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.
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.
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.