John H. Boyd is Founder and Principal of The Boyd Co., Inc. Founded in 1975 in Princeton, NJ, 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.
COVID-19 has hit supply chains with a “double whammy.” It’s not just that supply of vital medical equipment, pharmaceuticals, and essential consumer staples has crashed. Companies have also seen a plunge in demand as more than 30 million workers lost their jobs and shelter-in-place rules halted normal commerce. Meanwhile the already booming e-commerce sector has kicked into overdrive.
How will these large and rapid changes impact the distribution warehousing sector here in the United States? From my vantage point as a corporate site selection consultant, I have identified some of the key trends that I see having an impact on site locations and design decisions.
Move toward reshoring
Reshoring of manufacturing and supply chain operations from China back to the U.S. has been a trend since the Trump tax cuts, but we expect the pace of this supply chain realignment to pick up even more now. The pandemic has brought into the spotlight the fact that our nation’s supply chains have been stretched to the limit at our great peril. COVID-19 has been a painful wakeup call that our supply chains—normally hidden from public view—are far too reliant on distant nations like China. The message of supply chain risk has even reached the halls of the U.S. Congress where lawmakers—on both sides of the aisle—are crafting legislation to encourage American companies to shift supply chain operations from China back to the U.S. through the use of tax breaks, generous subsidies, and new rules of the road.
As a result, we expect that warehouse site selection within the U.S. will become less “port centric” and more oriented to the dynamics of domestic production and consumption. In recent years, some of the most popular and expensive supply chain real estate has been close to deep-water container ports like Miami, Florida; New York/New Jersey; Southern California; and Houston, Texas. We see that interest moderating and predict a heightened interest in warehouse sites near centers of U.S. manufacturing and agricultural production, especially in our nation’s central region.
Weakened economy
Interest in keeping a close eye on cost efficiencies and operating costs will intensify in the weakened COVID-19 economy. As a result, companies may favor lower-cost cities and states with more favorable tax regimes for their supply chain facilities. Figure 1 lists ten top locations on the U.S. East Coast for a cold chain distribution center serving the pharmaceutical industry and shows the comparative operating costs (labor, real estate, construction, power, taxes, and shipping) for a 175,000-square-foot facility. Annual costs range from a high of $27.5 million in Staten Island, New York, to a low of $18.1 million in Rocky Mount, North Carolina. The cost differential between the New York location (a state with a corporate income tax rate of 6.5%) and North Carolina (a state with the nation’s lowest corporate income tax rate at 2.5%) is $9.4 million, a significant differential of 34.2%.
[Figure1] Distribution center operating cost comparisons
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Also shown in Figure 1 are ten top Central U.S. DC sites along with annual operating costs for a 750,000-square-foot national warehouse. Annual costs range from a high of $20.1 million in Humble, Texas, to a low of $18.1 million in Liberty, Missouri. Three of the ten top national DC sites are in Missouri which records the lowest corporate income tax rate in the Central U.S. and the second lowest in the nation at 4.0%.
Site-seeking companies need to be on guard for major tax hikes and toll increases in the months ahead. Those states hardest hit by COVID-19 will face unprecedented budget challenges and will be searching for new revenue sources. California, for example, is gearing up for a large property-tax hike. The state’s November ballot initiative would effectively exclude commercial and industrial properties from the landmark Proposition 13 passed in 1978 that limited property taxes for homes, businesses, and all other land to 1% of the property's value at the time it was last sold. If passed, this game-changing initiative is expected to hike property taxes for California businesses by as much as $12 billion.
At the same time, the weakened economy may also open up new sources for distribution sites. Some of the nation’s most attractive commercial real estate will be the many millions of square feet of retail space that will not be coming back after COVID-19. Developers will be especially quick to repurpose former malls and “big box” stores. These sites may prove attractive to developers due to their low cost, highway access, and truck and employee parking accommodations.
The role of risk management
Conventional risk management has always been part of the warehousing location decision. Companies have long taken into account such considerations as the integrity of the physical site, insulation from natural disasters, and political stability when choosing where to locate a warehouse or distribution center. The pandemic, however, will greatly expand the boundaries of risk management and its role in site selection. It will now need to include a range of COVID-related considerations like transitioning to new suppliers and/or customers as well as transitioning away from some that may go out of business due to COVID. Similarly, DC design and management will need to consider a myriad of human resourcefactors related to the impact of the virus on the DC’s workforce and local labor market as a whole.
Rising importance of the cold chain
COVID-19 will change not only where warehouses and DCs are located but also how they are designed. Cold storage was already on track to become a much larger player in the supply chain before COVID-19. Now, we are seeing unprecedented interest in the cold chain from investors and site-seeking industries like pharmaceutical and food. Our firm’s BizCosts unit forecasts that between 100 million and 125 million square feet of freezer/cooler space will be required to meet new demands, much of it coming from pharmaceutical, biotech, and food processing companies.
This trend is expected to continue beyond COVD-19. We expect to see many consumers continue to order perishables, including frozen food, online. Additionally, pharmaceutical and biotechnology firms are developing a wide range of new products that rely on cold storage throughout the entire supply chain. Biologics—drugs and medicines developed from living organisms—are also driving new cold storage demands. The cold chain will become even more critical when the much anticipated COVID-19 vaccine is developed, and the pharmaceutical supply chain has to handle distribution of an unprecedented number of dosages.
Technology and connectivity
COVID-19 is also causing a spike in warehouse automation. Some companies are turning to robots to help maintain social distancing and keep workers safe within the warehouse setting. Fetch Robotics, a provider of warehouse robotics, reported that inquiries are up by two-thirds since the emergence of COVID-19. Walmart says that concerns about worker safety are driving its dealings with Bossa Nova Robotics, which is designing a new shelf-scanning robot for the mega-retailer’s warehouses and stores.
Greater use of robotics will also be encouraged by the COVID-19-driven reshoring of manufacturing and supply chain facilities back to the U.S. This type of automation will help companies offset higher U.S. operating costs, principally in the area of labor.
COVID-19 has also accelerated the trend toward remote working, which will have a significant impact on the U.S. commercial real estate industry. As more employees work from home, the demand for office space decreases. When we started our firm in the 1970s, many U.S. offices averaged 500 square feet per worker. That number dropped down to 200 square feet per worker a decade ago and is now less than 150 square feet per worker. For warehousing projects, we expect to see less space allocated to other back office functions (such as accounting, sales, and customers service) that may be co-located at the site.
Rewriting the script
It’s important to remember that no one saw this coming. There’s been no script for supply chain players to follow when it comes to reacting to and dealing with the COVID-19 pandemic. Instead supply chain companies and their consultants have been writing a new script each and every day.
Given the industry’s ability to adapt quickly to changes, I have no doubt we will recover from this horrible event with a more secure and resilient supply chain in tune with the “new normal.” … What that “new normal” is, however, still remains to be determined.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The U.S. manufacturing sector has become an engine of new job creation over the past four years, thanks to a combination of federal incentives and mega-trends like nearshoring and the clean energy boom, according to the industrial real estate firm Savills.
While those manufacturing announcements have softened slightly from their 2022 high point, they remain historically elevated. And the sector’s growth outlook remains strong, regardless of the results of the November U.S. presidential election, the company said in its September “Savills Manufacturing Report.”
From 2021 to 2024, over 995,000 new U.S. manufacturing jobs were announced, with two thirds in advanced sectors like electric vehicles (EVs) and batteries, semiconductors, clean energy, and biomanufacturing. After peaking at 350,000 news jobs in 2022, the growth pace has slowed, with 2024 expected to see just over half that number.
But the ingredients are in place to sustain the hot temperature of American manufacturing expansion in 2025 and beyond, the company said. According to Savills, that’s because the U.S. manufacturing revival is fueled by $910 billion in federal incentives—including the Inflation Reduction Act, CHIPS and Science Act, and Infrastructure Investment and Jobs Act—much of which has not yet been spent. Domestic production is also expected to be boosted by new tariffs, including a planned rise in semiconductor tariffs to 50% in 2025 and an increase in tariffs on Chinese EVs from 25% to 100%.
Certain geographical regions will see greater manufacturing growth than others, since just eight states account for 47% of new manufacturing jobs and over 6.3 billion square feet of industrial space, with 197 million more square feet under development. They are: Arizona, Georgia, Michigan, Ohio, North Carolina, South Carolina, Texas, and Tennessee.
Across the border, Mexico’s manufacturing sector has also seen “revolutionary” growth driven by nearshoring strategies targeting U.S. markets and offering lower-cost labor, with a workforce that is now even cheaper than in China. Over the past four years, that country has launched 27 new plants, each creating over 500 jobs. Unlike the U.S. focus on tech manufacturing, Mexico focuses on traditional sectors such as automative parts, appliances, and consumer goods.
Looking at the future, the U.S. manufacturing sector’s growth outlook remains strong, regardless of the results of November’s presidential election, Savills said. That’s because both candidates favor protectionist trade policies, and since significant change to federal incentives would require a single party to control both the legislative and executive branches. Rather than relying on changes in political leadership, future growth of U.S. manufacturing now hinges on finding affordable, reliable power amid increasing competition between manufacturing sites and data centers, Savills said.
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.