Warehouse Users Seek More Space as Hedge Against Supply Chain Volatility
A single ship caused what was literally a world of trouble. That ship was the 220,000-ton Ever Given container ship, which ran aground in the Suez Canal for six days in late March, blocking other vessels from passing through. The havoc this mishap caused for shipping traffic worldwide—to the tune of $10 billion per day—“underscores the fragile nature of global supply chains,” says CBRE.
That fragility has implications for industrial tenants, as well as landlords and developers. “Supply chain volatility further heightens the need for additional warehouse space to stockpile goods and mitigate future disruptions,” CBRE reports.
“CBRE Econometric Advisors estimates that a dollar increase in imports requires three times as much warehouse space as a dollar increase in exports (holding industrial production constant). Thus, a trend toward shorter, more resilient supply chains has gathered pace over the past year.”
Although many companies would prefer to store their additional “safety stock” inventory near ports of entry, “what little warehouse space is available in these markets is getting expensive,” says CBRE. Seaport markets finished 2020 with an average vacancy rate of just 3.6%—one percentage point lower than the national average.
In contrast to the active pipelines of some of the more inland industrial markets, just 75 million square feet of space was under construction in port cities at the end of 2020, with more than a third of it preleased. Accordingly, CBRE says, “the low amount of available supply has led to record-high rental rates.
” Increasing rents are leading to higher pricing on for-sale warehouse facilities, making the investment market even more competitive. While occupiers must overcome the “sticker shock” of higher rents in these markets, occupancy costs remain a low portion of overall supply chain costs. CBRE says this will give landlords room to continue increasing rental rates for the foreseeable future.
All of this occurs against the backdrop of surging shipping volume as retailers and manufacturers rush to replenish depleted inventories during the pandemic. CBRE reports that U.S. West Coast ports are experiencing historic shipping volume and congestion in a rush to increase inventories on shore.
Year-to-date, loaded imports have increased at the ports of Los Angeles and Long Beach by 24.2% and 32.1%, respectively, says CBRE. East Coast ports also have seen a significant uptick in volume, with the ports of Savannah, Virginia and New York/New Jersey posting gains of 17.7%, 16.8% and 13.2%, respectively.
Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces.
Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications.
Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).