Macrotrends such as the growth of e-commerce and same-day delivery are placing costly new demands on warehouse operators. Here are four major problem areas affecting site-selection decisions this year.
John H. Boyd (jhb@theboydcompany.com) is founder and principal of The Boyd Co. Inc. Founded in 1975 in Princeton, New Jersey, and now based in Boca Raton, Florida, the firm provides independent site selection counsel to leading U.S. and overseas corporations.
Organizations served by Boyd over the years include The World Bank, The Council of Supply Chain Management Professionals (CSCMP), The Aerospace Industries Association (AIA), MIT’s 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 corporate site selection, there always seems to be an industry or sector "du jour" that is setting trends and dominating relocation and investment activity. No doubt about it, this year's "industry of the day" is logistics. This hot sector is commanding record-high industrial rents, experiencing vacancy rates hitting lows not seen since "the go-go 1990s," and establishing new rules of the road when it comes to site selection.
With this kind of growth and dynamism come a number of challenges that impact location and investment decisions. Here are some of our company's observations on the major issues affecting both the logistics sector and site-selection activities in 2017.
Spiking operating costs
Brisk consumer spending, white-hot e-commerce sales, and global trade developments are all fueling the growth of new warehousing and distribution center (DC) space. In particular, the push for next-day or even same-day delivery, driven by our "instant gratification economy," is leading companies to place large DCs in expensive, big-city locations. These "last mile" dynamics, in fact, are putting virtually all the areas around large U.S. cities in play for new distribution facilities—something that in the pre-Amazon days had been rejected due to high costs (principally real estate and property taxes) in favor of lower-cost alternatives in the hinterland.
This is evident in Figure 1, where we have identified a series of distribution center "hot spots" that are increasingly on the radar screens of our site-seeking clients. The DC "hot spots" listed in Figure 1 also show that companies are favoring sites that have well-developed transportation infrastructure, access to major seaport and intermodal facilities, and real estate cost and availability advantages, in addition to strength in other site-selection factors.
Regardless of where they are located, comparative operating costs (such as labor, real estate, taxes, and utilities) continue to be important in most DC site-selection decisions given the uncertain U.S. economy and continued price pressures from offshore competitors. Improving the bottom line on the cost side of the ledger is the only choice for many DC operators.
While shipping rates have remained flat, helping to moderate overall logistics costs, there have been hefty increases in DC operating costs related to real estate, construction, and labor, which are up 5.5, 6.7, and 2.1 percent, respectively, from 2016. National average asking rents for DC space of around $5.75 per square foot (including taxes, utilities, and maintenance) are nearing decade highs. Rents are spiking even higher in many U.S. cities, especially those on the West and East coasts, where rents are approaching $10.00 per square foot in markets such as California and New York.
Labor costs are a particularly big concern for our DC clients. Many are increasingly outsourcing staffing and human resources (HR) functions to third-party agencies that specialize in the logistics sector in order to keep inflationary labor-cost pressures in check, especially the spiraling costs for health-care and legal fees. Onerous and costly labor laws in litigious states like California, New Jersey, and New York also continue to plague the industry and fuel the flight to third-party HR providers. Additionally, labor unrest at the ports of Los Angeles and Long Beach is escalating as dray drivers feel that the brunt of new clean-air standards are falling too heavily on their shoulders and pocketbooks. This unrest is creating workflow uncertainties at DCs and is putting pressure on shippers to pay higher drayage rates.
Port and rail congestion
Our firm has monitored traffic congestion for years, mostly within the context of labor-force commuting patterns and practices. Now, however, congestion is becoming a broader issue and is greatly challenging the efficiency of our DC clients and their supply chains. In particular, congestion at our nation's seaports and inland infrastructure links is an increasingly severe risk factor handicapping our clients' ability to keep pace with their global competitors.
Congestion and delays are becoming increasingly common at major U.S. ports—a problem having a profound impact on the $900 billion worth of goods transported to and from the United States each year by container ships. Of the 10 busiest container seaports, at least seven are grappling regularly with congestion, according to the American Association of Port Authorities. Ports like Charleston are doubling down on capital investments to keep ahead of congestion, as seen in Charleston's new $700 million Hugh K. Leatherman Sr. Terminal, which will increase container capacity by 50 percent at the South Carolina port.
Those seeking to locate near seaports might want to consider what steps the ports are taking to alleviate congestion. Bayonne was the first terminal at the Port of New York and New Jersey to require appointments. A handful of other North American ports have adopted similar reservation systems to help mitigate congestion, including the West Coast ports of Los Angeles, Long Beach, and Oakland in California, and Vancouver in British Columbia.
This problem is not limited to our nation's busy seaports. Railroads and intermodal yards across the country continue to battle congestion. For example, Chicago handles about 25 percent of the country's rail freight traffic and is becoming overwhelmed by the volume; it can now take a train as much as 32 hours to pass through the city. Legendary railroad executive Hunter Harrison, now head of CSX, says that Chicago is "bursting at the seams," and that CSX is exploring alternatives to bypass the city. Train delays in the pivotal Chicago freight market can have a cascading effect, disrupting delivery schedules in DCs throughout the national supply chain.
Challenges in the cold chain
The DC sector showing the strongest growth in new starts in 2017 is the cold-storage and blast-freezing warehouse sector. Yet suitable cold chain space is in short supply nationally. Growing exports of U.S. agricultural and branded food products are a key driver behind the growth of demand for temperature-controlled facilities. As a result, many companies in the cold-storage field are implementing a "port-centric" investment strategy. Near the Port of Charleston, South Carolina, for example, California-based Lineage Logistics recently broke ground on a new 340,000-square-foot cold-storage warehouse utilizing blast-freezing technology, which is required when exporting meats, fruits, and other perishable food products. Trident Seafoods, the nation's largest seafood company, just opened a convertible refrigerated/freezer warehouse near the Port of Tacoma, Washington, to meet growing export demands.
The Food Safety and Modernization Act (FSMA), the most extensive update of federal food-safety laws since 1938, adds expensive new compliance costs for the always hyper-cost-sensitive DC sector. FSMA requires warehouses and shippers to develop well-defined food-safety strategies that will ensure the integrity of their storage and transport operations. Compliance with the new regulations requires making upgrades to many existing cold-storage facilities, but this often is economically unfeasible due to those facilities' age and the expensive design and connectivity requirements of modern warehouses.
Cybersecurity threats
The banking industry has been under siege by cybercriminals for years now, losing billions of dollars to hackers and frauds—much of which transpires under the radar screen. Why rob banks? "It's where the money is," according to the infamous bank robber Willie Sutton. Why rob the supply chain? Well, "It's where the goods are," and therefore ripe for thievery, extortion, and ransom.
From the now almost daily reports of data breaches, identity theft, ransomware, and even hacking for political purposes, it's clear that cyberthreats are pervasive, affecting all sectors of the economy. It's also clear that they pose a most severe threat to the global supply chain. In June 2017, the NotPetya ransomware attack hit companies in at least 64 nations, including Russia, Germany, and the United States. A number of supply chain-related companies were directly affected. The world's largest shipping company, A.P. Møller-Maersk, was among the victims of the NotPetya attack, which caused outages in its computer systems around the world. Maersk-owned APM Terminals' facility at the Port of New York and New Jersey had to close temporarily due to the extent of the system attack. Another victim was FedEx's TNT subsidiary. Trade in FedEx stock was temporarily halted during the attack.
DCs and other logistics service providers will have to meet this new online threat, and their investments in cybersecurity will be soaring in the months and years ahead. For that reason, our firm's labor-market investigations for site-selection clients increasingly include special research into an area's ability to supply coveted information technology talent in cybersecurity. One of our benchmarks is the presence of a college or university that has full accreditation by the National Security Agency (NSA) for its programs in information assurance.
The NSA and the U.S. Department of Homeland Security (DHS) jointly sponsor the National Centers of Academic Excellence in Cyber Defense (CAE-CD) program. The goal of the program is to reduce vulnerability in our national information infrastructure by producing professionals with the latest in cyberdefense expertise. Such expertise is increasingly being sought by the human resources departments of our corporate site-seeking clients, both in and out of the logistics industry. NSA-designated colleges run the gamut from Dakota State University in Madison, South Dakota (population: 7,425), to schools in major metro areas like Northeastern University in Boston (population: 4.6 million).
Finding the way
Based on our firm's five decades of site-selection experience within the dynamic and ever-evolving supply chain industry, I am fully confident these and other challenges will be met with great success by the industry's best and brightest. Those logistics companies that find their way through these challenges—and do so while keeping costs in check—will lead this sector to even greater heights in the years ahead.
New Jersey is home to the most congested freight bottleneck in the country for the seventh straight year, according to research from the American Transportation Research Institute (ATRI), released today.
ATRI’s annual list of the Top 100 Truck Bottlenecks aims to highlight the nation’s most congested highways and help local, state, and federal governments target funding to areas most in need of relief. The data show ways to reduce chokepoints, lower emissions, and drive economic growth, according to the researchers.
The 2025 Top Truck Bottleneck List measures the level of truck-involved congestion at more than 325 locations on the national highway system. The analysis is based on an extensive database of freight truck GPS data and uses several customized software applications and analysis methods, along with terabytes of data from trucking operations, to produce a congestion impact ranking for each location. The bottleneck locations detailed in the latest ATRI list represent the top 100 congested locations, although ATRI continuously monitors more than 325 freight-critical locations, the group said.
For the seventh straight year, the intersection of I-95 and State Route 4 near the George Washington Bridge in Fort Lee, New Jersey, is the top freight bottleneck in the country. The remaining top 10 bottlenecks include: Chicago, I-294 at I-290/I-88; Houston, I-45 at I-69/US 59; Atlanta, I-285 at I-85 (North); Nashville: I-24/I-40 at I-440 (East); Atlanta: I-75 at I-285 (North); Los Angeles, SR 60 at SR 57; Cincinnati, I-71 at I-75; Houston, I-10 at I-45; and Atlanta, I-20 at I-285 (West).
ATRI’s analysis, which utilized data from 2024, found that traffic conditions continue to deteriorate from recent years, partly due to work zones resulting from increased infrastructure investment. Average rush hour truck speeds were 34.2 miles per hour (MPH), down 3% from the previous year. Among the top 10 locations, average rush hour truck speeds were 29.7 MPH.
In addition to squandering time and money, these delays also waste fuel—with trucks burning an estimated 6.4 billion gallons of diesel fuel and producing more than 65 million metric tons of additional carbon emissions while stuck in traffic jams, according to ATRI.
On a positive note, ATRI said its analysis helps quantify the value of infrastructure investment, pointing to improvements at Chicago’s Jane Byrne Interchange as an example. Once the number one truck bottleneck in the country for three years in a row, the recently constructed interchange saw rush hour truck speeds improve by nearly 25% after construction was completed, according to the report.
“Delays inflicted on truckers by congestion are the equivalent of 436,000 drivers sitting idle for an entire year,” ATRI President and COO Rebecca Brewster said in a statement announcing the findings. “These metrics are getting worse, but the good news is that states do not need to accept the status quo. Illinois was once home to the top bottleneck in the country, but following a sustained effort to expand capacity, the Jane Byrne Interchange in Chicago no longer ranks in the top 10. This data gives policymakers a road map to reduce chokepoints, lower emissions, and drive economic growth.”
It’s getting a little easier to find warehouse space in the U.S., as the frantic construction pace of recent years declined to pre-pandemic levels in the fourth quarter of 2024, in line with rising vacancies, according to a report from real estate firm Colliers.
Those trends played out as the gap between new building supply and tenants’ demand narrowed during 2024, the firm said in its “U.S. Industrial Market Outlook Report / Q4 2024.” By the numbers, developers delivered 400 million square feet for the year, 34% below the record 607 million square feet completed in 2023. And net absorption, a key measure of demand, declined by 27%, to 168 million square feet.
Consequently, the U.S. industrial vacancy rate rose by 126 basis points, to 6.8%, as construction activity normalized at year-end to pre-pandemic levels of below 300 million square feet. With supply and demand nearing equilibrium in 2025, the vacancy rate is expected to peak at around 7% before starting to fall again.
Thanks to those market conditions, renters of warehouse space should begin to see some relief from the steep rent hikes they’re seen in recent years. According to Colliers, rent growth decelerated in 2024 after nine consecutive quarters of year-over-year increases surpassing 10%. Average warehouse and distribution rents rose by 5% to $10.12/SF triple net, and rents in some markets actually declined following a period of unprecedented growth when increases often exceeded 25% year-over-year. As the market adjusts, rents are projected to stabilize in 2025, rising between 2% and 5%, in line with historical averages.
In 2024, there were 125 new occupancies of 500,000 square feet or more, led by third-party logistics (3PL) providers, followed by manufacturing companies. Demand peaked in the fourth quarter at 53 million square feet, while the first quarter had the lowest activity at 28 million square feet — the lowest quarterly tally since 2012.
In its economic outlook for the future, Colliers said the U.S. economy remains strong by most measures; with low unemployment, consumer spending surpassing expectations, positive GDP growth, and signs of improvement in manufacturing. However businesses still face challenges including persistent inflation, the lowest hiring rate since 2010, and uncertainties surrounding tariffs, migration, and policies introduced by the new Trump Administration.
As U.S. businesses count down the days until the expiration of the Trump Administration’s monthlong pause of tariffs on Canada and Mexico, a report from Uber Freight says the tariffs will likely be avoided through an extended agreement, since the potential for damaging consequences would be so severe for all parties.
If the tariffs occurred, they could push U.S. inflation higher, adding $1,000 to $1,200 to the average person's cost of living. And relief from interest rates would likely not come to the rescue, since inflation is already above the Fed's target, delaying further rate cuts.
A potential impact of the tariffs in the long run might be to boost domestic freight by giving local manufacturers an edge. However, the magnitude and sudden implementation of these tariffs means we likely won't see such benefits for a while, and the immediate damage will be more significant in the meantime, Uber Freight said in its “2025 Q1 Market update & outlook.”
That market volatility comes even as tough times continue in the freight market. In the U.S. full truckload sector, the cost per loaded mile currently exceeds spot rates significantly, which will likely push rate increases.
However, in the first quarter of 2025, spot rates are now falling, as they usually do in February following the winter peak. According to Uber Freight, this situation arose after truck operating costs rose 2 cents/mile in 2023 despite a 9-cent diesel price decline, thanks to increases in insurance (+13%), truck and trailer costs (+9%), and driver wages (+8%). Costs then fell 2 cents/mile in 2024, resulting in stable costs over the past two years.
Fortunately, Uber Freight predicts that the freight cycle could soon begin to turn, as signs of a recovery are emerging despite weak current demand. A measure of manufacturing growth called the ISM PMI edged up to 50.9 in December, surpassing the expansion threshold for the first time in 26 months.
Accordingly, new orders and production increased while employment stabilized. That means the U.S. manufacturing economy appears to be expanding after a prolonged period of contraction, signaling a positive outlook for freight demand, Uber Freight said.
The surge comes as the U.S. imposed a new 10% tariff on Chinese goods as of February 4, while pausing a more aggressive 25% tariffs on imports from Mexico and Canada until March, Descartes said in its “February Global Shipping Report.”
So far, ports are handling the surge well, with overall port transit time delays not significantly lengthening at the top 10 U.S. ports, despite elevated volumes for a seventh consecutive month. But the future may look more cloudy; businesses with global supply chains are coping with heightened uncertainty as they eye the new U.S. tariffs on China, continuing trade policy tensions, and ongoing geopolitical instability in the Middle East, Descartes said.
“The impact of new and potential tariffs, coupled with a late Chinese Lunar New Year (January 29 – February 12), may have contributed to higher U.S. container imports in January,” Jackson Wood, Director, Industry Strategy at Descartes, said in a release. “These trade policy developments add significant uncertainty to global supply chains, increasing concerns about rising import costs and supply chain disruptions. As trade tensions escalate, businesses and consumers alike may face the risk of higher prices and prolonged market volatility.”
New York-based Cofactr will now integrate Factor.io’s capabilities into its unified platform, a supply chain and logistics management tool that streamlines production, processes, and policies for critical hardware manufacturers. The combined platform will give users complete visibility into the status of every part in their Bill of Materials (BOM), across the end-to-end direct material management process, the firm said.
Those capabilities are particularly crucial for Cofactr’s core customer base, which include manufacturers in high-compliance, highly regulated sectors such as defense, aerospace, robotics, and medtech.
“Whether an organization is supplying U.S. government agencies with critical hardware or working to meet ambitious product goals in an emerging space, they’re all looking for new ways to optimize old processes that stand between them and their need to iterate at breakneck speeds,” Matthew Haber, CEO and Co-founder of Cofactr, said in a release. “Through this acquisition, we’re giving them another way to do that with acute visibility into their full bill of materials across the many suppliers they work with, directly through our platform.”
“Poor data quality in the supply chain has always been a root cause of delays that create unnecessary costs and interfere with an organization’s speed to market. For manufacturers, especially those in regulated industries, manually cross-checking hundreds of supplier communications against ERP information while navigating other complex processes and policies is a recipe for disaster,” Shultz said. “With Cofactr, we’re now working with the best in the industry to scale our ability to eliminate time-consuming tasks and increase process efficiencies so manufacturers can instead focus on building their products.”