The latest logistics challenge? Rising warehouse costs.
You can thank the internet for the squeeze on warehouse real estate. Companies like Amazon have made next-day and same-day delivery a consumer expectation, and those capabilities require retailers to keep their stock as close as possible to the customer.
To compete, smaller retailers don’t just have to solve massive last-mile logistics challenges — they have to get involved in a hyper-competitive real estate market as well.
Now, warehouses in close proximity to urban centers are getting more and more expensive, even as older suburban and rural warehouses lie empty.
It’s a question of supply and demand
There simply isn’t enough warehouse space in urban areas to meet the needs of the market, driving costs higher. Vacancies in many urban areas are nearing all-time lows; in Chicago, for example, industrial vacancies are at their lowest level since 2001.
Developers and builders are recognizing the opportunity, but urban real estate is expensive to begin with, and they can’t build fast enough to satisfy the explosion of urban warehouse demand.
According to CNBC, there is more than 255 million square feet of warehouse space under construction in the U.S., but that’s still not enough. Rents, as a result, are up 19.2% since 2015.
Meanwhile, warehouses in suburban or industrial areas outside of cities are being abandoned, as they’re simply too far away from customers to meet the new expectations of lightning-fast fulfillment. For example, when shipping to a customer in Los Angeles, a shipper might have previously housed their stock in the Inland Empire. Now, they need to move closer to the ports and closer to the population centers.
In addition, shippers are favoring new construction because of the technological advantages it offers. A new warehouse gives its owner the ability to able to accommodate new automated solutions and distribution models.
In an ironic footnote, many of the urban spaces Amazon is converting into warehouses are old shopping malls–formerly home to the same institutions they helped put out of business.
How high is the rent?
In the western U.S., warehouse rent climbed to $8.14 per square foot in Q3 2019, $2.24 higher than the national average. In L.A., meanwhile, warehouse rent was $10.32 per square foot, one of the highest rates in the nation.
That may be due in part to increased volumes coming in from China, as shippers have attempted to get their merchandise into the U.S. before potential new tariffs go into effect.
Investors are taking notice of these trends. REITs focusing specifically on warehouses are performing exceptionally, with gains as high as 50% YTD.
Will it even out soon?
If you’re hoping that the supply will catch up with demand and level out prices in the next few years, you might be out of luck.
Businesses are competing with giants like Amazon and The Home Depot, and many of the warehouses currently under construction are already owned by these large retailers. What space remains is subject to intense competition.
More and more shippers are turning to 3PL partners
Businesses hoping to build or buy their own urban warehouses have a tough challenge ahead of them.
One option for these businesses is to partner with a 3PL provider that already owns warehouse space near urban ports. GlobeCon, for example, provides warehouse space just outside the Ports of Los Angeles and Long Beach for its customers.