CBRE EA BLOG Deconstructing CRE

What trade barriers might mean for U.S. warehouse demand

Jan 12, 2017, 10:04 AM by Bill Wheaton

The national stock of warehouse space has increased by 3.5 billion sq. ft. since 1988—an increase of 75%. Economic globalization has transformed the U.S. economy, resulting in a transformed supply chain that has greatly boosted demand for U.S. warehouse space.

The incoming administration has several policy objectives pertaining to globalization. The first intention is to renegotiate trade agreements to more strongly favor U.S. interests, penalizing imports and providing better access for U.S. exports. Economists have long agreed that boosting U.S. exports and curtailing imports is a potential tactic to increase GDP growth. A second objective is to expand U.S. corporate investment within our borders to increase domestic manufacturing. There is less agreement among economists on the effects of policies designed to prevent corporate profit shifting or to penalize job outsourcing.

Imports, exports and domestic production each generate their own types of inventories, which impacts warehouse demand. Imports are mostly repackaged and transshipped once landed; as such, they require much distribution space. Meanwhile, exports most often move directly to shipping from the point of production, creating warehouse demand mainly in the destination country. Domestic industrial production generally creates a shorter supply chain than international imports do. Shorter chains are held to reduce inventories and warehouse space requirements.

Recently we crunched the numbers and came up with some results for how warehouse demand might respond to the changes proposed by the coming administration. Using standard time-series analysis—specifically, an error-correction model—we found that  the following occurs (if slowly):

  • A dollar increase in imports consumes three times as much warehouse space as a dollar increase in exports (holding industrial production constant).
  • A 1% rise in industrial production (holding trade constant) actually reduces warehouse demand as the supply chain shortens.

Assuming there is no “trade-war” retaliation, the above proposed policies could well help U.S. GDP. From a real estate perspective, however, they may cut short the three-decade expansion in U.S. warehouse space.

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