US warehouses run out of space as containers pile up

Containers stacked at the Port of New York and New Jersey form a striking sight from the 115,000 square foot warehouse operated by Michael Sarcona, president of logistics company Sarcona Management.

The facility is one of eight Sarconas operating near the port with a combined capacity of almost 2 square meters, but at the moment it is not enough. It has a team of employees and real estate agents urgently looking for more space.

The rebound in consumer demand has resulted in record imports through US ports on both coasts and straining every link in the supply chain. After 41 years in the business, Sarcona has a unique perspective on one of the worst bottlenecks that executives and economists believe could derail the U.S. recovery.

“The demand for space and the demand for people has been the biggest I have ever seen,” he said, adding that he had been inundated with calls from new customers but had to turn down many to prioritize existing customers.

Imports at the ports of New York and New Jersey – the country’s third largest – were 26.4% higher for the year ending August than for the same period in 2020.

Warehouses where these container loads would normally go first before being distributed are struggling to cope: Nationwide industrial vacancy rates hit an all-time low of 3.6% in the third quarter, according to the report. commercial real estate group CBRE, but in port areas, space is even more scarce. In the three markets closest to the Port of New Jersey, the combined vacancy rate is only 1.5%.

A surge in demand collided with an industry that had not invested enough to build capacity for times like this. Warehouse operators also say they face shortages of everything they need to effectively run their facilities, from racks and balers to forklifts, as this equipment is caught in the same shipping delays. than other imports.

As in many industries, acute labor shortages also worsen the situation. According to the Bureau of Labor Statistics, the number of warehouse workers increased only 3% between January and September, not enough to match the influx of goods entering the supply chain.

In the past, Sarcona said, referrals from its employee network were enough to find new people, but now even job postings and placement agencies don’t bring in enough recruits.

The effects are being felt by a growing number of companies, with rail operators and consumer goods groups among those citing warehouse shortages as concerns in their third quarter earnings calls.

Lack of space also drives up the price tenants pay to store their belongings. CBRE said industry rents rose 10.4% in the third quarter from a year ago.

It was common for new warehouses to sit empty for months or years before finding tenants, but now the demand is so intense that customers are reserving space before the buildings are even finished. Prologis, the warehouse operator, said in its latest earnings call that a record 70% of the space it is developing in the United States has been pre-let.

“People are kind of in panic mode when it comes to buying or engaging in real estate,” Hamid Moghadam, CEO of Prologis, said on the same call.

Some companies with the resources to do this buy their own warehouses to make sure they don’t compete against competitors for the capacity they need. According to CoStar Group, a commercial real estate data group, America’s 25 largest retailers acquired nearly 38 million rentable square feet in new industrial space last year, more than double the figure for 2019.

Warehouse owners are speeding up construction plans to catch up with demand. CBRE said a record 433 m² warehouse space was under construction in the third quarter.

Sean Henry, managing director of a third-party logistics company called Stord, said many clients are entering into long-term contracts rather than taking cheaper short-term leases just for the space they already know. need “because they want to know that the space is there”.

With so few options near ports, some retailers and logistics companies are pushing further inland. Henry said he was redirecting some customers from the Los Angeles port area and Long Beach to states such as Utah and Nevada, where Stord has added millions of square feet of capacity.

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These facilities can be cheaper by a margin of 20 to 35 percent, he said, but “instead of [spending] $ 800 per container to go from the port to a nearby warehouse, you could spend $ 3,500 to have it unloaded ”at a more remote location.

For Moghadam of Prologis, simply shipping goods further afield will not solve the central problem. “It’s quite easy to increase capacity in the center of the country when there are no consumers. Corn . . . in San Francisco or New York or Chicago. . . how do you build these facilities that will contain all this inventory that will insulate us from these shocks? He asked at an event last week.

With New Jersey politicians among those considering legislation to slow unpopular “warehouse sprawl”, the answer is far from clear, however.

“This problem is going to be with us for a while,” said Moghadam, who said he saw no loosening until the middle or end of 2023. “I think it’s actually fine. get worse, “he warned, saying once people experience the expected delays in holiday deliveries,” they’re going to change their spending habits, and we’re not quite sure how. “

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