Our site selection firm's first office was on Princeton, New Jersey’s Nassau St., overlooking the university and a few blocks from the former home of the father of the theory of relativity, Albert Einstein—who lived in Princeton from 1933 until his death in 1955. So, it seems fitting that in characterizing the current state of the warehousing sector, I lean heavily on the term “relative.”
First, the specter of an impending commercial real estate market crash is very much a reality. About $1.5 trillion in commercial mortgage debt is due by the end of 2025. With rising financing costs, along with stricter credit conditions and a fall in property values brought on by remote work, the risk of default has greatly increased. More than half of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by as many as 450 basis points.
Yet relative to other sectors of the commercial real estate industry, especially compared to the office sector, the warehousing market is doing quite well. The warehousing sector is doing an admirable job dodging the bullets of a slowed economy, rising interest rates, and the easing of pandemic restrictions that helped brick-and-mortar retail win back some of the business that it lost to e-commerce during the lockdowns.
In fact, fundamentals within the warehousing sector have remained fairly stable over the past year, and in many markets, they’re growing even stronger. That’s primarily due to sustained demand from online shopping, reshoring trends in manufacturing, and a shortage of prime, shovel-ready warehousing sites.
We are actually seeing double-digit rental rate hikes over the past year in the majority of U.S. distribution warehousing hubs, with all-time high rental rates being reached in many markets. Simply put, warehousing has not been turned upside down by the pandemic and rising interest rates like the office and retail markets have. Furthermore, these rising warehouse rents have not yet been reflected in many long-term leases. As a result, the next cycle of lease renewals will very likely increase the valuations of most warehousing assets.
Bellwether layoffs
Despite warehousing fighting the good fight amid 2023 upheavals in the overall commercial real estate market, the sector is not completely immune to the cooling economy. Real-estate analysis firm CoStar Group Inc. reported new warehouse construction fell by almost 25% in the most recent 2023 quarter, reaching the lowest level since the start of the pandemic.
Another sign is that warehousing employment has dropped significantly over the past year as companies slashed payrolls amid a downturn in the U.S. economy and talks of a recession. Warehousing companies have reduced employment by some 75,000 jobs over the past year, led by bellwether logistics giants Amazon, Walmart, UPS, and FedEx.
Recent companywide layoffs by Amazon total almost 30,000. Walmart, the world’s largest retailer, is also cutting back as it responds to falling consumer demand and concerns about a potential recession. The company plans to lay off more than 2,000 workers at distribution centers in Texas, Florida, and Pennsylvania as well as making additional cuts at other locations.
UPS plans to lay off some of its weekend drivers, and FedEx Freight announced it has gone through three rounds of layoffs since late 2022. FedEx is also consolidating its FedEx Express, FedEx Ground, FedEx Services, and other FedEx operating companies into what will be called the Federal Express Corporation. Combining these segments is part of an overall plan to trim its staff and expenses. All of these logistics giants are also automating operations greatly to speed up order processing and further trim headcounts.
Three trends to watch
Looking ahead we see three general trends that will affect the location of future warehouses: growing interest in logistics corridors, nearshoring, and continuing resistance to new warehouse construction from some local communities.
Logistics corridors. In spite of the big layoffs noted above, many oftoday’s site-seeking warehousing companies still want to access expanded labor markets as well as greater real estate options. As a result, site searches are increasingly focusing on prominent controlled-access highway corridors, especially in states offering attractive operating cost structures and low taxes. These corridors expand the geographic area that companies can draw upon for warehousing labor as well as shovel-ready sites for construction.
Some companies are shortlisting areas with smart highways that can monitor road conditions and communicate with vehicle navigation systems via smart infrastructure. Such technology can improve the speed of delivery and accommodate the future needs of electric trucks and emerging technologies like autonomous vehicles and hydrogen fuel cell-powered trucks. A good example is the SH 130 Corridor in Central Texas that utilizes futuristic technology, such as satellites, and links the high-growth areas of Austin and San Antonio. Figure 1 provides the location of these types of logistics corridors along with comparative warehouse operating cost data and state business climate information.
Nearshoring. Many industrial clients of Boyd continue to seek alternatives to manufacturing in and sourcing from China since the Trump tariffs in 2018 and the pandemic-induced global supply chain bottlenecks and geopolitical tensions. Today, the new federal incentives to manufacture and source in North America that were written into Biden’s Inflation Reduction Act (IRA) are fast-tracking the nearshoring movement even more.
At the same time, imports from Mexico are soaring, creating great demand for new cross-border logistics services. Foxconn, for example, which makes parts for Apple’s iPhones, now has major new production facilities in Ciudad Juarez, Mexico, and the automotive company Tesla just announced plans to open a new “gigafactory” in Monterrey, Mexico. Data from Uber Freightpoints to over 400 companies opening plants in Mexico in 2023, generating some $35 billion in new exports to the U.S. The magnitude of these exports is creating a new draw for supply chain investments in and near border states like Texas, Arizona, California, and New Mexico.
“Nimby-ism.” Our clients in the manufacturing sector have long faced anti-growth pressures from NIMBY (“not-in-my-backyard”) groups. Their objections are most often about noise, pollutants, and emissions. What is driving the NIMBY movement’s response to warehousing is different and has more to do with the sheer size and speed of the sector’s proliferation, especially in logistics hubs like New Jersey, Chicago, and California’s Inland Empire. This fast pace of change and the overpowering size of many of these new warehouses—one million square feet is becoming common—is unnerving to many.
In our firm’s home state of New Jersey, NIMBY-ites have long stressed traffic and stormwater runoff from warehouse roof tops and parking lots as major objections in places like the Millstone River Basin in Central New Jersey—home to millions of square feet of warehousing space in and around the popular Exit 8-A environs of the New Jersey Turnpike. The NIMBY movement here has recently upped the ante and is about to acquire a new arrow in its quiver. It is one that is likely to be adopted in other warehousing hubs around the country.
Local groups are now arguing that it would be appropriate to use American Rescue Plan Act (ARPA) funds to buy land where warehouses would otherwise be built on the premise that it was the pandemic that ignited the explosion in e-commerce and the subsequent sprawl of warehouses in New Jersey. They also say that protecting available land from warehouse use would underscore the value of open space, which was stressed during the pandemic.
Other warehouse NIMBY groups and like-minded lawmakers in other states are watching closely to how this all plays out in New Jersey. It would be quite the irony if federal monies that were designed to help businesses hurt by the pandemic were actually used to create new hurdles for their expansion and job creation. Irony, yes, but all things considered, a turn of events that would only be a minor speed bump in the ongoing growth and resiliency of the U.S. warehousing sector.
The Port of Los Angeles plans to build a $52 million on-dock rail expansion at its Fenix Marine Terminal, saying the project will expand capacity and cargo efficiency while providing environmental benefits.
The investment follows several similar moves to expand rail access at other U.S. ports, including an $83 million project at the Port of Virginia, a $73 million rail expansion project on Pier 400 at the Port of Los Angeles, and ongoing work on a $127 million rail cargo facility at the Georgia Ports Authority.
Users of the port facilities cheered the expansion, which is planning to begin construction next year. “This investment ensures that there is adequate on-dock intermodal capacity to accommodate future volume growth, enabling POLA and FMS to further compete for discretionary cargo in an environmentally and community responsible way,” George Goldman, President & CEO of CMA CGM (America), said in a release.
Specifically, the project will add five loading/unloading tracks in the intermodal yard at the port’s Pier 300 terminal. The improvement will increase on-dock railyard capacity, enabling more cargo to be loaded directly onto trains via the on-dock railyard within the terminal. That shifts freight volume off of trucks, since rail is the most energy and fuel-efficient means of long-haul freight movement within the continental U.S., port leaders said.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
“Unrelenting labor shortages and wage inflation, accompanied by increasing consumer demand, are driving rapid market adoption of autonomous technologies in manufacturing, warehousing, and logistics,” Seegrid CEO and President Joe Pajer said in a release. “This is particularly true in the area of palletized material flows; areas that are addressed by Seegrid’s autonomous tow tractors and lift trucks. This segment of the market is just now ‘coming into its own,’ and Seegrid is a clear leader.”
According to Pajer, Seegrid’s strength in the sector is due to several new technologies it has released in the past six months. They include: Sliding Scale Autonomy, which provides both flexibility and predictability in autonomous navigation and manipulation; Enhanced Pallet and Payload Detection, which enables reliable recognition and manipulation of a broad range of payloads; and the planned launch of its CR1 autonomous lift truck model later this year.
Seegrid’s CR1 unit offers a 15-foot lift height, 4,000-pound load capacity, and a top speed of 5 mph. In comparison, its existing autonomous lift truck model, the RS1, supports six-foot lift height, 3,500 pound capacity, and the same top speed.
The “series D” investment round was funded by existing lead investors Giant Eagle Incorporated and G2 Venture Partners, as well as smaller investments from other existing shareholders.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”