Supply of Warehouse Space Yet to Meet Demand
A lack of warehouse space in growth markets — driven by the surge in e-commerce — is being exacerbated by a scarcity of building materials and their skyrocketing costs.
The pandemic uncovered a significant amount of previously unseen, or unthought-of risk for corporations across the globe. When supply chains turned upside down, many companies were forced to watch helplessly as their product sat quietly in a steel box stacked halfway to space on a ship the size of a small country. They were forced to make quick reactionary decisions to ensure their shelves were full and their customers were happy.
In a typical market cycle this is a perfectly normal dynamic, but when someone pulls the fire alarm and every company floods the market at the same time, many just can’t compete to pay for existing buildings. The larger companies, on the other hand, will always be able to better sidestep the major catastrophic shortfalls, as was proven when we saw record retail sales in Q4 2021. Turns out having a large balance sheet and significant cash on hand allows for such flexibility (who knew) — like giving you the ability to purchase prime real estate near the ports, charter your own ships, use your own trucks, or pay for expanded air freight capacity. Either way, the desire and demand to store goods has soared exponentially.
The pandemic uncovered a significant amount of previously unseen, or unthought-of risk for corporations across the globe. High Industrial Demand
The real theme of the current demand is more of a — fool me once shame on you; fool me twice, shame on me — type of thing. Companies do not want to be caught empty-handed (literally) ever again, and thus pull-ahead orders, bulk-buying, and over-manufacturing will come in vogue over the course of 2022. This will altogether continue to spread the backups farther and farther up the supply chain and keep industrial demand high; this will, of course, only continue to contribute to the massive bullwhip effect fanned by different governments around the world shutting down, re-opening, re-shutting down, and re-re-opening economies at different times and for different periods of time.
To the joy of large institutional owners everywhere, space is just flat out not available, and their buildings are all completely full — in fact, they probably could double rents and their buildings would still be full (wink). For developers and construction companies across the country this would sound like music to their ears, as the next natural thing would be to build more. But those supply chain dislocations aren’t just affecting large consumer goods companies. As a service provider, they’re also affecting your ability to confidently deliver projects on time and within budget, or at least with more variability than in the past.
Skyrocketing Building Costs
The cost of building products has skyrocketed. For example, steel in some geographies has gone up by upwards of 30–40 percent, and even the availability of steel is hard to come by (thanks Amazon). Additionally, even if you were able to have product on-site, the availability of labor is a complete unknown, and the talent level of that labor is now probably an even greater unknown variable.
To the joy of large institutional owners everywhere, space is just flat out not available, and their buildings are all completely full. The world has once again proven it’s an unpredictable, complex, and fragile place. The whole dynamic is out of whack, there’s massive imbalance in the market, and as I said above, the very factors contributing to the demand are also hindering the supply. Companies may want more space so they don’t run out of product, but you can’t build the product because other companies don’t have enough of their products, and then that mismatch creates pricing variability which delays decisions, and around and around we go.
Congestion at the Ports
Luckily, we all know this won’t last forever. The queue of ships lining port cities across the country will normalize. The stacks of containers in staging areas from L.A. to Chicago to New Jersey will subside, and the American supply chain will continue to move forward. Commodity prices will settle, materials will arrive to job sites on time, project schedules and budgets will be met (for the most part), and someone somewhere will wind up losing his shirt overbuilding supply in some market and sitting on empty space for a couple of years. Business as usual — it’s the lasting effects of this disruption that will be what to look for.
This desire for alternative ports, or alternative modes of transportation, will coincide perfectly with the recent passing of the infrastructure bill. For instance, maybe some companies take the time to realize they depended too much on East Asian companies for their product manufacturing. I think it’s safe to say that some companies may have overestimated their power or ability to control what happens in these countries, which may ultimately lead to more onshoring or near-shoring of capacity. The new USMCA free-trade agreement and Buy-American initiatives will support this strategy — look out for states supporting our neighbors to the south and north. Additionally, maybe companies will realize that they rely too much on the ports of L.A./Long Beach or NY/NJ and need to devise alternative strategies.
This desire for alternative ports, or alternative modes of transportation, will coincide perfectly with the recent passing of the infrastructure bill. Increasing investment to update these facilities will ultimately increase the capacity and operability of those hubs to better compete with the likes of Southern California and Northern New Jersey — keep a keen eye on those locales.
Nonetheless, the supply of space has yet to meet demand, and most likely won’t in the near term. Port cities will continue to be the premier locations, especially those in core markets, but will continue to be dominated by larger companies with the ability to afford it. Shifting populations and changing demographics in each state will continue to shake up the landscape, opening up opportunities in perhaps lesser-known areas. There will be winners and losers in the great reshuffling of supply chains, and it will be interesting to see what happens next.
The Evolution of the Megasite
36th Annual Corporate Survey: Executives Focus on Labor, Energy, Shipping Costs
Rail Gains Advantage Amidst Supply Chain Snarls
The 2021 Top States for Doing Business Reflect Their Locational Advantages
18th Annual Consultants Survey: Access to Major Markets and Skilled Labor Are Clients’ Primary Concerns
2021 Gold & Silver Shovel Awards Recognize State and Local Economic Development Efforts
Innovative and Collaborative Design Sets the Stage for Life Science Innovation