Prologis

Maggie Xu

The pandemic has had a disruptive effect on many aspects of our lives. One of the more compelling  impacts involves global supply chain issues, which have contributed to higher materials pricing and delayed construction starts. This phenomenon is especially pronounced in logistics warehouse  development and construction. On the one hand, we are experiencing phenomenal growth driven by a  lack of space in the market coupled with surging rents. On the other hand, materials are either in short  supply or delayed. As a project manager from the developer’s side who manages several million square feet of development and construction projects in the Los Angeles logistics market, here are a few risk mitigation measures I have implemented with the help of my team.

“Even for smaller companies, focusing on building long-term relationships is a viable strategy”

 Identify and Track Critical Shortages by Suppliers

Information and relationships are especially important in critical times. During the preconstruction  phase, we must first identify high-cost drivers and understand required lead times from major suppliers. For a warehouse development, the highest costs are typically associated with concrete, roofing and steel. To understand lead times on each item, we leverage our ongoing relationships with suppliers directly. Never before has it taken 12 months to get roof joists or 6-8 months for roofing to arrive onsite. The best practice is to get all information directly from the source and then figure out the estimated lead times for your project.

Once an estimated time requirement is established, decisions must be made far ahead of bidding or construction starts if the lead time is longer than the actual time it takes to complete the project The best advice I can give is to negotiate with suppliers on how best to ensure inventory for your project. The sooner these commitments are made, the better. Some industry experts are predicting that supply chain issues and inflation are here to stay, at least for the near term.

Reserve a Contingency Budget for Price Escalation

It is wise to reserve a contingency budget for price escalation during construction in addition to normal hard cost contingencies. Even when you have reserved inventory on materials, most suppliers are not willing to fix the price in this market unless you buy it out. Therefore, you will either spend money to store and insure the materials or to offset any price escalations that might arise before you or your contractor issues a purchase order. Another factor that comes in play is the shortage of labour. No one knows what’s coming in 2022, but I do believe we should be prepared for all scenarios.

The justification for this additional contingency budget is the potential rent/valuation increase of the  project. Fortunately, those who are successful in navigating through the unexpected will reap the  rewards down the line.

 Optimize Your Design to Hedge against the Shortages

Even when you have commitments on the high-cost drivers, challenges can rear up. Hone your focus on design. Again, the devil is in the details. When everyone is specifying a 12” RCP pipe and the lead time stretches to 6 months, I would ask the team: Will a 15” design work? Switching to a different size, model or brand that’s not as popular may be the perfect solution. Having a transparent dialogue with your design and construction team early on is key to optimizing design and hedging against shortages.

Prologis’ scale makes a difference when it comes to negotiating with vendors and suppliers. The current situation presents an opportunity to build and strengthen relationships with existing and new vendors and suppliers. Even for smaller companies, focusing on building long-term relationships is a viable strategy. I firmly believe that both the supply chain and the construction procurement system will come out of this perfect storm stronger and more efficient than ever.