E-commerce fulfillment growth into secondary markets driving up warehouse labor costs, report says

The penetration of e-commerce fulfillment services beyond first-tier property-leasing markets into the so-called secondary region of the Midwest is driving up labor costs and causing worker shortages in traditional and e-commerce distribution centers, a report from real estate and logistics services firm JLL Inc. said today.

The findings underscore arguably the most profound change wrought by the e-commerce phenomenon on the nation's logistics network: The strains being placed on labor availability and across-the-board costs due to exploding demand for massive facilities that require significant worker counts to handle surging product throughput.

Dearer rents are pushing e-tailers, omnichannel retailers, and their logistics partners out of primary markets such as Dallas/Fort Worth, southern California's "Inland Empire" east of Los Angeles, and the New York-New Jersey-central Pennsylvania corridor. Increasingly, they have turned to Midwest markets with lower costs, abundant land, and good access to the national road network, the report said. Indianapolis; Columbus, Ohio; Cincinnati; and St. Louis have seen spikes in e-commerce deals over the past two years, and each market ranks in the top 10 nationally of e-commerce locations, JLL said. In Indianapolis, which is near the nation's population center and intersected by multiple highways, e-commerce has accounted for 61.2 percent of leases of "big-box" buildings of more than 500,000 square feet for the past two years, according to JLL.

Even though these facilities are heavily automated, they still require enormous investments in labor, especially during seasonal spikes, JLL said. Large-scale e-fulfillment operations typically have one employee per 700 to 1,000 square feet. In contrast, traditional warehouse facilities that replenish retail stores and distribute wholesale goods have an average employee count of one per 1,500-3,000 square feet, according to the report.

"As a result, e-commerce-focused leasing can drive local demand for labor at a rate two to three times that of traditional warehousing operations," the report said.

The increasing demand for labor sparked by e-commerce, combined with a low national unemployment rate (averaging around 4.7 percent), is having a spillover effect on traditional warehouse operations. Those facilities now must compete at higher wage thresholds for the same tight pool of workers, the report said.

On average, workers in industrial markets with elevated e-commerce leasing activity have seen 5.8-percent annualized wage gains from 2013 to 2015. That is far above the 2.7-percent national average wage growth rate, making warehouse labor the U.S. occupation with the fastest wage growth rate, according to the report.

Warehouse workers in Indianapolis and Dallas/Fort Worth experienced annual wage increases of 6.2 and 6.3 percent, respectively, during the same period, while the wage growth for all occupations over the same time frame increased by only 0.8 percent and 3.7 percent, respectively, the report said. In the Inland Empire, the annual median wage for laborers and freight stock employees rose 8.2 percent from 2010 to 2015, but only by 4.6 percent for all occupations, JLL said.

The labor challenge is unlikely to recede any time soon, especially as e-commerce continues to suck more of the air out of the property-leasing room. Over the past two years, e-commerce has accounted for 22.5 percent of all big-box leases, according to JLL data. That was followed by third-party logistics (3PL) providers at 15.2 percent, consumer non-durables at 12.1 percent, and traditional retail at 10.4 percent.

In a sign of how quickly the pace of e-commerce growth has eclipsed bricks-and-mortar activity, from 2010 to 2014 e-commerce was the third most active industrial sector, accounting for 16.1 percent of all "big box" transactions nationally. Traditional retail and consumer non-durables each accounted for 16.7 percent of the activity, JLL said.

The report advised that companies invest in predictive labor analytics software to determine workforce needs, evaluate the use of productivity-improvement technologies, and understand the qualitative and quantitative dynamics of each labor market.