Global supply chain gridlock effect on Cayman Real Estate

Back in June 2021, I wrote an article that focused on construction material costs and availability as well as addressed two key factors that are contributing to the increase in overall property values in the Cayman Islands that particularly impacted new construction: building and shipping costs.

In that article, I quoted a chief economist at Moody’s Analytics who projected “by the fall or end of the year prices will be coming back to earth.”[i] At that time, I don’t think anyone would have thought the effects of the pandemic shutdown would have taken so long to get back to normal. In fact, the global supply chain gridlock is affecting almost every industry in the world, and many are projecting that there is no end in sight.

As the world economy struggles to recover from the pandemic, supply chain distributions are driving up prices and leading to a growing shortage of goods. It’s all comes down to supply and demand.

Articles are flooding the news channels right now exploring the broken supply chain system for almost every single item imaginable from toys for Christmas to parts and components for factories to even energy. The global supply chain is like a chain of dominos. Once one falls the rest will soon fall.

In this article, I wanted to explore further the supply chain chaos the world is currently experiencing and how this is impacting the real estate market in the Cayman Islands.

The first domino – surging demand

As seen during the early days of the pandemic, online ordering has gone through the roof and continues to do so. Two years ago, only 13.6% of sales were made from online purchases. Today, that number is expected to reach 19.5% in 2021, a 45.8% increase in ecommerce market share over two years.[ii]

For the last year and a half, consumers have been spending less on travel, going out to movies or dinner, attending events and in turn are spending their money in other places such as household goods and renovation, automobiles, appliances, and electronics to name just a few. And the rise in imported goods and items that are built here with foreign sourced parts have resulted in more container volume trying to get through the ports than before the pandemic.[iii]

In fact, consumer goods demand is overall 22% higher compared with pre-pandemic levels (comparing February 2020 with August 2021).[iv]

After a slowdown in manufacturing in China due to the coronavirus, production is back up. Shipments from the world’s biggest exporter in August rose 25.6% year-on-year, picking up speed from a 19.3.% gain in July.[v] About 25% more cargo was shipped from Asia to the US in the first eight months of 2021 compared with the same period in 2019 pre-pandemic, according to Container Trades Statistics.

The second domino – ocean shipping

As of October 19, 2021, there are approximately 200,000 shipping containers on ships off the coast of Los Angeles that cannot get into the Los Angeles or Long Beach ports to unload, which is approximately two weeks’ worth of work sitting in the Los Angeles harbour. That equates to a record-breaking 100 container ships with 45 more expected later this week.[vi]

Last week, these ports went to a 24/7 operating schedule in attempt to handle the backlog. So even though goods may be shipping more regularly they cannot be unloaded. Together, the ports of Long Beach and Los Angeles account for approximately 40% of the shipping containers entering the United States.

The third domino – land shipping

But the problem doesn’t end there. Once at the port, a lot of the containers are just sitting there. The US is experiencing a lack of truck drivers to deliver the materials once they arrive at the port. This isn’t new. The shortage of truck drivers has been in the news since 2018 but has become worse as many long-haul drivers are switching to local delivery routes to be closer to their families and not be out on the road for weeks on end.

In fact, Moody’s said the weakest link in the supply chain may be the shortage of truck drivers, which has led to the port congestion noted above and gas stations in the UK running dry.

The fourth domino – not enough workers

Economists believe there are several factors contributing to the supply-chain shortages, including a growing number of workers quitting jobs key to keeping things running smoothly.

A record 4.3 million Americans quit their jobs in August — the most since the Department of Labor started tracking this data in 2000. The Labor Department in July reported that the warehouse industry had a record 490,000 job openings.[vii]

Dubbed “The Great Resignation” people are leaving their jobs to find something different. Much like the re-evaluation of what home means, people during the pandemic were also able to step back and re-evaluate what work means.

So, what does this all mean?

Moody’s Analytics has warned that problems “will likely get worse before they get better.

As the global economic recovery continues to gather steam, what is increasingly apparent is how it will be stymied by supply-chain disruptions that are now showing up at every corner,” Moody’s wrote in a report.[viii]

“Border controls and mobility restrictions, unavailability of a global vaccine pass, and pent-up demand from being stuck at home have combined for a perfect storm where global production will be hampered because deliveries are not made in time, costs and prices will rise and GDP growth worldwide will not be as robust as a result,” Moody’s wrote in the report.[ix]

How does this affect real estate in the Cayman Islands?

Much like the US, the supply chain backlog will primarily affect real estate in the Cayman Islands when it comes to sourcing raw materials needed in new construction. In the US in September, housing starts unexpectedly fell 1.6% a “one-year low amid acute shortages of raw materials and labor.”[x]

Lumber prices are rising again after tumbling from record highs set in May. Building materials, like windows and electric breaker boxes, are in short supply. Prices for copper, another essential material in home building, have soared more than 16% since the end of September, buoyed by decades-low supplies.[xi]

“The hurricanes that hit the southern part of the US are also contributing to a shortage in construction materials,” added David Johnston, President of the Cayman Contractors Association. “Materials required to rebuild such as drywall, lumber, electrical sockets and more are being allocated for these damaged areas first. Additionally, the forest fires that hit North America this year are contributing to the lower supplies of lumber as well as the increased cost.”

As of September 14, 2021, the National Interagency Fire Center (NIFC) reported that 44,647 wildfires in the United States had burned 5.6 million acres of land.  Similarly, the Canadian Interagency Forest Fire Centre (CIFFC) announced that 6,317 wildfires burned 10.34 million acres.

“Six months ago, it appeared the challenges we were experiencing with sourcing construction materials would be easing up by the end of the year,” commented David Johnston, President of the Cayman Contractors Association. “Unfortunately, this is not the case. We are looking at lead times up to 40 months for certain types of specialized construction equipment.

In fact, lead times for most materials has almost doubled. Given this, I don’t see the current supply chain challenges easing for quite some time. We could be dealing with the same obstacles today into a good part of 2022 and potentially into the 3rd and 4th quarter.”

As for real estate in the Cayman Islands, much like US and Canada, and as I’ve mentioned in numerous articles, prices will continue to climb. Existing properties will continue to appreciate due to the increasing replacement cost as well as the lack of land available for building. Land prices will continue to climb as land becomes more and more scare on the island. Prices for new developments will also go up due to the overall increase in materials required to build them.

As mentioned above, it’s a domino effect that impacts every aspect of real estate and in fact, almost every aspect of our lives. Everything is costing more, if you can get it, and if you can get it and it’s the same price, it will cost more to get here. Gasoline prices in the US increased to 0.84 USD/liter in September, which is the highest since 2014.[xii]

“Unlike six months ago, these delays have become standard now in our industry,” commented David Johnston, President of the Cayman Contractors Association. “Everyone is in the same boat whether you are in the Cayman Islands, US, Canada or anywhere in the world. It’s expected now and everyone is learning to live with this new normal.”

It’s important to take into consideration all the factors when it comes to selling, purchasing, building, or buying new construction and if you have any questions or need guidance, please do not hesitate to contact me at +1 345 945 4000.

I’d like to thank David Johnston, President of the Cayman Contractors Association, for his valuable contribution to this article.

[i] Associated Press, June 10, 2021
[ii] Shopify, 2021
[iii] CNN, October 19, 2021
[iv] BBC News, October 15, 2021
[v] Reuters, September 7, 2021
[vi] ACB7 News Los Angeles, October 19, 2021
[vii] ACB News, October 19, 2021
[viii] ABC News, October 19, 2021
[ix] CNN, October 13, 2021
[x] Reuters, October 19, 2021
[xi] Reuters, October 19, 2021
[xii] U.S. Energy Information Administration