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 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.
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.
Jeremy Van Puffelen grew up in a family-owned contract warehousing business and is now president of that firm, Prism Logistics. As a third-party logistics service provider (3PL), Prism operates a network of more than 2 million square feet of warehouse space in Northern California, serving clients in the consumer packaged goods (CPG), food and beverage, retail, and manufacturing sectors.
During his 21 years working at the family firm, Van Puffelen has taken on many of the jobs that are part of running a warehousing business, including custodial functions, operations, facilities management, business development, customer service, executive leadership, and team building. Since 2021, he has also served on the board of directors of the International Warehouse Logistics Association (IWLA), a trade organization for contract warehousing and logistics service providers.
Q: How would you describe the current state of the contract warehouse industry?
A: I think the current state of the industry is strong. For those that have been focused on building good client relationships over the years, I think it’s a really exciting time. Coming out of all the challenges of the past few years, I think there’s a lot of opportunity for growth and deeper partnerships. It’s fun to see the automation and AI (artificial intelligence) integration starting to evolve [in a way that’s] similar to what we saw with WMS (warehouse management systems) in the early 2000s.
Q: You are now president of your family firm. Is it an advantage having grown up in the business as opposed to working elsewhere?
A: I definitely believe it was an advantage growing up in the business. Whether it’s working with family or someone else in the industry, there’s always an advantage when you have mentors[to guide] you. I’ve been blessed to have several mentors, some in the industry, others just in life, and I’m thankful that they were willing to mentor me and that I was willing to listen to them.
Q: What are the biggest challenges currently facing 3PLs, and how are you addressing them?
A: Labor and legislation are both tough right now. The two seem to have a lot to do with each other, and it can make it tough to find and retain people. So I think we’ll see more and more automation of processes industrywide.
Q: Third-party service providers often must handle a wide variety of products for a lot of different clients. Does this variety make it difficult to invest in automation and other new technologies?
A: It can make things more difficult when looking at certain automation, but it’s in the “difficult” that a lot of opportunities lie. It would be tough to find a single solution that fits every client’s needs, but there are always opportunities to improve in certain areas. It just takes a bit of vision and commitment, and a willingness to invest in your own long-term success.
Q: As a 3PL, what do you look for when selecting the clients you work with?
A: Quality relationships that will last a long time. When both parties are happy and working together in the same direction, everyone wins.
Q: You’ve been a board member of the International Warehouse Logistics Association since 2021. Why is your involvement with this organization important to you?
A: I think it’s important to understand what’s happening in the industry. IWLA is a great resource for staying up to date and getting a solid education when it comes to the latest logistics trends. I also think it’s important to give back and pass along what we’ve learned to those just getting started in the business. As important as it is to have a mentor, it’s just as important to mentor and help others.
“While there have been some signs of tightening in consumer spending, September’s numbers show consumers are willing to spend where they see value,” NRF Chief Economist Jack Kleinhenz said in a release. “September sales come amid the recent trend of payroll gains and other positive economic signs. Clearly, consumers continue to carry the economy, and conditions for the retail sector remain favorable as we move into the holiday season.”
The Census Bureau said overall retail sales in September were up 0.4% seasonally adjusted month over month and up 1.7% unadjusted year over year. That compared with increases of 0.1% month over month and 2.2% year over year in August.
Likewise, September’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.7% seasonally adjusted month over month and up 2.4% unadjusted year over year. NRF is now forecasting that 2024 holiday sales will increase between 2.5% and 3.5% over the same time last year.
Despite those upward trends, consumer resilience isn’t a free pass for retailers to underinvest in their stores by overlooking labor, customer experience tech, or digital transformation, several analysts warned.
"The 2024 holiday season offers more ‘normalcy’ for retailers with inflation cooling. Still, there is no doubt that consumers continue to seek value. Promotions in general will play a larger role in the 2024 holiday season. Retailers are dealing with shrinking shopper loyalties, a larger number of competitors across more channels – and, of course, a more dynamic landscape where prices are shifting more frequently to win over consumers who are looking for great deals,” Matt Pavich, senior director of strategy & innovation at pricing optimization solutions provider Revionics, said in an email.
Nikki Baird, VP of strategy & product at retail technology company Aptos, likewise said that retailers need to keep their focus on improving their value proposition and customer experience. “Retailers aren’t just competing with other retailers when it comes to consumers’ discretionary spending. If consumers feel like the shopping experience isn’t worth their time and effort, they are going to spend their money elsewhere. A trip to Italy, a dinner out, catching the latest Blake Lively and Ryan Reynolds films — there is no shortage of ways that consumers can spend their discretionary dollars,” she said.
Editor's note:This article was revised on October 18 to correct the attribution for a quote to Matt Pavich instead of Nikki Baird.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
A real-time business is one that uses trusted, real-time data to enable people and systems to make real-time decisions, Peter Weill, the chairman of MIT’s Center for Information Systems Research (CISR), said at the “IFS Unleashed” show in Orlando.
By adopting that strategy, they gain three major capabilities, he said in a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI.” They are:
business model agility without needing a change management program to implement it
seamless digital customer journeys via self-service, automated, or assisted multi-product, multichannel experiences
thoughtful employee experiences enabled by technology empowered teams
And according to Weill, MIT’s studies show that adopting that real-time data stance is not restricted just to digital or tech-native businesses. Rather, it can produce successful results for companies in any sector that are able to apply the approach better than their immediate competitors.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modelling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”