Date: Thursday, June 22, 2023
Source: Sourcing Journal
Despite the warehousing market softening this year, tenants still have to pay up. Rent for several U.S. East Coast markets continued growing through May, according to a research note from Jonathan Petersen, managing director at Jefferies.
Eastern and central Pennsylvania saw the highest year-to-date rent growth at 10 percent, while Atlanta saw a 7.3 percent increase, Petersen said in his research note.
Los Angeles recorded the biggest year-to-date market rent decline at 6.3 percent in May, followed by Phoenix and Houston, where rents declined 4.3 percent and 2.7 percent, respectively.
The higher rents also come amid a 3.6 percent vacancy rate, according to commerce real estate services firm Cushman & Wakefield, which is well below the 10-year historical average of 5.3 percent.
Cushman & Wakefield’s report says average earning rent jumped 3.5 percent quarter-over-quarter to $9.19 per square foot. This should decline later this year and into 2024.
As rates increase, warehousing capacity appears to be inching upward as firms ditch some space amid weakening consumer demand. The Logistics Managers’ Index (LMI) said that new e-commerce leases signed in the first quarter were down 66 percent year-over-year to 4.7 million total square feet as consumers continue to shift spending habits back towards services.
But as space opens up, warehousing utilization growth rates decline, as seen with Stitch Fix and Big Lots recently offloading some of their footprint. In May, LMI’s warehousing utilization metric dipped to 54.7 from 55.1 in the prior quarter. This is the second-lowest rate of expansion in the 6.5 years the index has tracked this rate.
Warehousing utilization has never contracted in LMI data as e-commerce growth accelerated throughout the pandemic. But if the seasonal restocking of goods does not happen later this year, it could become a distinct possibility.
Part of the uncertainty related to expected rent and capacity comes from the speculative nature of the construction, which is priced at a premium and still doesn’t have a committed buyer.
Much of today’s in-progress warehouse construction—83 percent—is speculative in nature, according to Cushman & Wakefield. It expects vacancy rates to surpass 6 percent by the second half of 2024, but said the “historically healthy” market has vacancy sitting below the 15-year average of 6.8 percent.
“The rise in vacancy is good news for occupiers looking for increased options within industrial facilities,” the Cushman & Wakefield report said. “Vacancy is not expected to top out higher than that because of the scaling back of development.”
That’s not to say companies won’t have any pressing concerns about warehouse space.
Jena Santoro, Americas regional lead, intelligence solutions for Everstream Analytics, told Sourcing Journal that businesses dealing with “storage shortages” could see new U.S. port congestion despite a tentative new West Coast dockworker contract recently being reached. Pre-deal disruption could still ripple through the supply chain.
“If the congestion levels do peak, and start to climb again at the West Coast ports, we may start to see issues of, ‘where does the cargo go? Who’s processing this and how do we get it out into the market?’” Santoro said. “If we get into a situation where there’s a lot of buildup and backlogs of cargo processing at ports because of labor shortages, we might get into a sticky situation.”
Alice + Olivia’s logistics VP talks drones, warehouse labor
Apparel retailers looking to expand their global distribution and adhere to customer-friendly service level agreements should prioritize their broader warehouse networks with rent potentially rising.
Women’s luxury brand and wholesaler Alice + Olivia fulfills customer orders from five global distribution centers in Secaucus, N.J.; Hong Kong; Belgium; the U.K.; and Canada so customers anywhere will get their order in three days or less, according to Joseph Harris, vice president of logistics for the New York-based contemporary women’s fashion brand.
Making the most out of warehousing capability comes down to developing a dedicated workforce of full-time employees, Harris told attendees at the Home Delivery World Conference in Philadelphia on Thursday.
“We believe in having as many W2 employees as possible, and only supplementing when absolutely necessary with contract employees,” Harris said. “Having permanent employees in place is not only more efficient, but ultimately yields a better customer experience, because the accuracy is much higher.”
Harris sees considerable opportunity to enhance warehouse operations with technology. He wants Alice + Olivia to use RFID-armed drones to perform cycle counting at the distribution centers within two to three years.
“We have 30- or 35-foot-high ceilings, we have garments on racks that go almost to the ceiling, it’s very difficult for a human being to get up there and count those,” said Harris.