In spite of a hiccup from bellwether company Amazon and increasing global and local challenges, warehousing remains one of the hottest sectors in the U.S.
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.
In May of 2022, e-commerce giant Amazon—the company that rewrote the “rules of the road” when it comes to warehousing—announced it was losing billions of dollars due to a drop in e-commerce sales and an overabundance of warehouses. Amazon’s online sales declined 3% during the most recent 2022 quarter, as shoppers relied less on the company with the decline of the Omicron variant signaling a possible turning point in the pandemic.
As a result, the company plans to shrink its national warehousing footprint. Over the past few months, Amazon has canceled plans for nearly 10 million square feet of warehouse space, shelving plans for more than a dozen fulfillment centers and delivery facilities around the U.S. as the company wrestles with a costly space glut.
Amazon’s rightsizing of its capacity to a more normalized post-pandemic pattern of demand is significant, especially for those local markets shut out of the new jobs and tax ratables that would have come from the new facilities. However, Amazon’s catching its breath is no more than a drop in the ocean when it comes to sizing up the overall U.S. warehousing landscape. On the national level, warehousing continues to soar and is by far the hottest sector of the U.S. commercial real estate market.
Vacancy rates for warehouses and distribution centers are at all-time lows across the board, and demand for space is continuing to climb. By 2025, the U.S. will need an additional 335 million square feet of warehousing space just to handle the increase in online ordering over these next 36 months.1 Warehouse demand from brick-and-mortar retailers, third-party logistics firms, and others will generate a need for another 660 million square feet of distribution space.
The increased demand for warehouse space is pushing up rents in markets coast to coast. The national average asking rent in the second quarter of 2022 reached $6.96 per square foot, up 17% from a year ago. Warehousing hubs like the Inland Empire and Northern and Central New Jersey have long surpassed the $10.00-per-square-foot benchmark and are now at unheard of highs of $16.69, $13.85, and $12.61 per square foot, respectively. (See Figure 1.)
Signaling that demand will remain strong throughout the year, over 70% of newly constructed warehouse space is being delivered pre-leased. One bright sign on the supply side is that the pipeline of new construction will start hitting the market at a faster pace as pandemic-related shortages of steel, concrete, and lumber should ease in the coming quarters.
Feeling global shock waves
The past few years can be summed up by the expression, “the global supply chain sneezes, U.S. warehousing catches pneumonia.” Never have offshore events impacted the U.S. supply chain like they are now. We are going on three years from the start of the pandemic, and the global supply chain continues to unravel. Beyond the early COVID lockdowns, our warehousing clients are now dealing with the war in Ukraine, spiking wages in China, soaring fuel and ocean freight costs, growing protectionism policies discouraging cross-border commerce, labor shortages from “the Great Resignation,” unpredictable lockdowns in Chinese ports and industrial hubs, computer chip shortages, and U.S. inflation at a 40-year high. The cost of shipping a container to the U.S. is now almost 10 times higher than pre-pandemic levels. Transporting goods from China can now takes as many as 80 days, compared to half that prior to the pandemic.
Our warehousing clients are reacting to these world events as best they can and in several different ways. First and foremost, there is a fast-tracking of reshoring manufacturing operations back to the U.S. as seen by leading industrial firms like Ford, GM, Boeing, Lockheed Martin, Caterpillar, and Micron, to name just a few.
Foreign firms are also making major brick-and-mortar investments here in the States in order to avoid global supply chain bottlenecks and better serve the huge U.S. market. Examples include our client Tritium, which will be producing and warehousing fast-charging stations for the electric vehicle market in Tennessee, rather than in its home country of Australia. Other foreign direct investments include Samsung in Texas, Toyota in North Carolina, Kia in Georgia, Airbus in Alabama, and TSMC, the Taiwanese chipmaking giant, in Arizona.
We also anticipate near-shoring to accelerate as companies opt to establish production facilities in areas proximate to the U.S., such as Mexico, Canada, and the Caribbean. We are also seeing the end of the decades-long love affair with just-in-time inventory in favor of a just-in-case approach requiring larger, closer, and more warehouses. Clients are also increasing their total number of vendors as well as where they source from geographically in order to spread the risk of any supply chain disruptions.
NIMBY 2.0
At the same time that our warehousing clients are trying to respond to the effects of global supply chain shocks, many are also facing pressure from local “not in my backyard” (NIMBY) groups. Our clients in the manufacturing sector have faced anti-growth pressures from NIMBY groups for many years. Their objections often centered around noise, pollutants, and smelly, dangerous emissions. What is fueling the NIMBY movement against our warehousing clients is a bit different in nature and centered more on the sheer size and speed of the sector’s expansion and proliferation. This fast pace of change and the overpowering size of many of these new warehouses—1 million square feet is becoming common—is unsettling to many.
Also, our warehousing clients are finding that it is not just retired baby boomers with time on their hands walking the picket lines and showing up at zoning board meetings. As more and more last-mile and micro-fulfillment centers go into urban enclaves, residents in many of the lower income communities are a doubling down on NIMBYism—driven by concerns about displacement, rising real estate prices, and gentrification of the neighborhoods.
The epicenter of warehouse NIMBYism is in Southern California, especially the Inland Empire communities that have been the poster children of the explosion of e-commerce and warehousing. But it is by no means limited to there. Arvada, Colorado, killed an Amazon warehouse due to wildlife concerns. In rural Virginia, the community of Brown Grove delayed the construction of a warehouse for grocery retailer Wegmans for over two years, arguing it negatively impacted forested wetlands. In Pompano Beach, Florida, a major developer is facing fierce NIMBY protests about his proposed warehouse near its famous racetrack site.
Meanwhile concerns about stormwater runoff is the major narrative being used by the NIMBY movement in the Millstone River Basin in Central New Jersey—home to millions of square feet of warehousing in Cranbury, Robbinsville, and the popular Exit 8-A area of the New Jersey Turnpike.
If it is not enough for our warehousing clients to be up against local, grass roots protesters, a new ally of the NIMBY movement has recently emerged in the form of the International Brotherhood of Teamsters. In trend-setting California, the union claims to have stopped or delayed Amazon facilities in Gilroy, Fremont, Hayward, San Jose, and Santa Rosa. The Teamsters have also joined NIMBY forces against Amazon in Colorado and Indiana. In New Jersey, the Teamsters joined with environmentalists and North Jersey politicians to help nix a new Amazon logistic hub at Newark Liberty Airport. Amazon would have spent $125 million to redevelop two antiquated buildings into a new state-of-the-art air cargo facility creating 1,000 jobs.
Robotic relief?
In response to many of the challenges mentioned above, more and more companies are turning to automation. The pace of automation in warehousing is off the charts, and the rationales for investing in robotics are likewise growing. North American companies began 2022 by purchasing the most robots ever in a single quarter, with 11,595 robots sold at a value of $646 million, according to the Association for Advancing Automation. These first quarter 2022 numbers represent a growth of 43% over the previous year.
Why robots? The reasons are growing well beyond mere efficiencies and cost savings. Robots don’t get COVID, don’t take time off, and don’t require expensive health plans. The “Great Resignation” has forced many warehouses to pay unsustainable startup wages and bonuses, with hourly rates beginning as high as $25 per hour. Robots are also being rationalized by an unlikely voice, that of progressives pointing to ESG and social impact imperatives. ESG stands for “environmental, social, and governance” and refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company.
Environmentally, robots don’t require large, paved parking lots and don’t add to traffic congestion, auto emissions, and stormwater runoff. Robots also don’t take bathroom breaks using flush toilets that can strain public utility systems like workers do. They also do not require as much air conditioning as people do. As a result, the facility can be more energy efficient and reduce a company’s carbon footprint. On the real estate side of the equation, automation often allows the warehouse to have a smaller floorplan, helping to address the growing shortage of suitable warehousing sites, especially in urban areas.
Robots can also alleviate some NIMBY concerns, especially in last-mile facilities in city neighborhoods. In Milford, Massachusetts, NIMBY complaints about an Amazon delivery station included workers smoking, urinating behind hedges, and excessive commuter traffic jams in the once-quiet residential streets. All bad traits you won’t see in a robot … at least this generation of robots.
Looking ahead
Distribution warehousing continues to be one of the hottest sectors of the supply chain—indeed one of the hottest sectors of our national economy, now accounting for almost 15% of gross domestic product (GDP). Based on our firm’s six decades of experience in the field, I am confident today’s supply chain challenges will be met and overcome by the industry’s best and brightest. I have no doubt the supply chain sector will rise to greater heights and take on an even greater significance within our national economy in the days ahead.
Notes:
1. These figures are based on research and analysis performed by The Boyd Co.’s BizCost unit, which creates reports on the cost of doing business.
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.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.