Lack of Warehousing Space is a Ticking Time Bomb Waiting to Explode
North America is facing a historically high drawdown in warehousing capacity availability that needs to be addressed ASAP
A hearty welcome to the 12th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
Scrolling through the stories we’ve done till now, it was interesting to see virtually all of them have at least a passing mention of the COVID-19 pandemic. Pointing this out as this ‘accidental’ common theme continues on this instalment as well.
One of the biggest impacts of COVID-19 on supply chains is the way it scooped out space and capacity from the market—be it trucking, maritime, air freight, or railroad capacity. And space isn’t just a problem across different modalities, but also in warehouses.
Warehouses across North America are staring at historically low inventory space availability, and a part of it has to do with COVID-19. The city lockdowns that ensued at the onset of the pandemic led people to buy things online—everything from kitchenware to gym equipment. The summer of ’20 saw a widespread transition of people from buying in physical retail outlets to shopping online. Most of them would probably never use physical retail the same way they did pre-pandemic.
Herein lies the problem. E-commerce consumes a lot of space. E-commerce takes up roughly three times more space than traditional physical retail to sell comparable volumes. E-commerce has a similar, outsized impact on warehousing capacity as well. While physical retail-bound volumes are usually stored in the retail inventories and decked on its shelves, e-commerce retail volumes almost always are held in warehouses before they are packed and sent for last-mile delivery.
E-commerce takes up roughly three times more space than traditional physical retail to sell comparable volumes.
This aside, the volatility and demand spikes retailers see with their consumer segment keep them on edge, as they always look to ensure there are enough stocks on their inventories. With significantly long delivery lead times and transport capacity being hard to come by, e-commerce retailers have resorted to bloating their inventories a bit more than usual. Prologis estimates that average inventory levels have fattened by 5-10% in the last year due to the e-commerce boom.
And Amazon has a lot to do with the warehouse capacity drawdown, a situation that has persisted for the last few years until the pandemic ended up exacerbating it. Amazon has been aggressively scooping up available warehousing space, especially around urban markets.
Fascinating enough, it’s the neighbor up north of the US that’s facing the heat of a warehousing crunch to a greater extent. Amazon has added nearly 12 million square feet of inventory space across nine major Canadian markets since late 2019—for instance, pushing the Toronto area’s warehousing vacancy to 0.5%. And there seems to be no respite.
The situation is so bad that real-estate major CBRE forecasted Canada’s warehousing capacity to dry out entirely by the end of 2021. Considering the unrelenting growth of e-commerce and the understandably slow process of increasing available warehousing space in the country, Canada running out of warehousing capacity is an imminent possibility.
The situation is so bad that real-estate major CBRE forecasted Canada’s warehousing capacity to dry out entirely by the end of 2021.
Doomsday prophesies apart, e-commerce affinity is booming amongst the urban populace. Urban consumers are the epicenters of the e-commerce surge, and holding inventories closer to them helps e-commerce retailers score big on delivery speed.
However, with warehousing space being critically low around urban centers, we are left with retailers scrambling desperately for space that isn’t available. Building new infrastructure, especially sprawling warehouses in the middle of cities, is a cumbersome process. To circumvent this, major retailers like Amazon have looked to refashion existing commercial spaces across urban areas—in various stages of desertion—into warehouses. This includes malls, ice factories, and parking lots.
But this is easier said than done. To convert existing commercial buildings into a space that can be used to stock inventories takes time and resources, which often goes beyond what’s feasible for smaller retailers. These converted buildings also come with different space constraints. For instance, the ceiling clearance might not be as high as a regular warehouse. Multi-story warehousing could become a thing, as the lack of space forces retailers to contend with parking their products in shorter racks and narrower aisles, but across multiple levels in the building.
That said, retailers have another issue with renting warehousing space in urban regions—the ridiculously high costs. Retailers see sense in having their inventories in neighboring regions that are more cost-effective and lengthen their last-mile delivery routes. However, funnily enough, this might be counter-intuitive as Deloitte found while trying to answer the question—“Are the costs of having an urban fulfillment center in the Bronx much higher than outside of New York City?”
The answer, in short, was a resounding no.
“We found that while real estate and labor is more expensive in the Bronx (as opposed to outside the city), when considering the last-mile delivery costs, the total cost to serve is less, and its competitive advantage to service from a fulfillment center in the city increases as the delivery commitment window reduces from same day to hours. It is at least 22% more cost-effective to serve the same multibillion-dollar e-commerce demand in NYC out of the Bronx versus other New Jersey locations due to higher transportation costs from locations outside the city after considering the cost of getting in and out of the city.”
Retailers who think twice about renting warehousing space in urban areas due to the high costs associated with it might be missing the forest for the trees. Choosing to hold inventories closer to the consumers would mean faster delivery times and undercutting competitors who keep their inventories outside urban areas.
While this is a long-term strategy for retailers to position operations, the more pressing issue at hand remains warehousing capacity availability. Resorting to flexible warehousing options with short-term contracts, converting other commercial spaces to storing inventories, and lengthening last-mile delivery operations to serve from distant distribution centers are a few options that retailers are working with today. This being said, warehousing capacity tightness is expected to continue through this year, and it could be a while before we see the proverbial light at the end of the tunnel.
The Weekly Roundup
🚢 The trans-Pacific trade lane has been under a lot of stress in the last few months due to robust import demand in the US. Ironically enough, sustained record-high import demand has actually caused import volumes to fall in the US, thanks to maritime networks crumbling under the weight of demand. In a client note, Maersk explained that the slight fall in imports is not due to softening demand, but rather due to heavy congestion and capacity disruptions.
📦 DHL has expanded its current partnership with Locus Robotics by ordering more warehousing robots for its warehousing facilities. DHL looks to double its present Locus’ robot worker force to 2,000 by 2022, as interest in automation piqued during the pandemic. Robots perform better than human workers, as they are more accurate, do not need breaks, and can keep things running even amidst a lockdown.
💰 Supply chain visibility major project44 announced a $202 million round earlier this week in Series E investment. The round, led by Goldman Sachs, brings project44’s total investment to $442.5 million at a valuation of $1.2 billion. The company has also bought maritime data firm Ocean Insights and analytics company ClearMetal in this year’s first quarter, signaling its efforts to consolidate data across different modalities on a single platform.
💨 Maersk has introduced Emissions Dashboard, an analytical data tool that its customers can use to measure their carbon footprint from their entire supply chain and with a detailed emissions overview on the modalities they travel in. The end-to-end carbon emissions measurement is vital going forward, especially with stricter climate-centric regulations expected to be passed. The emissions dashboard will help companies and logistics service providers to reckon with their emissions and work religiously to reduce them.
...said who?
“Over the last six weeks, we have seen the market come roaring back faster than anybody would have anticipated. The start up has been, in many ways, as difficult as the shutdown…Everybody is trying to turn it on immediately and the capacity might not be there.”
- Mark Allen, CEO of the International Foodservice Distributors Association, commenting on distributors facing a shortage of everyday food products, workers, and freight capacity, as Americans returning to restaurants creates supply chain chaos.
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