Starting this August, the industry will be looking at a steady increase in US industrial rates, thanks to numerous market trends that all seem to have costs pointing north. The freight forwarding and logistics industry is well into 2016 and already had its fair share of recession, alliance scrambling, and the notable VGM implementation. Despite the recession period, manufacturers are continuing to produce and carriers continue to deliver. So what’s the problem?
At the moment, product sales have slowed down significantly on the consumer end, which was what began this recession. Simply put, the demand for product doesn’t match the supply and the frequency of which the supplies are produced. This has caused warehouses to be filled at capacity and additional warehouse space has become a premium in the market, leading to the inverse of the aforementioned supply-and-demand problem: the demand for warehouse and distribution space is now higher, and the supply (space) remains low.
According to a Prologis report on the first half of 2016, net absorption of industrial space has been the strongest first half of a calendar year since the year 2000, sitting at an approximate 125 million square feet in the US. One trend contributing to this is the need of warehouse space for e-commerce fulfillment. Besides reconfiguring their supply chain efficiency, many retailers are outgrowing the buildings they occupy because they are looking have all their distribution in one warehouse. E-commerce distribution requires nearly three times the space of traditional distribution, and this demand of space has forced retailers to move to bigger buildings in order to maximize efficiency.
Shippers are now moving quickly to acquire warehouse and distribution space because of the demand. As inventories remain tight and warehouses continue to remain bloated with products, the demand for additional space will continue to rise. What exacerbates this situation is that, according to the Prologis report, the growth in demand will continue to supersede the delivery of new warehouse space. It seems that until the issue of inventory oversaturation is resolved, the rising industrial rates for warehouse space will continue to exist.