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 (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 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.
A hefty 42% of procurement leaders say the biggest threat to their future success is supply disruptions—such as natural disasters and transportation issues—a Gartner survey shows.
The survey, conducted from June through July 2024 among 258 sourcing and procurement leaders, was designed to help chief procurement officers (CPOs) understand and prioritize the most significant risks that could impede procurement operations, and what actions can be taken to manage them effectively.
"CPOs’ concerns about supply disruptions reflect the often unpredictable nature and potentially existential impacts of these events," Andrea Greenwald, Senior Director Analyst in Gartner’s Supply Chain practice, said in a release. "They are coming to understand that the reactive measures they have employed to manage risks over the past four years will not be sufficient for the next four.”
Following supply disruptions at #1, the survey showed that the second biggest threat to procurement is seen as macroeconomic factors, which include economic downturns, inflation, and other economic factors. While more predictable, those variables can substantially influence long-term procurement strategies.
And the third-most serious perceived risk was geopolitical issues, including tariffs and regulatory changes, and compliance issues, including regulatory and contractual risks.
In addition, the survey also revealed that “leading organizations” are 2.2 times more likely to view energy availability and cost as a top risk; indicating a focus on future emerging risks. As electrification drives demand for power, brittle grid infrastructure raises concern about whether the energy supply can keep pace. Therefore, leading organizations recognize that access to energy will become a significant future risk.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
Imports at the nation’s major container ports should continue at elevated levels this month despite the strike, the groups said in their Global Port Tracker report.
To be sure, the strike wasn’t without impacts. NRF found that retailers who brought in cargo early or shifted delivery to the West Coast face added warehousing and transportation costs. But the overall effect of the three-day work stoppage on national economic trends will be fairly muted.
“It was a huge relief for retailers, their customers and the nation’s economy that the strike was short lived,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release. “It will take the affected ports a couple of weeks to recover, but we can rest assured that all ports across the country will be working hard to meet demand, and no impact on the holiday shopping season is expected.”
Looking at next steps, NRF said the focus now is on bringing the International Longshoremen’s Association (ILA)—the union representing some 45,000 workers—and the United States Maritime Alliance Ltd. (USMX) back to the bargaining table. “The priority now is for both parties to negotiate in good faith and reach a long-term contract before the short-term extension ends in mid-January. We don’t want to face a disruption like this all over again,” Gold said.
By the numbers, the report forecasts that U.S. ports covered by Global Port Tracker will handle 2.12 million twenty-foot equivalent units (TEU) for October, which would be an increase of 3.1% year over year. That is slightly higher than the 2.08 million TEU forecast for October a month ago, and the strike did not appear to affect national totals.
In comparison, the August number was 2.34 million TEU, up 19.3% year over year. The September forecast 2.29 million TEU, up 12.9% year over year, November is forecast at 1.91 million TEU, up 0.9% year over year, and December at 1.88 million TEU, up 0.2%. For the year, that would bring 2024 to 24.9 million TEU, up 12.1% from 2023. The import numbers come as NRF is forecasting that 2024 retail sales – excluding automobile dealers, gasoline stations and restaurants to focus on core retail – will grow between 2.5% and 3.5% over 2023.
Global Port Tracker, which is produced for NRF by Hackett Associates, provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.
The North American robotics market saw a decline in both units ordered (down 7.9% to 15,705 units) and revenue (down 6.8% to $982.83 million) during the first half of 2024 compared to the same period in 2023, as North American manufacturers faced ongoing economic headwinds, according to a report from the Association for Advancing Automation (A3).
“Rising inflation and borrowing costs have dampened spending on robotics, with many companies opting to delay major investments,” said Jeff Burnstein, president, A3. “Despite these challenges, the push for operational efficiency and workforce augmentation continues to drive demand for robotics in industries such as food and consumer goods and life sciences, among others. As companies navigate labor shortages and increased production costs, the role of automation is becoming ever more critical in maintaining global competitiveness.”
The downward trend was led by weakness in automotive manufacturing, which traditionally leads the charge in buying robots. In the first half of 2024, automotive OEMs ordered 4,159 units (up 14.4%) but generated revenue of $259.96 million (down 12.0%). The Automotive Components sector was even worse, orders 3,574 units (down 38.8%) for $191.93 million in revenue (down 27.3%). Declines also happened in the Semiconductor & Electronics/Photonics sector and the Plastics & Rubber sector.
On the positive side, Food & Consumer Goods companies ordered 1,173 units (up 85.6%) for $62.84 million in revenue (up 56.2%). This growth reflects the increasing reliance on robotics for efficiency in food processing and packaging as companies seek to address labor shortages and rising costs, A3 said. And the Life Sciences industry ordered 1,007 units (up 47.9%) for revenue of $47.29 million (up 86.7%) as it continued its reliance on robotics for efficiency and precision.