The quest for California warehouse space is more challenging than ever. Whether you’re partnering with a 3PL or looking to secure space on your own, you’re going to need deep pockets, perseverance, a competitive spirit, and a little luck. To get more insight into the situation, we spoke with Weber Logistics’ Chief Executive Officer, Bob Lilja.
Why is it impossible to find California warehouse space?
Well, it’s not just California or the West Coast where warehouse space is hard to find. Demand is outpacing supply by a wide margin all over the country, and vacancy rates are at an all-time low in metropolitan areas nationwide. I’m hearing from colleagues all over that they’re having the same issues. And the closer to a US port you go, the worse the challenge is.
There are number of factors that are causing these record-low vacancy rates. You have the meteoric rise of eCommerce. And eCommerce operations demand substantial amounts of space for floor-based pick lines, large pack out areas, conveyor systems, and large labor forces.
Companies are also holding on to far more inventory due to supply chain unpredictability. Our clients are telling us this – and making long-term commitments – as they address this fundamental shift in procurement strategy.
You also have companies that are looking to get products to their customers faster. So a company with one DC in the Midwest that distributes to the entire country is now looking at a more regional approach to put inventory closer to end customers.
But the situation is worse in California, right?
Correct. Most consumer goods coming into the US come from Asia, and most imports from Asia come into the West Coast – the Ports of L.A. and Long Beach in particular. So, consumer goods companies and supply chain companies want to be close to these ports to receive product and get it out for distribution quickly.
You then have the events of the past two years where port congestion has spilled over to warehouse congestion and companies are finding that they don’t have enough space – even in their yards – to handle all the incoming product. So, they seek new space at a time when everyone else is doing the same. Available space then becomes and extremely very competitive, with the resulting double-digit rises in real estate lease costs and commercial real estate property values – which is leading to a great deal of sales activity, and corresponding property tax valuation increases.
What is the California warehouse space situation like now?
Available space is almost non-existent, especially in Southern California. In the Inland Empire, for instance, industrial real estate hit an unheard of 0.7% vacancy in 2021. If space is available and it can handle eCommerce or omnichannel distribution, there is a ton of competition for it.
And when I say competition, I mean you’re competing against some of the biggest companies in the world for space. Companies like Amazon and UPS and FedEx, who already have millions of square feet in the market.
Every day, you have companies that are competing for buildings that are still under construction – and leases are commencing while TIs are still in process.
Then there are offshore 3PLs that have entered the fray in a big way, putting down enormous deposits to secure space. This drives up the costs even higher.
You mentioned unfinished buildings. Are the shortages of raw materials like steel holding up construction and delaying new warehouses coming online?
Absolutely. And it’s not just the initial construction that’s affected. Once a warehouse is up, you still need to add racking and build it out. The shortage of steel and other materials is affecting that, too.
For example, we have a brand-new warehouse that has space committed and should be receiving inventory. However, we’re still 12 weeks away from receiving the second phase of the racking for it – if there are no raw material delays. That’s 12 weeks when our clients needed it yesterday.
We also upgraded the security system at one of our facilities, but had to wait over 3 months due to shortages of component materials. There are countless examples of these kinds of shortages affecting both construction and then everything that needs to happen after construction for the warehouse to be operational.
As a company that’s very active in securing new warehouse space – and has been for years – can you talk about the changes you’ve seen in industrial real estate rates?
Two years ago, we rented a building less than 50 miles from the Ports for less than half of the price of a building we just opened last month – that’s 25 miles farther away from the Ports.
Historically, the further you get from a US port, the less expensive real estate is. That’s still true, but because of the truck driver shortage coupled with record-breaking demand at West Coast ports in 2021, the prices for port drayage have gone through the roof. We’re talking 50-80% price increases. So, every cost throughout the distribution supply chain is substantially higher than it was even a year ago.
This even includes the yards needed to stage and store trailers and containers. The inability of the ports to relieve container congestion and accept empty returns means that containers are dwelling longer at warehouses, so companies are looking for larger yards or standalone yards. Any unimproved piece of land that can store trailers or containers is now far more valuable than it was two years ago.
How are 3PLs faring in general during this tumultuous time?
3PL providers that have both space and can pay the higher wages to secure today’s skilled warehouse employees are doing very well. The demand is stronger than ever.
However, 3PLs who don’t have the space and an adequate or stable labor pool are not faring well. If they run out of space, they can’t receive their customers’ products and provide the services they were contracted for – and they certainly can’t grow.
Some 3PLs, even established ones, are afraid to secure more real estate. They tell their customers, “We will not take down a building because the current market costs are too high, and they might fall later.” There’s also the fact that the market demands a 7+ year lease commitment. They’re afraid of volatility and lessening demand for warehouse space, while still being locked into long leases at high rates.
It’s also worth mentioning that most of the new generation of buildings that are being built and coming online are far larger than many 3PLs can support. These would be substantial investments at any time, let alone at today’s lease rates.
As for Weber Logistics, we’re rapidly expanding our footprint. We believe that any future economic downturn will be brief and will be offset by the continuing growth demand for warehouse space. eCommerce volumes will continue to grow. Real estate has always been a great performer over the long term. 3PLs are a cost-plus business and when rates drop, there are those customers that shop around. But over the long term, high quality service at fair market rates will support long-term relationships.
What can 3PL customers expect in terms of storage rate increases?
Many existing 3PL customers are still enjoying storage rates that were based upon the real estate rates of a few years ago because they signed multi-year leases back then. All those leases are coming up. If your existing 3PL hasn’t raised your storage rates by double digits, you should ask when the building lease agreement expires. When your lease is up, your 3PL will have no choice but to raise your rates – or not renew, and give you notice. You’ll need to pay fair market value or try to secure other space that will cost just as much or more – nothing else is sustainable.
It is not a good time right now for a company to move on from a 3PL to save a buck. First, that is becoming a pretty rare scenario to even find, in our market. Also, companies that need service should be cautious about the scenario in which a 3PL gets a company to invest to move inventory in for a first year at low rates, only to find them raised far higher, as soon as contractually possible (e.g., 30-50% increase in storage costs). Between move costs and disruption, that is not a winner.
Earlier, you mentioned labor being as big a challenge as space. Can you elaborate?
This shortage of warehousing is also related to a full-employment market. Companies not working with a 3PL that has sustainable levels of strong, stable staffing are going to see service levels degrade. There’s a lot of noise in the market about this issue lately. In fact, many 3PLs have been reluctant to take on new customers because they can’t adequately serve the ones they have. 2021 was challenging enough for all 3PLs, but those who have not built solid teams by now, with rates sufficient to hire and retain the quality employees necessary to execute in the “new normal”, are struggling.
What advice do you have for shippers looking for California warehouse space?
First, you will need to find a 3PL with the space you need or go out and secure it yourself. If you’re looking at 3PLs, ideally you’ll find one that can first commit to what you need, and is investing in expanding space to serve its customers. Every one of their customers is likely intending to grow or maintain far higher inventory levels than they previously have.
Remember that space is only part of the solution. Equally important is the labor situation. A warehouse full of inventory means little if there aren’t trained, reliable associates to get those products picked, packed, and shipped. My advice would be to find out whether your 3PL relies mostly on temp employees or has a majority of full-time company workers being paid market wages and benefits. Full-time workers create much more stability for a 3PL’s operations and the resultant service excellence that every customer has the right to expect.