Containers piled high at the Port of New York and New Jersey form an attention-grabbing view from the 115,000 square feet warehouse operated by Michael Sarcona, president of logistics company Sarcona Management.
The facility is one of eight Sarcona operates near the port with a combined capacity of almost 2m square feet, but right now that is not nearly enough. He has a team of employees and real estate agents urgently searching for more space.
Rebounding consumer demand has led to record imports through US ports on both coasts and strained every link in the supply chain. After 41 years in the business, Sarcona has a unique vantage point over one of the worst of the bottlenecks that executives and economists fear could derail the US recovery.
“Demand for space and demand for people have been the greatest I have ever seen,” he said, adding that he has been inundated with calls from new customers but has had to turn many of them down to prioritise existing clients.
Imports at the port of New York and New Jersey — the third-largest in the country — were 26.4 per cent higher for the year to August than for the same period in 2020.
The warehouses where those container loads would normally head first before being distributed are struggling to cope: nationwide industrial vacancy rates hit a historic low of 3.6 per cent in the third quarter, according to commercial real estate group CBRE, but in port areas space is even more scarce. In the three markets closest to the New Jersey port, the combined vacancy rate is just 1.5 per cent.
A leap in demand has collided with a sector that had not invested enough to build capacity for moments like this. Warehouse operators also say they face shortages of everything they need to run their facilities efficiently, from racks and balers to forklift trucks, because this equipment is caught in the same shipping delays as other imports.
As in many industries, acute labour shortages are also making the situation worse. According to the Bureau of Labor Statistics, the number of warehouse workers increased by only 3 per cent between January and September, a number insufficient to match the surge of goods flowing into the supply chain.
In the past, Sarcona said, referrals from his employee network were enough to find new people, but now even job ads and employment agencies are not bringing in enough recruits.
The effects are being felt by growing numbers of companies, with railroad operators and consumer goods groups among those citing warehouse shortages as concerns on their third-quarter earnings calls.
The shortage of space is also pushing up the price tenants pay to store their goods. CBRE said industry rents were up 10.4 per cent in the third quarter as compared to last year.
It used to be common for new warehouses to sit empty for months or years before they found tenants, but now demand is so intense that customers are booking space even before buildings are completed. Prologis, the warehouse operator, said on its latest earnings call that a record 70 per cent of the space it is developing in the US has been pre-leased.
“People are kind of in a panic mode almost when it comes to buying or committing to real estate,” Hamid Moghadam, Prologis chief executive, told the same call.
Some companies with the resources to do so are buying their own warehouses to ensure they are not fighting rivals to secure the capacity they need. According to CoStar Group, a commercial real estate data group, the 25 largest US retailers acquired almost 38m rentable square feet in new industrial space last year, more than double the 2019 figure.
Warehouse owners are meanwhile accelerating construction plans to catch up with demand. CBRE said a record 433m square feet of warehouse space was under construction in the third quarter.
Sean Henry, chief executive of a third party logistics company called Stord, said many clients were committing to long-term contracts rather than taking cheaper short leases only for the space they already know they need “because they want to know the space is there”.
With so few options near the ports, some retailers and logistics companies are pushing further inland. Henry said he was redirecting some customers from the Los Angeles and Long Beach port area to states such as Utah and Nevada where Stord has added millions of square feet of capacity.
These facilities can be cheaper by a margin of 20-35 per cent, he said, but “instead of [spending] $800 a container to get from the port to a nearby warehouse you might be spending $3,500 to get it unloaded” at a more distant location.
For Moghadam of Prologis, simply shipping goods further will not solve the core problem. “It’s pretty easy to bring on capacity in the middle of the country when there are no consumers. But . . . in San Francisco or New York or Chicago . . . how do you build these facilities that are going to hold all this inventory that’s going to insulate us from these shocks?” he asked at an event this past week.
With politicians in New Jersey among those considering legislation to slow down unpopular “warehouse sprawl”, however, the answer is far from clear.
“This problem is going to be with us for a while,” said Moghadam, who said he saw no let-up until the middle or end of 2023. “I think, actually, it’s going to get worse,” he cautioned, saying that once people experience the expected delays to holiday deliveries, “they’re going to change their consumer habits, and we don’t quite know how”.
Source: Economy - ft.com
