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The overhang of surplus inventories, scarce warehouse space, and falling number of development starts for new space could mean higher costs and uncertain availability persist for the foreseeable future. Here are five major factors that are making it difficult to find warehouse space.
First the good news: the pandemic-related disruptions that threw supply chains into chaos over the past three years have greatly subsided. But don't breathe easy just yet. The overhang of surplus inventories, scarce warehouse space, and falling number of development starts for new space could mean higher costs and uncertain availability persist for the foreseeable future.
Here are five major factors that are making it difficult to find warehouse space, along with a solution that might help.
Stung by shortages that cost them business in 2020 and 2021, retailers are overcompensating to make sure they aren't shocked again. US inventories hit a record $2.48 trillion in December 2022, up more than $450 billion from the month COVID lockdowns began in March 2020. Although e-commerce activity has shown signs of leveling out after three years of blistering growth, there is still a lot of leftover inventory in the pipeline. As a result, warehouse vacancy rates across the United States are at their lowest levels ever, between 3% and 4%, and even lower in the most popular markets.
The inventory glut has a revenge effect as businesses lower prices to get rid of excess goods. That damages profitability for everyone. It's a safe bet that it will be some time before manufacturers and retailers are comfortable going back to historic industry inventory levels if they ever do so.
High interest rates, economic uncertainty, and a tight labor market are just a few factors that are putting the reins on warehouse construction. CBRE reported that although a record 661 million square feet of industrial space was under construction in the third quarter of 2022, groundbreakings in 2023 are expected to decline by more than half. Prologis expects that the shrinking pipeline of new space will create capacity shortages that persist into 2024.
Colliers reported that the average rent for industrial properties in the United States has increased for nearly five years in a row and was up 15.2% in 2022 over the previous year. The firm said 13 industrial markets posted year-over-year asking rent increases of more than 15% compared to just one-Cleveland-with lower rates. Industrial markets near the busy ports of Los Angeles/Long Beach and New York/New Jersey have some of the lowest vacancy rates in the country and also some of the highest rents given their limited capacity to expand.
The locations of new spaces are shifting as well. Renters are seeking metro areas with deep labor pools and more affordable rents in places like Louisville, Memphis, Minneapolis, Indianapolis, and Kansas City. Nevertheless, vacancy rates everywhere are expected to remain below their ten-year averages, with Greater Los Angeles, New York City, and the San Francisco Bay area among the eight markets that currently post vacancy rates of less than 3%, according to Colliers. That will drive up warehousing costs for organizations that need space adjacent to major ports as well as for capital-strapped small businesses.
The average US warehouse today is more than 180,000 square feet in size, which is about 40% larger than 20 years ago, according to Cushman & Wakefield. Recent lot-busting projects include Tesla's 10 million-square-foot Gigafactory in Nevada, its 4.3 million-square-foot manufacturing and warehouse facility in Texas, a new 2.8 million-square-foot Amazon warehouse in Snohomish County, WA, and a 3.8-million-square-foot Amazon warehouse being built in Detroit, MI.
While these figures are impressive, they're not necessarily good news for smaller companies. Amazon, for example, sublet only about 2.6% of its total warehouse space in 2021. It plans to increase that number this year amid declining revenue growth, but the lesson is that more space doesn't necessarily mean more available inventory.
Now more than ever, companies are finding it increasingly difficult to rely on traditional in-house or outsourced logistics strategies to adapt to a constantly changing supply chain environment. The ongoing shortage of warehouse space is making this even more challenging, especially for small-medium or growing businesses who can't or don't want to make a multi-year commitment to a fixed location.
Iron Mountain Warehousing and Logistics can help you to quickly respond to changing market conditions by supplementing your existing logistics model when necessary and providing you flexibility to expand and grow without heavy CAPEX or fixed OPEX expenses. With contract lengths measured in months instead of years, rapid onboarding, flexible service agreements, and a comprehensive set of value-added services, we provide solutions for overflow storage, seasonality needs, product launches, and short/long term storage. And with a network of local warehouses and fulfillment facilities located in key markets throughout North America, we're your partner for on-demand flexibility at scale.