Is the warehouse cost crunch sticking around?

Costs are spiking in the US warehouse sector, as the heightened demand for storage space sustains, but the above-trend rent increases are likely to fall back before long.

Rent rates aren’t the only costs going up, however; associated labor costs for warehousing are also moving that way. Retailers and suppliers are struggling to find talent to manage and operate warehouse space. The Bureau of Labor Statistics shows year-on-year growth of 8% and 10% in wages for associates and supervisors respectively.

But the circa 580 million square feet of warehouse space now in development forecast by the Mohr Partners Commercial Real Estate Intelligence Market Analysis – a 50% leap on 2021 levels – could shift the balance away from constricted supply, while increasing tech adoption could offset the rise in labor costs.

Rising rents

The Mohr Partners analysis showed that just 3.7% of warehouses sat vacant in Q2 2022, a 27-year low. Average rents were over 9% higher than in the same period a year earlier, with rent rate increases of 10.4% this year and an estimated at 8.8% in 2023.

The hotspot of Inland Empire (IE), outside Los Angeles, has seen even higher increases compared to the rest of California and the US, reflecting its popularity for importers operating through the port at LA/Long Beach. 

The robust demand for warehousing has been driven by the boom in e-commerce, an impact of COVID-19 that doesn’t appear to be going away.

Adding to this has been trade normalization after the disruption of the pandemic, creating a bullwhip effect on inventory from previously constrained supply chains. Another shorter-term factor playing a role on rent rates is the threat of a recession and consumer downturn. Retailers have cut back on buying faster than expected, leaving suppliers with excess inventory to store.

The effect is cost escalations being built into contract renewals with third-party providers and warnings from landlords that rents are multiplying on terms expiring in the next six months.

New builds

This rise in value in the warehouse space has attracted less experienced investors, backing developments that could take over a year to come online. These sites could miss the current elevated levels of demand and add supply that will draw down prices in the medium and longer term.

At the same time, that 580 million square feet of warehouse space being created isn’t evenly spread across the US. New construction growth in California, including the IE area, has lagged the rest of the country. The US (excluding California) QoQ construction growth rate is 7.9%, for the period Q1 2020 to Q2 2022. The rate in IE is 5.7%. That suggests that development levels may have a variable effect on rents, if demand stays as it is currently.

From capacity crunch to capacity management

What happens to demand is the key question. It’s difficult to predict how inventory and the economy will play out, as the new warehouse capacity comes online. Either way, these dynamics will cross over; take the news reports of Amazon letting go of some of its warehouse space as it, along with Target and Walmart, see sales growth softening. 

Despite the uncertainty on the exact path warehouse costs will take, there are ways to better manage the current crunch and warehouse capacity going forward:

• Make more from the space you have: investing in storage and automation technology can help achieve maximum density and limit exposure to higher labor costs. Robotics and AI systems can reduce error, harness data and augment the role existing staff play.
  
  
• Do you have excess space or processing capacity? There’s potential to monetize it through subletting and short-term partnerships for sharing space and processing.
  
  
• Question your current strategies on warehouse footprint and inventory: Where can forecasting and buying processes be improved to reduce inventory? Is there potential to consolidate warehouse locations? If you have some flexibility on location, is there a more competitive market nearby?