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Supply Chain Challenges, Warehouse Operations

Give me some (warehouse) space

Alex Stark | March 30, 2021

The industrial real estate market has changed dramatically in the last year. Today, it’s a seller’s market and power users of warehouse space, like large CPG companies, don’t have the same ability they once had to access the space they need at the rates and terms they desire.

These companies need to take a more strategic, long-term approach to their industrial space requirements to make sure they have the space needed to support their companies’ growth requirements.

How did we get here?

The reduced amount of available warehouse space has been driven mostly by rising eCommerce demand related to COVID-19. eCommerce sales grew 32% from 2019 to 2020 (US Dept of Commerce). The resulting demand for warehouse space has resulted in a projected net absorption (space newly occupied MINUS space vacated) of 250 million square feet in 2021, according to data from CBRE. That’s well over the trailing 5-year average of 211 million square feet.

Much of the new space under construction is pre-leased. According to James Breeze, CBRE's senior director of research, “We're not in a state of oversupply; we're in a state of undersupply. We need a lot more space under construction." Jones Lang LaSalle reports that the U.S. may need another 1 billion square feet of warehouse space by 2025.

Another macro trend lowering vacancy rates is companies opening new warehouses to get products closer to the end customer – both consumers and retail customers.

With warehouse space in such high demand, companies are finding that past distribution strategies just don’t work.

Overflow space is a good example. Companies that historically relied on short-term space leased under 30-day terms to handle peak periods are finding that the space is not there. Landlords are now in the driver’s seat and are holding out for longer-term deals. CPG companies that fail to plan ahead may find their options limited.

Need to take a longer-term view

In today’s industrial real estate market, it’s really about shifting the distribution planning approach from reactive to proactive, from short-term to long-term and from tactical to strategic.

That doesn’t mean slowing down in the face of massive disruption in CPG supply chains. It just means being ready when the need arises. Take the time now to answer some key strategic questions.

How much space will you need?

You can no longer assume that space will be there when you need it. Understand your company’s long-term sales forecasts. Your infrastructure plan needs to be ahead, not behind, that growth curve.

Safety stock will impact future space requirements. Because of the pandemic and trade conflicts, most companies are reducing risks related to supply chain disruption by increasing days of inventory on hand. What’s your strategy?

Where should your DCs be?

As your mix of customers has changed in this omni-channel world, it might be time for a network optimization study. But be careful. Distribution network modeling tools won’t give you the answer. You’ll need to look at space, labor and freight availability in the markets you examine.

Are you open to new approaches?

The conversion of shuttered retail space into distribution space is just one of the trends that will change tomorrow’s industrial real estate landscape. Are you in or out?

Think first, think fast

When it comes to warehouse space, many of yesterday’s leasing strategies won’t work. To ensure you have the infrastructure to support your brand’s future growth, take a break from the daily firefighting routine and simply THINK.

When you take the time to answer the key questions that will drive your brand’s future distribution needs, you gain clarity of purpose. It’s this clarity that leads to faster decisions, smarter decisions, and the focus required to turn your brand’s distribution operation into a competitive advantage.

Move quickly, but have a plan.

Need some help thinking through what that plan might look like? Kane Logistics works with some of America’s largest and best-known brands to develop distribution strategies that are both practical and sustainable. Let’s talk.

 

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