FREMONT, CALIF. – November 2, 2021 – Warehousing and distribution space in the San Francisco Bay Area is being snapped up and utilized at a record pace as companies continue to order products and build up larger and larger inventory levels as a hedge against stock outs and manufacturing line shutdowns from lack of parts.
It is a capacity crunch that is only going to become even more challenging as businesses prepare for the holiday surge in sales – and warehouse operators, logistics managers, commercial truckers and parcel carriers struggle to deal with record volumes.
“We’ve had tight capacity markets in the past, but what we are seeing today is unprecedented,” noted Rock Magnan, president of RK Logistics Group, a Silicon Valley based third-party logistics (3PL) provider which operates seven warehouses and provides on-demand distribution and trucking services throughout the Bay Area.
Magnan noted that RK Logistics collectively manages some 940,000 square feet of warehouse space, primarily through seven facilities in the East Bay, serving semiconductor equipment manufacturers, automotive and industrial firms, and providing eCommerce fulfillment for retail and e-tail businesses.
A year ago, his facilities were running at about 80 percent of capacity. Today, those facilities are nearing 100 percent fully utilized.
That does not include two new warehouses RK is opening later this year in Newark, a 269,000 square foot facility at 6753 Mowry Avenue, as well as a 141,000 square foot warehouse at 7375 Morton Avenue. Both are in the final stages of outfitting – and are almost completely spoken for as existing RK clients sought to secure leases in advance of the facilities’ completion to ensure they have access to future warehouse capacity for their goods.
“We have clients who are holding on to space they might previously have let go, even if it’s empty and not immediately being utilized, because they want the assurance of capacity going forward. They don’t see the market loosening anytime soon,” Magnan noted. “We are looking to add an eighth warehouse to meet growing demand in the East Bay and are looking for a ninth facility in the Tracy-Stockton area where rents are a little cheaper.”
The impact of exploding eCommerce and surging demand for goods also has caused Bay Area warehousing costs to soar. “A year ago, a local building we were interested in was available for 73 cents a square foot,” Magnan recalls. “It went off the market and came back on this summer at $1.74 per square foot. Those types of increases make it hard to budget and forecast for our clients,” he notes.
He cites four key factors behind the capacity crunch, creating a perfect storm of challenges for logistics operators. Those include:
Shifting inventory practices. For years retail and manufacturing firms operated on ‘just-in-time’ practices which emphasized lean inventory levels and relying on frequent shipments and supply chain velocity to get goods to plants and on store shelves just when needed. With the impact of Covid being felt across the world, resulting in plant shutdowns and restarts, congestion at ports, truckers and rail providers, businesses have pivoted. Today companies are ordering with longer lead times and building up record levels of inventory, subscribing to “just in case” practices to minimize stock outs on retailer’s shelves and parts outages that can shut down expensive assembly lines. More inventory on hand requires more warehouse space to store and stage it.
Labor shortages. Warehouse operations, even with increased automation and use of robots, still requires people to pick, pack and put away products and fill eCommerce orders. Between Covid stimulus keeping people at home and rising demand for workers in virtually every industry, finding and retaining sufficient warehouse labor has been extremely difficult. “It’s the tightest market for workers we have ever seen,” noted Magnan. In response, RK Logistics has raised its starting wage for entry-level warehouse workers to $22 an hour and is providing retention and performance bonuses that can generate up to $8 more per hour. RK today has some 400 employees on the payroll in a variety of warehouse operation and logistics management roles.
Equipment delays. When the pandemic hit, many businesses stopped producing goods. That included steel makers who provide pallet racking and storage systems in warehouses, as well as manufacturers of forklifts, totes, dollies, pallet jacks and other warehouse equipment. “The result has been delays that impact our ability to bring on capacity in a timely manner,” Magnan said. Steel delays alone have pushed out the opening of RK’s two newest warehouses by over 6 months, waiting for racking deliveries.
New facilities being sited further away. Not only are existing facilities reaching capacity and becoming more expensive, siting and construction of new warehouse facilities has changed as well. “Especially in the Bay Area, where available land is scarce and costs are high, new warehousing is moving further and further from population centers – and customer manufacturing locations,” Magnan said. “So, while you might be able to get cheaper warehouse space in Tracy or further east, now you have longer travel times and traffic congestion to deal with, which creates other costs and service issues.”
Nevertheless, despite all the challenges, Magnan sees the current market as one where professional logistics providers, their experience and expertise, are more important – and more valuable - to businesses than ever.
“Retailers and manufacturers want to focus their resources, time and attention on the core competencies that make them valuable, and their products in demand from consumers,” Magnan said. “If I make the machines that make semiconductor chips, engineering and manufacturing is my core competency – not running the warehouse where all the parts are staged. An agile, experienced 3PL can be the solution."