stockpiling for contingencies, and locale-specific influences – significantly shape warehouse demand dynamics.

The widely held assumption that an onshoring surge, and consequently, a swell in exports would directly result in a consistent uplift for warehouse space requirements, doesn't hold up to scrutiny. Instead, we found that the effects of onshoring on warehouse demand follow a cyclical pattern, altering over different timeframes. While an initial dip in absorption due to increased exports may present hurdles, stakeholders should not be deterred from recognizing the eventual advantages. Over time, as logistics processes are fine-tuned and capabilities scaled up, our analysis indicates a promising surge in warehouse demand propelled by exports. Nevertheless, stakeholders' approach should aim for equilibrium. Their strategies need to balance the continual demand brought about by imports with the longer-term absorption generated by export activities.

In conclusion, our findings emphasize the need for strategic adaptability among industrial real estate stakeholders. As the global economic environment and trade patterns continue to evolve, stakeholders must adapt their strategies in an increasingly competitive market. Those involved in the industrial real estate sector will now be better equipped to navigate the challenges and opportunities of shifting trade dynamics and the ongoing debate surrounding onshoring and offshoring.