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.
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 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.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.