A couple of days ago, I wrote about the ongoing challenges in global shipping. Specifically, I said that the long-term bullish case for our shipping container pick (up 60% compared to the S&P 500’s 18.5% during that time) was still intact.

Today, I want to look further down the supply chain and explain why ongoing problems could lead to big-time profits for investors.

But first, let’s revisit our nation’s ports.

The U.S. processed 39 million fully-loaded containers last year. That includes handling both inbound and outbound freight, but the former is at least twice the size of the latter.

The Port of Los Angeles does most of the heavy lifting. The busiest complex in the Western Hemisphere has 83 cranes operating in seven container terminals spanning 43 miles of waterfront. The facility has reported a record-breaking throughput volume of 10.7 million containers over the past year through June.

Terminals in other cities, such as Charleston and Newark, have also been busy. U.S. ports are now welcoming a record-breaking 2.3 million imported containers per month, up from the typical pre-pandemic volume of 1.8 million. That’s about 6 million more containers to unload this year. In part, the National Retail Federation attributes that growth to stores stocking up on merchandise before inflation drives wholesale costs even higher.

General cargo imports surged 83% year-over-year in raw tonnage to reach 840,000 tons in May. The bottlenecks and extended wait times we saw last year have begun to ease in the past few months. But now, another problem is emerging: we’re out of places to store all this stuff.

A Massive Inventory Glut

Remember all those out-of-stock items and half-empty shelves during the pandemic? Ever since store owners have been diligently trying to restock their depleted cupboards to meet the insatiable demand. But it was never enough. Consumers devoured incoming shipments as quickly as they came in.

So retailers kept trying to adjust, placing larger and larger orders to satisfy customers. Finally, merchandise has started to arrive en masse from Asian suppliers… just about the time demand slackened. Inevitably, this resulted in an inventory glut.

Big-box retailers have over-corrected. Amazon, for example, has seen the amount of merchandise in its warehouses build by 47% from a year ago. By comparison, sales are only up 8% over the same period. It’s a familiar story. Walmart, Home Depot, Kohls, and many others report bloated inventory levels.

Even the heartiest of appetites can be filled. Whatever the cause, discretionary consumer spending fatigue has set in. Stores that were once bereft of merchandise have suddenly become over-stocked. Yet, huge deliveries of furniture, clothes, kitchen appliances, and other bulky goods continue to arrive daily, piling up.

Target, whose inventory level has swelled by 43%, is said to be canceling orders from some of its vendors. Department store chain Dillard’s is marking down prices as much as 75% to clear out excess shoes, bedding, and home decor. Liquidators are having a field day.

Where shoppers see the word “sale,” investors see terms such as “right-sizing.” Whatever you call it, retailers face higher inventory-to-sales ratios and shrinking margins – neither of which is good for shareholders.

A recent Citigroup study found that inventories outpaced sales by at least 10% at more than half of the nation’s top retailers. So it’s not surprising to learn that warehouses around the country are brimming at max capacity.

We Need More Warehouses

According to commercial real estate manager Cushman & Wakefield, vacancies at industrial warehouses have fallen to just 3%, meaning they are 97% full. But the biggest distribution centers, known as the “Inland Empire,” have a collective vacancy rate of just 0.6%. This warehouse district stretches from the Port of Los Angeles to the Nevada border and contains 1.6 billion square feet of storage space. For context, the Pentagon (the world’s largest office building) spreads across 6.5 million square feet. Imagine 245 Pentagons laid end to end, stacked to the rafters with Christmas decorations, sporting goods, and everything in between.

And ships continue to unload mounds of cargo.

This situation may resolve in time. But long-term demand for industrial warehouse space is headed nowhere but up – unless you think the internet is a fad. There are millions of digital retail transactions each year. Whenever you receive an order from your favorite online vendor, you can bet the items didn’t make a direct flight to your doorstep – they probably had a layover in a distribution center.

Warehouse space absorption is inextricably linked to growing e-commerce activity and speedy order fulfillment. Prologis (NYSE: PLD) estimates that every $1 billion incremental increase in e-commerce sales will necessitate a million square feet of additional storage and distribution space.

And brick-and-mortar continues to cede market share. According to the Commerce Department, online shoppers spent $231 billion last quarter, accounting for about 14% of total retail spending. That’s expected to top 25% within the next few years.

That will translate into hundreds of millions of additional square footage in warehouse space needed by sellers and third-party logistics providers – creating even more upward pressure on rental rates.

Action To Take

Looking ahead, Amazon has already invested billions in buying existing warehouses and thousands of acres of undeveloped land to build new regional distribution hubs. It now owns about 16 million square feet. But that’s not nearly enough to meet its needs – it leases 387 million, more than twenty times as much.

Add it all up, and we’re going to need more warehouses. A lot more.

I’ve already mentioned one name in this space that interested investors should consider: Prologis. And there are other REITs with a focus on the industrial/logistics space that are worth a look. But my favorite pick is turning all those “buy” clicks I mentioned earlier into a steady stream of monthly dividends. And that’s why we recently added it to our premium portfolio over at High-Yield Investing.

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