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Thursday, December 08, 2022

The Next Kink in the Supply Chain: The Warehouse

The Next Kink in the Supply Chain: The Warehouse

President Joe Biden recently struck a deal to unload cargo around the clock at the port of Los Angeles, the first step to speed up the backlogged supply chain that has been stranded in dozens of container ships off the Southern California coast.

But this is only the first step. More truck drivers and chassis and more warehouse space are needed to move goods out of ports and to their final destination.

The pandemic boosted demand for online shopping, creating a shipping backlog that experts fear will limit the supply of goods for shoppers this Christmas.

The distribution issues come on top of the existing shortage of industrial space in the area and, in particular, warehouse space.

Looking to expand distribution centers, Amazon and other retailers are on a shopping spree in Southern California.

Redlands economist John Hassing said operating the ports 24 hours a day, seven days a week, would pose significant challenges to the inland empire’s vast system of warehouses.

“The whole system has collapsed,” he said.

Jesse Casillas, managing director of research at commercial real estate brokerage NAI Capital, said rising demand for industrial space since the pandemic is driving up rents and driving down vacancy rates.

We asked him to explain how this demand was affecting warehouses and other industrial properties in the area. His comments have been edited for space.

Q: President Biden unveiled a plan on October 14 to expand operations at the Port of Los Angeles to reduce the backlog of container ships waiting off the Southern California coast. Do the warehouses in the area have the capacity to handle all those goods?

a: I’ve heard that too many warehouses are overflowing. Sure, our agents as they go out, it’s one of the things they look for, given what their yard looks like. Do they have a lot of stuff sitting outside and need extra space? So the answer is yes, you have heard a lot.

The market in Southern California is 1.7 billion square feet. The vacancy rate is 1.7%. So, you have extremely tight market conditions. If you don’t have enough space, you have to quickly send it to your clients and go through the same hoops as ports.

A semi-truck turns into an Amazon Fulfillment Center in Eastwell on Thursday, November 12, 2020.

Q: Industrial space is usually the cheapest property with the lowest rent. Does it mean that people are converting industrial space to other uses like housing to get better returns?

a: Yes. When you are looking at a fixed price per square foot for industrial that is zoned for residential, it can drive up to two or three times its value, depending on where it is located. The base (of industrial property) has shrunk as a result of going for residential use.

SoCal has been grappling with a lack of modern industrial space for years. However, the market is responding by building large, modern facilities, which take time to build. Modern warehouses are important for efficiently moving goods through the supply chain from warehouse distribution centers to retail outlets.

Old facilities that are built for construction and do not have column spacing and certainly do not have yard space. A modern feature, with an apparent height of 32 feet, a truck-turning radius where a truck can make a 180-degree turn, really brings efficiency to market.

Q: When did this log jam start?

a: As orders increased (during the pandemic), additional warehouse space was needed and the demand for warehouses increased. However, some businesses struggled to make room for new orders for existing goods due to a lack of trucking service providers.

Pre-existing conditions, including chassis shortages and dislocation, challenges truck drivers to return empty containers to port terminals and labor shortages in warehouses had already created inefficiencies in the supply chain.

Q: How has it affected the industrial market?

a: You’ve got double-digit rentals year-over-year for the distribution location. If you received a lease renewal today, think about the impact of your lease rate on where you were five years ago. Renewing it would be very expensive.

The Next Kink In The Supply Chain: The Warehouse
Workers work at a construction site for a warehouse on Kasmalia Street near Lyndon Avenue, north of the 210 Freeway, Tuesday, August 17, 2021 in Rialto, Calif.

Q: Is there enough construction to address this shortcoming?

a: About 30 million square feet are under construction in Southern California. Seventy percent of the industrial space under construction is in the Inland Empire, as far as Banning, 95 miles from the ports.

Remember, the other 50% of cargo landed at ports is placed on a train or truck bound from elsewhere, like out of state. At the end of the day, a large part of that consumption happens locally here. Fifty percent of cargo landed at ports is bound for local markets.

Question: How long will this lack of industrial space last?

a: This is probably going to be around for some time. Lack of land, limited infill opportunities, and large new buildings moving east will cause a lack of industrial space. Lack of scarce pockets of infill land will continue to drive up redevelopment, rent and sale prices.

Jesse Casillas Profile

Title: Jesse Casillas, Managing Director, Research

Organization: NAI Capital Commercial

Residence: March Vista

Education: University of Southern California

Previous Experience: Started at Grub & Ellis in 1998 and has worked in commercial real estate research since then

industrial market facts

Vacancy: 1.7% in the third quarter, down from 3.3% 15 months ago.

3rd quarter annual rent increase

LA County: 13%

Orange County: 13.9%

Inland Empire: 5.6%

Part of the regional distribution space:

LA County: 46.1%

Inland Empire: 39.8%

Orange County: 10.6%

Ventura County: 3.5%

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