The pandemic did little to cool down the red-hot warehousing market, but labor and material shortages (plus increasing regulation) could complicate future development.
John H. Boyd (jhb@theboydcompany.com) is founder and principal of The Boyd Co., Inc. Founded in 1975 in Princeton, New Jersey, and now based in Boca Raton, Florida, the firm provides independent site selection counsel to leading U.S. and overseas corporations. Organizations served by John over the years are many and varied and include The World Bank, The Council of Supply Chain Management Professionals (CSCMP), The Aerospace Industries Association (AIA), MIT’s groundbreaking Work of the Future Project, UPS, Canada's Privy Council and most recently, the President’s National Economic Council providing insights on policies to reduce supply chain bottlenecks.
Throughout the pandemic and its aftermath, warehousing has proven to be a remarkably resilient sector, to say the least. During the first quarter of 2021 alone, net absorption1 of the warehousing industry reached 80 million square feet, up over 50% from the previous year. This pace should translate into another record year of warehouse leasing activity, topping 600 million square feet, which was reached in last year’s record run despite economic uncertainties due to COVID.
Real estate developer clients of ours that have been in the logistics industry for decades are all telling me that they’ve never seen demand for warehousing space like they are today. They are all building new warehouse space as fast as they can, but it's been a struggle to keep pace with what seems like insatiable demand.
The key driver of this robust demand is the boom in online shopping, which has skyrocketed during the pandemic. Leading e-commerce players are recording over-the-top sales. Amazon in early 2021 reported its highest ever quarterly sales, surpassing $100 billion. Walmart’s online business was up almost 80% in its recent quarter, while Target saw its e-commerce volume surge by 154% during the same period.
U.S. markets leading the pack with new warehouse construction include: California’s Inland Empire; Houston, Texas; Atlanta, Georgia; Dallas, Texas; Chicago, Illinois; Central New Jersey; Milwaukee, Wisconsin; Detroit, Michigan; Phoenix, Arizona; and Columbus, Ohio. A high-growth sector that we are seeing in some of the country’s largest consumer markets—like New York; San Francisco, California; and Miami, Florida—is multi-story warehouses in urban settings that can provide quick and efficient last-mile deliveries. The rise of e-commerce and same-day delivery is ramping up demand for these urban warehouses, many in the food sector, as consumers are coming to expect faster and faster deliveries and are willing to pay for them.
Tight market conditions and strong demand are translating into sizeable warehouse rent hikes throughout the country. Year-over-year increases average about 4.9%, bringing the national average rental rate to about $6.35 per square feet, a new record high per our BizCosts.com database. Warehouse markets recording some of the highest asking rental rates include: San Francisco/North Bay, California, $14.97; Orange County, California, $13.94; Long Island, New York, $12.53; Los Angeles, California, $12.24; San Diego, California, $11.42; Central New Jersey, $10.72; East Puget Sound, Washington, $10.59; and Austin, Texas, $10.47.
Some of the tightest U.S. warehouse markets are Orange County, California; Los Angeles, California; Philadelphia, Pennsylvania; Central New Jersey; Nashville, Tennessee; Boise, Idaho; Hampton Roads, Virginia; Reno, Nevada; and Tulsa, Oklahoma—all of which are showing vacancy rates under 3%.
Costs carry the day
Comparative operating costs are playing an increasingly important role in deciding where to locate a distribution facility given the strains on the overall economy brought about by the pandemic. Higher corporate income taxes and the stiffer regulatory climate that is likely under the new Biden administration are also contributing to this focus on comparative costs.
The comparative cost of operating a warehouse in terms of labor, land, construction, power, and taxes can vary dramatically. Figure 1 compares the cost of operating a 500,000-square-foot distribution warehouse employing 150 workers. Annual operating costs range from a high of $18.3 million in the Meadowlands of Northern New Jersey to a low of $13.5 million in Ritzville, Washington—a differential of over 26%.
The costs shown for the surveyed locations in Figure 1 are consistent with site selection trends that show clients favoring cities with linkages to the global marketplace via deep-water ports and intermodal services. Each year, the U.S. moves more than $24 trillion in goods weighing over 19 billion tons between countless domestic and international points. An increasing percentage of these shipments are being made through our nation’s ports and intermodal facilities.
[Figure 1] Geographically variable operating cost ranking Enlarge this image
A new site-selection driver
For years, our firm has been saying that corporate site selection is both a science and an art. The “science” deals with the numbers, the quantitative analysis of operating costs, taxes, incentives, and other geographically variable factors that we can attach a dollar sign to.
The “art” of site selection relates to those more qualitative factors that vary by city, such as housing, education, and cultural and recreational amenities. These factors impact a company’s ability to retain key people in the initial move and to be in a strong recruiting position to attract top talent from both local and national labor markets in the years ahead.
That said, we are now dealing with a new site-selection variable on the qualitative side of the ledger: ESG (environmental, social, and governance) ranking. Beyond site-selection implications, investors in real estate—including major real estate investment trusts (REITs) that are heavily focused on warehousing—are increasingly applying ESG factors as part of their investment decisions.
A good example of ESG factoring into warehouse site selection, especially for power-hungry cold chain warehouses, is a current project of ours in Washington. Part of the draw of that state is that 70% of its power is generated by sustainable Columbia River hydro, solar, and wind power. Ritzville, located on Interstate 90 in eastern Washington, is home to the massive, new Adams-Nielson Solar Power Generation Plant. The facility, 25 times larger than any other solar farm in the state, was built to supply power to as many as 80 large warehousing and manufacturing customers wanting carbon-free, green electricity.
2021 speed bumps
While the warehousing sector is booming and is dominating our firm’s corporate site selection workload, it is not without speed bumps that are likely to persist into next year at least. Here are three of those speed bumps that need to be navigated:
1. Material shortages and rising prices. Wide-scale shortages of critical building materials, soaring commodity prices, and supply chain bottlenecks are all causing extended lead times and inflationary cost pressures for our warehousing site selection clients. Timing delays on raw materials—principally steel—are generating strong headwinds on the pace of new warehousing construction. Supply chain interruptions brought about by the pandemic are also driving up commodity prices. Look for warehouse construction materials as diverse as steel, lumber, drywall, copper, microchips, and aluminum to cost 10% to 25% more. Lumber prices alone are up 29% from last year.
Also contributing to supply shortages and rising costs are heavily backlogged West Coast ports and higher over-the-road freight costs, with truckload van rates now averaging $2.68 per mile nationally and as high as $2.81 in the Midwest region.
2. Labor shortages. Companies throughout the U.S. are struggling to find workers, and no industry is struggling harder than warehousing. Finding workers has been a challenge for a number of reasons, including the federal government’s extended unemployment insurance benefits, continuing apprehension of contracting COVID-19, and the need for some employees to care for their remote-schooled children.
These hiring difficulties have prompted our site-seeking warehouse clients to offer wage hikes and more generous benefit packages in order to better compete for workers in one of the tightest and most challenging labor markets that we have seen in years. The pace of client investments in robotics and automation techniques are also on the rise due to the worker shortage.
Compounding the hiring difficulties is the fact that warehouses tend to cluster in certain cities and in certain industrial parks, given their common need for zoning; major highway and/or rail access; and level, buildable, and affordable real estate. As a result, warehouses often compete against each other for the same labor.
3. Re-emergence of NIMBY (“not in my backyard”). Warehouse development has been having a sustained and unprecedented boom. As a result, the next boom we may see is an increase in regulation, spurred by anti-growth critics and watch dogs of the industry.
In trend-setting California, the governing board of the South Coast Air Quality Management District—the air pollution control agency for major portions of Los Angeles, Orange, San Bernardino, and Riverside counties—has adopted new regulations targeting warehouses of 100,000 square feet or more. These facilities must directly reduce nitrogen oxide (NOx) and diesel particulate matter (PM) emissions or pay a mitigation fee.
Similarly, many communities are also showing resistance to the construction of new warehouses. San Bernardino, California, situated in the epicenter of the vast Inland Empire warehousing market, was a single vote shy of establishing a 45-day moratorium on the construction of all new warehouses. Up until its May 2021 vote, San Bernardino had processed and approved 26 warehouse projects since 2015, covering 9.6 million square feet. Neighboring Inland Empire city, Colton, already has imposed a 45-day moratorium on new warehouses, with consideration to extend it another 10 months.
Nor is this type of pushback limited to the “Left Coast.” In the major warehousing hub of Chicago, a newly formed group, South Suburbs for Greenspace over Concrete, generated community opposition against warehouse development on the former Calumet County Club property. On the East Coast, opponents of two new warehouses planned for Robbinsville in Central New Jersey filed a lawsuit against the township’s approval of the project, saying the public was not given enough time to comment and that the decision was “tainted” by its reliance on flawed studies and out-of-date information.
Look for these speed bumps to emerge in other cities around the country, especially in those mature warehouse hubs with progressive leaders at the helm. At minimum, expect more changes to city codes that will elevate the standards against which municipalities evaluate and approve new warehouse projects moving forward.
Notes:
1. Net absorption is the sum of the square feet that became physically occupied for a period minus the sum of the square feet that became physically vacant.
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”