Supply Chain Issues Exacerbating Warehouse Woes

Remember the Great Toilet Paper Shortage of 2020? In hindsight, that scarcity heralded just the beginning of many other products. Processers and computer chips. Cereal. Aluminum cans. Exercise equipment. Refrigerant and HVAC equipment and parts. Shipping containers. Perhaps a better question to ask is “What hasn’t the world run short of?”

A backlog of billions of dollars of finished goods and raw supplies sits offshore at some of the United States’ busiest ports. The shortage of truck drivers has hit 80,000 and continues to grow. Manufacturers and companies are struggling to get shipping containers because so many remain on vessels and trains — or stacked in freight yards — waiting to be transported and unloaded at their final destinations.

Just last month, the Port of Savannah housed nearly 80,000 shipping containers — more than 50% its usual amount. Ships anchor up to 17 miles off the coast and wait for nearly two weeks to unload their cargo. And then the cargo sits, stacked on the docks and in the shipyards. In September, the shipyard held over 4,000 containers that had been waiting for pickup for three weeks.

It’s like a demented game of whisper down the alley, but instead of messages morphing from the original to something completely new (and inaccurate), holdups are causing potentially devastating chain reactions. Let’s say, for example, that a company’s boiler needs replacing. But the technician says it will take six to eight weeks for a new one. The company can’t operate without a boiler, so it closes temporarily. The cash flow stops. But the overhead and operating expenses keep coming. And the longer the delay, the greater the possibility the business won’t recover.

Shortages have led to other bottlenecks as well, with companies anticipating a holiday shopping season starting earlier than before. In preparation, many brands have ordered extra merchandise — and sooner than normal – clogging already jam-packed warehouses.

One retailer, for example, filled three million square feet of its local warehouse space in Georgia. The Port of Savannah staff shipped the excess inventory via rail to a warehouse in Charlotte, NC, where the retailer has additional storage space.

Bottlenecks at the ports, antiquated infrastructure, misplaced or rerouted containers, workforce and truck driver shortages have also created interesting warehouse challenges.

First the good:

Warehouse rents are soaring 30% higher or more, pending location. Some gateways — like California — have 1% or lower vacancy rates. Warehouse owners are booking gains on holdings as valuations skyrocket.

Moody’s Investor Service and Fitch Ratings says Blackstone Inc. has cashed out nearly $1.3 billion by refinancing two mortgages on industrial properties. Link Logistics, one of its portfolio companies, spent $5 billion to build 30 million ft2 of new space.

Experts estimate that for every $1 billion increase in online sales, companies need another 1 million ft2 of warehouse space. One logistics real estate developer estimates U.S. suppliers will need 800 million ft2 more of warehouse space to store excess inventory like critical auto parts and other products just in case the supply chain woes continue beyond 2022.

And now the bad:

It’s hard to erect a building without supplies. Supply chain snarls have ensnared building materials like wood, doors, particle board, shingles, wiring, HVAC items and more. And subcontractors can’t predict when their materials will arrive — nor can they maintain their bids with prices or delivery dates.

A lack of warehouse space has crews unloading containers in parking lots to find and repackage goods for their clients. One VP for a surface transportation company said, “Workers were combing through boxes to beat Halloween deadlines, setting down Christmas lights and pulling out witches on brooms to ship. There in the parking lot, we built displays that could go right to the storefronts.”

Another warehouse operator in Newark, the country’s third-largest port, says warehouses are at or over capacity with the greatest demand for space he’s ever seen. The average warehouse vacancy has dropped to a record low 3.6%, with a space shortage of about 300 million ft2 in 2021.

What does this mean? Even if retailers successfully get their products to the U.S., they’ll have no place to store them and will struggle to keep them moving along the supply chain. Efficient supply chains average about 15% availability of warehouse space. With a 3.6% availability, even the most efficient warehouses and crews can’t function properly.

In central and northern New Jersey ports, warehouse vacancies are currently hovering around 2%. Warehouse operators are scrambling to find more space, but it isn’t easy.

What does it mean for consumers?

It’s hard to predict whether consumers will have the luxury of shopping online as they’ve done since early 2020. Can they still buy things and have them shipped? Of course. But the supply chain’s likely to struggle to keep pace, especially with the rate at which omni-channel shopping has exploded.

Online retailers — and brands that sell online and in brick-and-mortar stores — can’t guarantee delivery times. It’s impossible and unrealistic for sellers to promise timely deliveries this holiday shopping season. Some predict more shoppers (especially those waiting until the last minute) will need to go back to stores for items they need.

Now what?

We’re not out of space — yet. But port warehouses are overwhelmed and bursting at the seams. Supply and construction are barely keeping pace with demand, especially as the land nearest to ports becomes an even greater commodity. Prices have spiked in reaction to demand.

To build a 500,000 ft2 warehouse facility requires 30 to 35 acres of flat land located near infrastructure — and that’s becoming increasingly scarce in NJ. Compounding the issue and adding to the congestion? Warehouses often send merchandise and goods to distribution centers. Those centers reroute products to brick-and-mortar stores and customers. Those centers are at full (or almost full) capacity, too.

In 2021, warehouse needs have jumped from 800 million ft2 to more than 1 billion ft2. Currently under development? Another 500 million ft2 of storage.

It won’t solve the supply chain issue, though. A U.S. Small Business Pulse Survey conducted over in October found 45% of businesses indicating they had domestic supplier delays — up from 26.7% in January.

Whether you’re a warehouse operator, supply chain manager or logistics planner, if you’re looking for more commercial space to expand or automation solutions to streamline operations, talk to the members of CREAUnited, a collaborative partnership of firms and individuals representing all disciplines within the commercial real estate industry.

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