Real Estate, that's inventory!
Inventory is not unique to the manufacturing and consumer goods industries. It represents all the money that the system has invested in things which it intends to sell. This applies to the services industries, and health care, as much as it does to manufacturing.
Consider that our economy is completely different now. Reality has more than set in. It is never going to look or feel like 2019 again.
Companies across each industry must adapt. The strategy of holding endless inventory is leading companies in the wrong direction. They are moving increasingly closer to deteriorating cash flows.
Anyone involved with the process of buying, leasing, selling, or renting nonresidential properties, such as office or retail space, has inventory. Does their inventory align with market-demand? It many markets, it does not look promising.
Recent data from JLL's Global Real Estate Health Monitor show Washington, DC had a negative 39.7% leasing recovery during Q1 of 2023. In that same time frame, Washington's vacancy rate of 20.7% was only surpassed by San Francisco; which had a vacancy rate of 26.4%.
Is this purely the result of pandemic related shifts in the need for office and retail space? No.
Is this the result of Millennials suddenly refusing to return to work? No.
Don't believe me? Let's take a more detailed look.
Avison Young reports that Washington, DC had 2.11 million square feet of sublease space available in Q1 of this year; the largest amount of available sublease space in history. Interestingly, it also points out this is double the amount of sublease space available in 2018. Not 2020!
The GAO released a report in March of 2018. This report was titled "Agencies Focus on Space Utilization As They Reduce Office and Warehouse Space." This same report notes the majority of government agencies started to reduce the amount of space being used in 2016. It also points out that, in 2015, the Office of Management and Budget issued a memo requiring 24 agencies to begin reducing their domestic office and warehouse space requirements.
The signs were there. Demand for a product was going to drop. Inventory levels needed to reflect that reduction; however, the inventory levels grew.
Excess inventory means higher operating expenses (carrying costs). Empty building space does not translate to increased throughput. Nobody wants to be holding the keys, and financial responsibilities, for empty buildings.
Good news is available for those who leverage an inventory strategy. Just as the signs were pointing to less demand for office space, key indicators can be used right now to get ahead of the market.
The need for office space is not going away. It will look different, as key indicators are already showing.
Online shopping reached its peak during the pandemic. In 2020, $1 out of every $5 spent was online. Brick and mortar still commanded 80% of the market. Shopping in stores, in person, is not going away. It will look different though.
The demand from the market is there, it's just different. That is the case with any shift in demographics amongst the workforce. Which company wants to listen and make money?