CBRE Group Shows High Warehouse Demand Amid Pandemic Reset
Although March and April’s COVID-19 lockdowns brought a sharp drop throughout the logistics industry (and nearly every other industry in the U.S. economy), the CBRE Group reports a major upswing in the demand for U.S. warehouse space in the past 30 to 60 days. Not only is the demand rebounding following the pandemic, but businesses are also requiring even more warehouse space than prior to the pandemic.
In the CBRE report on industrial real estate post-pandemic, experts found that industrial real estate (warehouse space) jumped 43% between April 15 and May 14 compared to the previous 30-day period. Even though activity fell from March 15 to April 14, total transactions for the year at this time are 2.8% higher than the same time in 2019. This is a radical jump considering the U.S. is still facing COVID-19 concerns and the overall American economy has yet to bounce back at that rate. This shows promise for the logistics sphere as well as retail and ecommerce overall.
Read more about the impact of COVID-19 on the logistics industry here.
What are the Short-Term Effects of COVID-19 on Warehouse Space?
What happened to warehouse space during the “height” of the pandemic in March and April?
- Despite a surge in ecommerce purchases, a lot of retailers were laden with unsold inventory. The economy essentially halted except for essentials, so it’s taking a while to move stock for other retailers. Inventory is sitting in warehouses for longer, which is further straining the U.S. warehouse capacity.
- There was a pickup in short-term leasing (under 12 months). This reflects the excess inventory as well as increases in demand for new types of ecommerce products, like groceries and medical supplies. A lot of vendors were looking for temporary warehouse space to meet the current and unexpected demand changes.
- The demand for warehouses of 100,000+ square feet remained the most consistent. Bigger facilities saw a 5% fall in the first month of the pandemic but spiked back up in May.
- New construction of warehouse spaces has slowed as construction workers are locked down and municipal workers can’t approve development permits. This means that it’s getting harder to meet the increasing demand for industrial space. Thus, logistics teams are getting more creative about the stocking of goods in their warehouses, like utilizing more vertical space and implementing machine learning inventory programs.
CBRE expects that retailers will continue to take a wait-and-see approach. It seemed in March and April that less overall leasing activity and higher vacancy rates would be problematic, but the rebound is proving that the industrial market post-pandemic will likely have minimal negative ramifications long-term.
Recommended read: Cass Freight Index Shows Sustained COVID-19 Impact
What are the Long-Term Effects?
Warehouse space demand is still in “rebound mode,” though it’s increasing quickly. Experts anticipate five major long-term effects of COVID-19 that will boost demand for warehousing real estate in the coming years:
The coronavirus lockdowns pushed everyone to buy online. Consumers who were previously not online shoppers or only partially online moved fully to the ecommerce sphere to buy almost all their goods, including groceries and medical supplies.
We expect that following the pandemic, these consumers will still buy a strong majority of their goods online. This is due to the distrust of physical stores to have safety precautions and the shutdown of physical storefronts, as well as the increasing efficiency and customer service of online retailers.
Ecommerce has always been one of the greatest catalysts for change in the logistics industry, especially when it comes to industrial real estate and transportation modes. The dominance of ecommerce always seemed inevitable, but we didn’t expect these levels for several years. Coronavirus has sped up the ecommerce world, which has in turn spawned radical shifts in the way logistics is done. In particular, an increasing demand for online goods has powered the need for more, bigger, and more localized distribution centers (referred to as distributed inventory).
As ecommerce continues to grow, the need to house these goods in warehouses will also grow in tandem. Physical storefronts will no longer hold a bulk of a retailer’s product as they traditionally have, and more and more companies will rely on a dispersed model of inventory in distribution centers. Accelerating ecommerce means higher inventory levels, since ecommerce typically requires about 3x as much space as the traditional distribution that serves physical storefronts. That’s why CBRE anticipates the U.S. warehouse demand could increase by as much as an incredible 400 million square feet in the next couple of years.
The way consumers reacted to the pandemic caught everyone off-guard. From stockpiling toilet paper and groceries to halting the purchase of other goods, retailers had to adjust their production quantities and stock levels accordingly.
A lot of major retailers, like Charmin, especially had to focus on ramping up production quickly—while keeping workers safe. Moving forward, a lot of retailers will probably hold higher amounts of stock held in warehouses in case of another “stockpile” situation to ensure they can meet demand as it arises. Some experts think businesses may increase inventories by 5-10% long term to minimize the risk of demand-shocks.
This kind of increase in inventory storage is going to call for larger warehouses, but those warehouses may have less movement. That means logistics managers will need new and smarter ways to regulate inventory levels. Many are now moving towards artificial intelligence programs to make this shift easier.
Supply chain diversification
Before the coronavirus, the U.S. had already imposed severe trade tariffs on Chinese imports during a massive “trade war.” As this was just coming to a close, the pandemic hit and further disrupted supply chains that relied on Chinese products. Besides, businesses had already been moving away from Chinese-only production, not just from these international border shutdowns. Rising labor costs in China and intellectual property theft meant outsourcing entirely to China was no longer the smart or economical decision.
Thus, most American companies are looking to diversify their supply chains. They’re looking to manufacturing goods in the U.S., Mexico, and other parts of Asia to reduce costs while minimizing risk. Diversifying the supply chain locations and methods is one of the best risk management strategies to prevent major losses due to labor, tariffs, or unforeseen incidents.
Distributed inventory systems
Vendors were already moving their goods closer to customers to speed up last-mile delivery times and enhance customer service. The pandemic accelerated this distributed inventory model by increasing the need to allocate inventory differently and more effectively throughout the country.
In particular, a lot of stores that had previously used storefronts to stock goods moved to fulfill with warehouses. Others were using “dark store” fulfillment centers, creating almost entirely remote businesses. It’s not just that there’s a higher demand for warehouse space; there is also a demand for new ways of utilizing that space to best deliver goods to their final destination. Planning this inventory distribution and supply chain connectivity are both proving critical in a post-COVID-19 world.
Warehouse labor + automation
Labor has been a concern for warehouses the past few years. Another CBRE report found that the rapid growth of ecommerce would lead to over 450,000 warehouse and distribution workers—and we’re seeing that number is now even higher than originally anticipated. With the labor crunch in the warehousing sector, logistics companies are looking for ways to meet the increasing demand with the need for more labor.
There are two ways logistics companies are addressing this labor shortage:
- They’re recruiting workers from other industries. This was a common practice even before the pandemic, but with so much job loss in other sectors, “poaching” has become a successful method of bringing in warehouse labor.
- They’re investing in automation. Whether it’s autonomous trucks, picking/packing robots, sanitation robots, or machine learning software, the implementation of technology has been rapid since the pandemic. Automation can help manage the labor-demand gap while enhancing the efficiency of the warehouse.
Learn more about how logistics companies are pairing labor with automation with the following resources:
- The most popular emerging logistics technologies
- Smart warehouses and inventory management
- What is robotic process automation?
Increasing Demand for U.S. Warehouse Space
Warehouses are rebounding quickly as consumers are buying more, businesses are increasing inventory, and supply chains are growing leaner and more efficient. Warehouse operations are proving highly critical to the supply chain, more so than ever before, as the “demand shock” of the pandemic hit the country; warehouses are the crux of the chain, so having room for stock and efficiency for stock movement is vital.
Even as the impacts of coronavirus lessen moving forward, there will still be a strong demand for ecommerce, especially online grocery delivery, that had not existed pre-coronavirus. Retailers will also be eager to future-proof their supply chains even more. There is a new era of post-COVID-19 shopping that requires a repositioning of inventory, new management systems, and greater lines of supply chain communication.
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