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.
Echoing the title lyrics of Buster Poindexter's 1987 silly dance hit, we can only describe the current real estate market for warehousing and distribution centers (DC) as "Hot, Hot, Hot." Warehouses, historically viewed only as cost centers where goods sat waiting to be shipped, are now being seen as red-hot profit centers not only by our site-seeking warehousing clients but also by real estate developers and investors, who have moved into the warehousing sector with gusto.
This shift has fueled tremendous growth in demand for warehousing space and a rise in rents from coast to coast. In the hot northern New Jersey market, for example, the average price for a large parcel of prime DC land is approaching $2.0 million an acre, up 18 percent from a year ago. Northern New Jersey's average warehouse lease rate is approaching $12.00 per square foot. In California's Inland Empire, DC land prices are also soaring, up over 25 percent from last year and reaching levels of $900,000 to $1.0 million per acre.
Article Figures
[Figure 1] Total geographically variable operating costs by cityEnlarge this image
Double-digit percentage increases in land prices are the rule, not the exception, in other hot DC markets as well. The Lehigh Valley in Pennsylvania is up 17 percent to $175,000 per acre; Las Vegas, Nevada, is up 15 percent to $225,000 per acre; and Chicago, Illinois, is up 18 percent to $275,000 per acre. Meanwhile Atlanta, Georgia, is up 13 percent to $120,000 per acre; and Houston, Texas, is up 13 percent to $200,000 per acre. These same markets are also seeing strong gains in asking lease rates.
This growth is not expected to slow any time soon. In the DC sector, we forecast that overall costs will increase by 9.9 percent in 2018. Figure 1 shows the total annual operating costs for a representative 750,000-square-foot warehouse employing 200 hourly workers for a series of warehousing hot spots in the United States. Costs include hourly labor, benefits, land, construction, property taxes, and utilities.
These numbers indicate that tight markets are the rule of the land now, as the availability of prime, fully serviced parcels are the lowest we have seen since 2001. Although new DC construction has exceeded 200 million square feet during the past year, it has not at all kept pace with net absorption.
This new demand has not gone unnoticed by developers and the investment community. The new DC value proposition is generating superior investment performance in comparison to other major commercial property types. Investors are bidding capitalization rates (the potential rate of return on the real estate investment) down to new all-time lows, and financial analysts are quoting total returns on DC properties at rates twice those of other commercial property types. DC real-estate investment trusts have seen a 24-percent return in 2017, according to the real estate advisory service firm Green Street Advisors, exceeding single-digit returns recorded by other sectors such as hotel, apartment, and office.
The impact of e-commerce
This growth is being largely fueled by the booming e-commerce sector. More stock devoted to e-commerce necessitates bigger warehouses with higher ceilings that are closer to consumer demand.
According to Boyd's BizCosts.com reports, which look at the comparative cost of business across the United States, the size of the average U.S. warehouse completed so far this year was 197,000 square feet, double the size from a decade ago. Driving the size explosion is the "endless aisle" concept, meaning that while a DC client might stock 50,000 stock-keeping units (SKUs) in its brick and mortar stores, it might offer 15 times as many items on its e-commerce website.
The endless aisle concept is also forcing warehouses to go higher. Our data shows that clear ceilings for new warehouses in the United States areover 20 percent higher than they werea decade ago. Higher ceilings allow warehouses to house mezzanine levels and space for larger material handling systems—both of which are in greater demand to keep up with e-commerce fulfillment. Since Amazon acquired mobile robot manufacturer Kiva Systems in 2012, interest in using robots in warehouses has grown, and more robot makers have entered the market, including Fetch, IAM, 6 River Systems, RightHand, and others. All of these automated systems require more space, not to mention thicker concrete floors for support.
Additionally, the "last-mile" shipping demands brought on by e-commerce are driving increased interest in urban industrial real estate, which historically has been long ignored by developers. The reality, however, is that very little infill space exists in most urban markets to accommodate the requirements of e-commerce, including vehicular traffic and employee parking associated with labor-intensive tasks like picking, packing, and gift-wrapping. Older urban buildings with ceiling clear heights of less than 30 feet don't make efficient use of cubic storage and limit the use of modern, automated material handling systems. The upshot of all of this is the dearth of suitable last-mile real estate in urban centers and when we find it, it is expensive, very expensive.
Other notable trends
Our instant gratification economy and the expectations of consumers and businesses for shorter and shorter delivery times have also led to a greater interest in air transport, and subsequently locating DCs near air cargo hubs. Air freight's predictability and short lead times can cut into the cost of maintaining higher than necessary inventories at our clients' warehouses. Additionally, renewed interest in air transport is being spurred by growing demands abroad for U.S.-branded food products and pharmaceuticals, which require cold chain delivery over great distances.
As a result, we have seen an increased interest in well-known international gateway air hubs like Atlanta, Chicago, New York, and Los Angeles along with Memphis, Tennessee—a major hub of FedEx—and Louisville, Kentucky—the major hub of UPS. Other cities with strong air cargo capabilities and growing DC location interest include: Indianapolis, Indiana; Miami, Florida; Oakland, California; Houston, Texas; Ontario, California; and Winnipeg in Canada.
Another trend that is also beginning to impact our warehousing site selection work is the growing reshoring movement. Today, we are finding that our supply chain clients' demand for Class-A warehouse space and acreage is bumping up against growing real estate demands from the re-energized U.S. manufacturing sector. Lower cost and plentiful U.S. energy supplies, as well asthe U.S. federal government's new tax cuts and regulatory pullback, have generated a greater sense of economic confidence among U.S. manufacturers. In recent months, companies like Boeing, United Technologies, Ford, General Motors, Caterpillar, AT&T, GE, Apple, and others have brought manufacturing jobs back to the United States. The upshot of this reshoring trend is that our site-seeking warehouse clients are facing heightened competition for prime industrial real estate.
As companies decide where to locate their distribution facilities in 2018, they must take into account some of the trends, challenges, and technologies noted here. I have no doubt industry professionals are up to the task. Looking ahead, new rules in global commerce and tariffs just now playing out will do much to shape the supply chain landscape in 2019 and beyond.
Companies in every sector are converting assets from fossil fuel to electric power in their push to reach net-zero energy targets and to reduce costs along the way, but to truly accelerate those efforts, they also need to improve electric energy efficiency, according to a study from technology consulting firm ABI Research.
In fact, boosting that efficiency could contribute fully 25% of the emissions reductions needed to reach net zero. And the pursuit of that goal will drive aggregated global investments in energy efficiency technologies to grow from $106 Billion in 2024 to $153 Billion in 2030, ABI said today in a report titled “The Role of Energy Efficiency in Reaching Net Zero Targets for Enterprises and Industries.”
ABI’s report divided the range of energy-efficiency-enhancing technologies and equipment into three industrial categories:
Commercial Buildings – Network Lighting Control (NLC) and occupancy sensing for automated lighting and heating; Artificial Intelligence (AI)-based energy management; heat-pumps and energy-efficient HVAC equipment; insulation technologies
Manufacturing Plants – Energy digital twins, factory automation, manufacturing process design and optimization software (PLM, MES, simulation); Electric Arc Furnaces (EAFs); energy efficient electric motors (compressors, fans, pumps)
“Both the International Energy Agency (IEA) and the United Nations Climate Change Conference (COP) continue to insist on the importance of energy efficiency,” Dominique Bonte, VP of End Markets and Verticals at ABI Research, said in a release. “At COP 29 in Dubai, it was agreed to commit to collectively double the global average annual rate of energy efficiency improvements from around 2% to over 4% every year until 2030, following recommendations from the IEA. This complements the EU’s Energy Efficiency First (EE1) Framework and the U.S. 2022 Inflation Reduction Act in which US$86 billion was earmarked for energy efficiency actions.”
Economic activity in the logistics industry expanded in November, continuing a steady growth pattern that began earlier this year and signaling a return to seasonality after several years of fluctuating conditions, according to the latest Logistics Managers’ Index report (LMI), released today.
The November LMI registered 58.4, down slightly from October’s reading of 58.9, which was the highest level in two years. The LMI is a monthly gauge of business conditions across warehousing and logistics markets; a reading above 50 indicates growth and a reading below 50 indicates contraction.
“The overall index has been very consistent in the past three months, with readings of 58.6, 58.9, and 58.4,” LMI analyst Zac Rogers, associate professor of supply chain management at Colorado State University, wrote in the November LMI report. “This plateau is slightly higher than a similar plateau of consistency earlier in the year when May to August saw four readings between 55.3 and 56.4. Seasonally speaking, it is consistent that this later year run of readings would be the highest all year.”
Separately, Rogers said the end-of-year growth reflects the return to a healthy holiday peak, which started when inventory levels expanded in late summer and early fall as retailers began stocking up to meet consumer demand. Pandemic-driven shifts in consumer buying behavior, inflation, and economic uncertainty contributed to volatile peak season conditions over the past four years, with the LMI swinging from record-high growth in late 2020 and 2021 to slower growth in 2022 and contraction in 2023.
“The LMI contracted at this time a year ago, so basically [there was] no peak season,” Rogers said, citing inflation as a drag on demand. “To have a normal November … [really] for the first time in five years, justifies what we’ve seen all these companies doing—building up inventory in a sustainable, seasonal way.
“Based on what we’re seeing, a lot of supply chains called it right and were ready for healthy holiday season, so far.”
The LMI has remained in the mid to high 50s range since January—with the exception of April, when the index dipped to 52.9—signaling strong and consistent demand for warehousing and transportation services.
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
"After several years of mitigating inflation, disruption, supply shocks, conflicts, and uncertainty, we are currently in a relative period of calm," John Paitek, vice president, GEP, said in a release. "But it is very much the calm before the coming storm. This report provides procurement and supply chain leaders with a prescriptive guide to weathering the gale force headwinds of protectionism, tariffs, trade wars, regulatory pressures, uncertainty, and the AI revolution that we will face in 2025."
A report from the company released today offers predictions and strategies for the upcoming year, organized into six major predictions in GEP’s “Outlook 2025: Procurement & Supply Chain.”
Advanced AI agents will play a key role in demand forecasting, risk monitoring, and supply chain optimization, shifting procurement's mandate from tactical to strategic. Companies should invest in the technology now to to streamline processes and enhance decision-making.
Expanded value metrics will drive decisions, as success will be measured by resilience, sustainability, and compliance… not just cost efficiency. Companies should communicate value beyond cost savings to stakeholders, and develop new KPIs.
Increasing regulatory demands will necessitate heightened supply chain transparency and accountability. So companies should strengthen supplier audits, adopt ESG tracking tools, and integrate compliance into strategic procurement decisions.
Widening tariffs and trade restrictions will force companies to reassess total cost of ownership (TCO) metrics to include geopolitical and environmental risks, as nearshoring and friendshoring attempt to balance resilience with cost.
Rising energy costs and regulatory demands will accelerate the shift to sustainable operations, pushing companies to invest in renewable energy and redesign supply chains to align with ESG commitments.
New tariffs could drive prices higher, just as inflation has come under control and interest rates are returning to near-zero levels. That means companies must continue to secure cost savings as their primary responsibility.
Specifically, 48% of respondents identified rising tariffs and trade barriers as their top concern, followed by supply chain disruptions at 45% and geopolitical instability at 41%. Moreover, tariffs and trade barriers ranked as the priority issue regardless of company size, as respondents at companies with less than 250 employees, 251-500, 501-1,000, 1,001-50,000 and 50,000+ employees all cited it as the most significant issue they are currently facing.
“Evolving tariffs and trade policies are one of a number of complex issues requiring organizations to build more resilience into their supply chains through compliance, technology and strategic planning,” Jackson Wood, Director, Industry Strategy at Descartes, said in a release. “With the potential for the incoming U.S. administration to impose new and additional tariffs on a wide variety of goods and countries of origin, U.S. importers may need to significantly re-engineer their sourcing strategies to mitigate potentially higher costs.”
Freight transportation providers and maritime port operators are bracing for rough business impacts if the incoming Trump Administration follows through on its pledge to impose a 25% tariff on Mexico and Canada and an additional 10% tariff on China, analysts say.
Industry contacts say they fear that such heavy fees could prompt importers to “pull forward” a massive surge of goods before the new administration is seated on January 20, and then quickly cut back again once the hefty new fees are instituted, according to a report from TD Cowen.
As a measure of the potential economic impact of that uncertain scenario, transport company stocks were mostly trading down yesterday following Donald Trump’s social media post on Monday night announcing the proposed new policy, TD Cowen said in a note to investors.
But an alternative impact of the tariff jump could be that it doesn’t happen at all, but is merely a threat intended to force other nations to the table to strike new deals on trade, immigration, or drug smuggling. “Trump is perfectly comfortable being a policy paradox and pushing competing policies (and people); this ‘chaos premium’ only increases his leverage in negotiations,” the firm said.
However, if that truly is the new administration’s strategy, it could backfire by sparking a tit-for-tat trade war that includes retaliatory tariffs by other countries on U.S. exports, other analysts said. “The additional tariffs on China that the incoming US administration plans to impose will add to restrictions on China-made products, driving up their prices and fueling an already-under-way surge in efforts to beat the tariffs by importing products before the inauguration,” Andrei Quinn-Barabanov, Senior Director – Supplier Risk Management solutions at Moody’s, said in a statement. “The Mexico and Canada tariffs may be an invitation to negotiations with the U.S. on immigration and other issues. If implemented, they would also be challenging to maintain, because the two nations can threaten the U.S. with significant retaliation and because of a likely pressure from the American business community that would be greatly affected by the costs and supply chain obstacles resulting from the tariffs.”
New tariffs could also damage sensitive supply chains by triggering unintended consequences, according to a report by Matt Lekstutis, Director at Efficio, a global procurement and supply chain procurement consultancy. “While ultimate tariff policy will likely be implemented to achieve specific US re-industrialization and other political objectives, the responses of various nations, companies and trading partners is not easily predicted and companies that even have little or no exposure to Mexico, China or Canada could be impacted. New tariffs may disrupt supply chains dependent on just in time deliveries as they adjust to new trade flows. This could affect all industries dependent on distribution and logistics providers and result in supply shortages,” Lekstutis said.