Global supply chains remain under pressure as the world economy continues to recover during a pandemic, rising U.S.-China trade tensions and, most recently, Russia's invasion of Ukraine.
The war's impact on global supply chains has focused on commodity availability, such as wheat, sunflower oil, metals and neon; however, an extended Ukraine-Russia conflict could also affect another existing shortage facing the global shipping industry: skilled labour.
In such a scenario, inflation would likely remain higher than many expect, reinforcing certain real estate asset allocation trends in place, such as favouring asset classes with higher rent growth and shorter lease terms.
The supply chain often comes under some pressure after a recession, as it takes time for supply to snap back to meet recovering demand. The COVID-19 recession, while not long, was extremely deep, as economies all but shut down during March and April of 2020. Thanks to massive fiscal stimulus packages in many developed countries, demand quickly rebounded, leading to a surge in supply chain pressure over the past two years.
As countries addressed rolling waves of COVID-19 with different public health measures and at different times, shipping container availability at ports worldwide began to vary greatly to the point that container shortages are commonplace in many parts of the world today, adding to price pressures and exacerbating supply chain bottlenecks. This is clearly the case in Canada, which has seen a rapid decline in its seaborne exports since the pandemic began.
The recent war in Ukraine has added to these pressures. In the near term, for example, food prices and other commodity exports from Ukraine, as well as energy prices, are likely to rise or remain elevated to historical norms as the conflict drags on.
Over the next few months, the combined effects of these supply chain pressures are likely to lead to more warehouse usage, all things being equal. Businesses appear to be rapidly expanding their inventories to meet demand, regardless of where these goods are being sourced. This means more space is needed to store more goods, which is positive for demand for industrial real estate.
However, a long, drawn-out war in Ukraine would likely exacerbate ongoing labour issues affecting global merchant marine fleets. This is because Russians make up 10.5% of all seafarers — officers and skilled seamen combined — the second-highest proportion in the world behind the Philippines at 13.3%, according to a study commissioned by the International Chamber of Shipping and published in April. Ukrainians are the sixth-most represented nationality, representing 4% of all seafarers, according to the same study.
In an interview with the Montreal Gazette, Martin Imbleau, CEO of the Montreal Port Authority, highlighted this risk, saying that the availability of Russian and Ukrainian crews was increasingly uncertain.
The possibility that Russian and Ukrainian crews could be less available to operate cargo ships would further stress already overstretched global supply chains. Even before the Russian invasion of Ukraine, the International Chamber of Shipping estimated that the shortage of qualified officers had increased from negative 16,500 globally in 2015 to negative 26,240 in 2021. Meanwhile, the global surplus of skilled seamen had collapsed from 119,000 in 2015 to 37,640 in 2021.
In a scenario in which Russian and Ukrainian crew availability is vastly limited, shipping delays would almost certainly continue, since the ability of maritime operators to find qualified crews would be diminished. An increasingly tight labour market would lead to rising wages and thus higher overall costs to ship goods. These increases would eventually be passed on to the end consumer in the form of higher prices, leading to higher levels of inflation for longer.
Given this potential — and the growing risk of stagflation — real estate operators will likely continue to favour sectors where rent growth levels are robust, such as apartment and industrial. Investors may also accelerate their move into promising alternative sectors such as life sciences, medical office, data centre, self-storage, mobile home and senior-living facilities. These sectors all benefit from solid structural demand drivers. At the same time, the available supply of these niche properties is often limited, allowing operators to lock in higher rental rates, thus helping investors to protect real income returns.
Hotels may also see an increase in investor interest given their ultra-short lease terms, which can be adjusted daily to meet demand, coupled with the fact that the travel and tourism sector is rebounding from pandemic-era lows.
A higher inflationary environment would also likely accelerate the repositioning of certain assets already underway. For example, more malls could become targets for mixed-use residential developments, while older offices could potentially be repositioned into apartments.
