Commercial real estate will be challenging for quite a while. Not only has the COVID recession hurt rent paying businesses, but more importantly the massive increase in e-commerce and all manner of contactless delivery options as well as the work-from-home trend will result in substantial overcapacity for commercial real estate for the foreseeable future.
The $4.6 trillion in commercial mortgages could be in trouble, but should not impact the overall economy as the $16 trillion in residential mortgages (in today’s value) did back in 2008. There will be a lot of empty and bank owned office space and malls, but this will be more than offset by a more productive and geographically diversified workforce. All things being equal, having the option of working from home and buying online, cannot be a net negative for the economy as a whole.
Property owners will get creative in converting their space to other uses and businesses will permanently adopt hybrid workforce models with work from home options, shared workspaces, hoteling, etc.
It’s all good for the economy, but obviously disruptive for some sectors.
You’ve recently spoken about the need for the healthcare supply chain to diversify its supply lines amidst pandemic. Have you begun to see a shift here or are we still stuck in the old ways of doing things? What are the first few steps logistics-oriented managers can take towards achieving greater diversification?
Healthcare supply chains were really exposed during the pandemic, as global trade practically ceased and borders closed. This is more of a macro and governmental issue rather than something healthcare providers can address on their own. The US needs to manufacture and stockpile critical medical supplies, medicines, etc. and only the government can provide these incentives and subsidies.
The Biden administration issued Executive Order 14017, which, among other issues, addresses critical pharmaceuticals and active pharmaceutical ingredients (APIs), and envisions more domestic manufacturing capacity. 87 percent of generic API facilities are located overseas, primarily India and China, which will be difficult to re-shore at reasonable cost.
A reasonable approach may be similar to food security, where farmers all over the world are subsidized (i.e. paid to stay in business), so that their economies can still trade freely in food products without giving up the capacity to produce at home in a crisis. I really hope that we have learned our lesson here, as the cost of preparedness is trivial to the cost of a pandemic.
The now proven advances in vaccine technology could not only prepare us for a future, potentially even more lethal pandemic, but also vastly reduce productivity losses and suffering from the seasonal flu, regular colds, etc. Again the issue is that the government needs to step in to provide the financial incentives (for example guaranteed purchases, stock piles, etc.) for the private sector to produce these vaccines.
In the long-run, the impact of the pandemic could be quite positive, if significant investments are made into universal vaccines, supply chain diversity, infrastructure, cybersecurity, electrical grid hardening, etc.
Now that State economies are beginning to open up, what cross-industry supply chain shifts do you predict will occur in the marketplace and how would you advise your clients to take advantage of them?
There has been a lot of talk of inflation and we’ve seen some significant raises in producer and consumer prices. However, it is not clear how much of that is the transitory effect of restarting complex supply chains; for example, shipping costs, poor demand forecasting, etc. versus the beginning of a 70’s-style inflationary spiral.
I am fairly optimistic that it’s the former. It is hard to overestimate the impact a total shutdown had on many industries and how difficult it is to respond to shifts in consumer behavior. Lumber prices are a great example, after quadrupling since the beginning of the pandemic as workers stayed home and focussed on home improvement, facing quite inelastic supply, they have now dropped by 40% as speculation abates and consumers start going out again and increasing their services spending.
Much of the global supply is only inelastic in the short term, as there is still significantly global latent capacity. Sadly, many of the Asian economies are still in the midst of the pandemic, suppressing their demand, which helps the developed world.
Smart companies should use this crisis as an opportunity to focus on the long-term, rather than panicking over short term supply squeezes.
Often, short-term supply squeezes are an excuse not to examine the supply chain holistically for fear of upsetting vendors. In fact, it’s a great time to strategically re-source core supply chains for both better long-term pricing and more diversity and robustness.
Strategic buyers should not go back to business as usual, but instead create a competitively differentiating supply chain for the long-term. The COVID supply chain experience provides the organizational urgency to act and the likely ongoing weakness in the world economy provides the motivation for suppliers to cooperate.
Most strategic sourcing initiatives take about six to nine months and return three to five times their investment within the first year of implementation, but require a high level of expertise and analytical sophistication. If such resources are not available internally, senior management should build (or bring in) the talent and capabilities from the outside.
Much has been written about the ‘new normal’ for workforce management. What trends do you see emerging in terms of the mix of work from home vs office as well as permanent vs contingent workforce?
When COVID-19 hit in the first quarter of 2020, businesses were forced to operate with a remote workforce, compressing what may have been a natural, decade-long adoption S-curve into a large-scale forced trial of remote working. The result is that some employers and employees like it and some do not, but the proportion of permanent work from home will certainly remain very high, post pandemic.
The second order implication of permanent remote working is that employers now have the flexibility to draw on national or global talent pools to find the best talent at the most competitive wages. HR professionals will face fierce competition for talent and significant shortages of specific skills amidst a diminished total workforce.
To compete effectively for scarce talent, employers need data and analytics about talent availability, cost, and outcomes. Companies need to manage the workforce across all modes of relationships, be it traditional W2, contingent, or intermediated all the way to SOW-governed contractors.
Given the size and scope of this challenge, managing the total workforce well could be one of the most important levers to improve earnings.
This is a complex and analytically intensive challenge, with mission-critical implications for most corporations. Many companies may want to leverage the data, experience, and analytical capabilities from specialized outside services providers to accomplish the task effectively.
About the Author
Hans Dau is the CEO of The Mitchell Madison Group. Over his 25-year consulting career, he has served C-level executives of large public companies, private equity firms, and other public and private institutions. He has worked in North America, Europe, and Asia with a focus on devising creative solutions for complex issues and unlocking economic value for his clients and their shareholders.