U.S. shippers face a capacity problem -not in available trucks as once was feared, but in warehouse
Warehousing is the one part of the supply chain where capacity is tightening, with excess capacity driving down transportation costs on land, sea and in the air. (Railroads have been able to maintain higher boxcar rates by managing capacity and because of their market power, but intermodal rates have dropped, thanks to direct competition with trucking.)
Demand for U.S. warehousing and distribution space, that one commercial real estate firm called “relentless” is fueling a construction boom, but developers can’t build fast enough. As a result, companies shipping goods are paying more to store them, which cuts into savings shippers have enjoyed in transportation costs, thanks to lower fuel prices and excess truck capacity.
During the holiday season, Amazon.com warehouses were packed. “We were very full,” Chief Financial Officer Brian Olsavsky said during a first-quarter earnings call. “It was a high-class problem to have.” In the first quarter, Amazon’s total fulfillment costs rose 33.6 percent year-over-year to $3.7 billion. For all of last year, those costs rose 24.6 percent to $13.4 billion, company data show.
The availability of industrial space declined 9.2 percent year-over-year in the first quarter, falling to its lowest level since 2001, commercial real-estate brokerage CBRE Group said in a report.
At the same time, the national vacancy rate for industrial real estate fell to 6.1 percent, down from 6.3 percent in the fourth quarter and 6.8 percent a year ago, industrial real-estate firm Cushman & Wakefield said in its May U.S. Macro Forecast. “Overall vacancy rates will tighten further, declining from 6.6 percent in 2015 to 5.9 percent in 2016,” the company said.
Real estate management firm Jones Lang LaSalle puts the national industrial vacancy rate at 6.2 percent in the first quarter, a 10 basis point drop from the fourth quarter. “Despite increased development volumes, quarterly net absorption was 7.3 percent higher than new construction in the first quarter of 2016,” JLL said in its first quarter U.S. Investment Outlook report.
“This is on par with the tightest conditions ever observed in the sector,” Cushman & Wakefield said. The U.S. industrial real-estate market has grown for 24 consecutive quarters of growth, and available space has declined for 24 consecutive quarters, as higher utilization of existing space or “net absorption” outpaces new construction, according to the real estate firms.
Those tight conditions are driving up distribution and logistics rents by double digits in some global markets, topped by a nearly 30-percent increase in prime rents in Oakland, California, CBRE said in its Global Prime Logistics Rents report, released May 16. Prime rents are the highest achievable rents for a high-quality or “prime” logistics facility, CBRE said.
U.S. coastal hubs experienced impressive growth. Prime logistics rents in New Jersey rose 15 percent last year, while prime rents for warehousing space in Southern California’s Inland Empire jumped 13.5 percent, CBRE said. In Los Angeles and Orange County, prime rents were up 9.8 percent. Prime rents in Dallas/Fort Worth rose 8 percent and 6.8 percent in Atlanta.
CBRE segmented older warehouses out of its prime rents report, largely because those facilities are unsuited to new warehousing demands created by the rapid growth of online sales. E-commerce warehouses, such as the major e-fulfillment centers built by Home Depot, typically have at least 100,000 square feet, and are often much larger. They have higher ceilings, stack goods much higher and use more automated equipment to pick, sort and ship goods. Home Depot opened its largest e-commerce fulfillment center last year in Troy Township, Ohio.
In another sign of growth, April was the 28th straight month warehousing employment increased. Warehousing businesses added 6,500 jobs in April, a 6.7 percent year-over-year increase, according to the U.S. Bureau of Labor Statistics. That 6,500 jump in employment accounted for three quarters of the job gains posted by transportation businesses in April.
Since January 2014, warehousing and storage businesses have added 129,500 jobs, the BLS data show, and warehousing accounts for about 18 percent of transportation and warehousing employment. The solid growth in warehousing payrolls closely tracks the tightening vacancy rate, expanding utilization of warehousing space and the construction of new facilities.
All three firms anticipate rapid warehouse and distribution construction will curb some space shortages, with Cushman & Wakefield predicting the U.S. industrial vacancy rate will move up to 6.1 percent in 2017. On a U.S. average basis, logistics rents will increase 4.7 percent in 2016 after rising 3.8 percent last year, and rise 5.5 percent in 2017, Cushman & Wakefield said.
JLL expects overall warehouse rents to grow moderately, and a bit more slowly, in the next 12 months compared with the preceding 12 months. Despite tight capacity and low vacancy rates, “There will likely be a lag between when new supply delivers and when it is leased,” the company said. That’s especially true in the booming big-box, e-commerce segment.
“Speculative construction is back in a big way in Atlanta and Central Pennsylvania,” JLL said. Atlanta “had annual warehousing asking rent growth of 7.3 percent during the (first) quarter; the forecast calls for 3 percent annual growth by year-end 2016.” JLL expects construction to expand this year in regional and secondary markets with diverse and expanding populations.
The first quarter experienced notable single-asset warehousing and DC sales in Southern California ($184 million for two Inland Empire facilities), Atlanta ($77.3 million), Philadelphia ($60 million), Charlotte, North Carolina ($54.1 million) and Chicago ($48.6 million). Major portfolio sales of several properties each occurred in Indianapolis, Florida and Oakland, JLL said.
Increasingly, shippers are working with dedicated warehousing providers such as Wagner Logistics. The Kansas City, Missouri-based logistics provider recently added locations in two new cities. “Call it the Amazon effect, or whatever you like, but companies want their inventories to be closer to their customers,” John Wagner Jr., chief customer officer, said in a blog post.
Despite the proliferation of new distribution centers, adding warehouse space isn’t easy. Broan NuTone, a manufacturer of household ventilation products, discovered that when it proposed a 136,000-square-foot expansion to its Hartford, Wisconsin warehouse. The plan is to raise the facility’s ceiling to 48 feet, which is 13 feet higher than permitted. The shipper needs permission from the city’s planning commission and the city council, according to a local news report.
Broan NuTone is also waiting on approval of a “reliever route” that would direct truck traffic around Hartford. “I will move distribution before I make the decision to move another 350 trucks a day through downtown Hartford,” Jeff Mueller, group president, said in an e-mail to the planning commission, according to a May 11 article published by Greater Milwaukee Today.
His comment underscores another problem facing shippers and developers planning warehouse expansion. More warehousing means more truck traffic, more noise and more diesel emissions, three things residential communities universally oppose. Warehouse expansion often requires more investment in supporting infrastructure, such as local and state roads.
Couple the need to deal with local restrictions and 'not in my backyard' movements with the availability of space in urban areas, and meeting rising demand for more distribution space looks like a tall order — one industrial developers will have to work hard to fulfill in the next few years.