Warehousing Adapts to the E-Commerce Boom

March 13, 2018 by Emma Hurt, @Emma_Hurt

The e-commerce boom is reshaping the entire supply chain, creating both demand for warehouse space and changing the way businesses store goods.

In the past, warehouses have generally been on the outskirts of cities, isolated from high population density, partially so that goods could be moved without hindrance. But now warehouse space is at a premium, especially closer to population centers to facilitate next-, or even same-day shipments.

“In the previous model you didn’t need to move things all that quickly,” said David Egan, head of industrial and logistics research at CBRE, a commercial real estate company. “In this compressed dynamic, you’ve got to push into cities and places where people live.”

This trend, combined with a general growth of retail purchases, has meant a boost in warehouse construction.

The National Retail Federation projects retail sales will continue to grow about 4 percent in 2018, a clip that has held fairly steady since the recession. IHS Markit estimates e-commerce made up 16 percent of U.S. retail sales in 2017, up from about 6 percent in 2007.

Warehouse construction in the pipeline hit a new high in the first quarter of 2017, according to a CBRE report by Egan.

Warehouse design also is changing.  The average new warehouse built in the U.S. between 2012 and 2017 is 143 percent larger and 3.7 feet higher than the last construction peak between 2002 and 2007, CBRE said in a November report.

Multi-story warehouses, popular in Asia and Europe, have joined the U.S. warehouse landscape to maximize space. Prologis Inc., the largest provider of logistics real estate in the U.S., is building the first multi-story warehouse in the U.S. in Seattle, set to open later in 2018. Another is in the entitlement approval process in San Francisco, Dan Letter, managing director of Prologis Inc. said.

The added capacity would be a “welcome change in key markets like Los Angeles, Orange County and Oakland, where vacancy rates are below 2 percent and last-mile users are trying to reach massive urban populations,” according to a 2018 market outlook report from Spencer Levy, head of research for the Americas at CBRE.

“Land is at a premium and warehousing rates are going through the roof,” said Cathy Roberson, an analyst at Logistics Trends & Insights. “Folks want [warehouses] as close to a densely populated area as possible for same-day delivery.”

“The general, mega-warehouse markets have just gotten bigger,” said Dru Ghegan, vice president at Atlanta-based Bonded Service Warehouse, which operates about 1 million square feet of warehouse space in Georgia.

“All the space that was soft for a long time has filled up, so the cranes are going again,” Ghegan said. “They’re building warehouses as fast as they can.”

There has also been an increase in facilities called inland ports that are used to get freight closer to population-dense areas faster and cheaper, Roberson said. Inland ports are inland intermodal rail terminals that allow for less-expensive over-land rail transit from seaports before a container moves to a truck. Storage rates inland are also cheaper.

Opened in 2013, the inland port of Greer, S.C., is a good example. It grew 33 percent last year. The state of South Carolina will launch another inland port in Dillon this April.

Inland ports are “good to get inventory and product moving quickly,” Egan said. “It’s a cost-efficient and dependable way to move things. There’s lots to be said for dependable.”

Some warehouses are physically changing as well, said Ryan Morel, vice president of market development at Flexe, an on-demand warehousing startup in Seattle.

“Fulfillment operations take up more space than traditional pallet and bulk storage and often require new equipment like conveyor belts and sorting or packaging machinery,” Morel said. “It also requires additional labor resources working throughout the day to pick, pack and ship orders.”

Rending of Georgetown Crossroads, a new multi-story warehouse in Seattle.

Rendering of Georgetown Crossroads, a new multi-story warehouse in Seattle. (Photo: Prologis)

With the crunch on warehousing space everywhere, pain points in the industry have become more pronounced, and startups such as Flexe are trying to address them with new ideas.

Traditionally, the warehouse industry operates with multiple-year leases that often leave unused capacity in off-peak season. “A lot of times users are leasing for their peak season … which is great for peak season but leaves excess the rest of the time,” Egan said.

“We’ve got to figure out a way to use excess capacity,” he said. “That’s the idea of the gig economy everywhere.”

Flexe, founded in 2013, is seen as an Airbnb for warehouse space. It originally offered shippers the option to find warehouse space in a pinch, piecemeal. Today, the Flexe marketplace is more versatile, said Morgan Hass, senior content marketing manager.

Some shippers use the marketplace for all their warehouse needs, and some use it during those seasonal ebbs and flows, Hass said. Shippers send in a project request, Flexe distributes that to its network and warehouses can bid on the project through the platform.

Morel said the problems that created the need for Flexe are not new and not exclusively tied to e-commerce. Therefore, he said he believes its model “will become a part of the norm.”

Stord is a warehousing software startup in Atlanta that has built a one-stop shop for warehouse space, skipping over the bidding step, said cofounder Sean Henry.

“We’re consolidating both capacity and customers,” Henry said.

Stord standardizes the software systems of its warehouses and shippers to alleviate the hyper fragmentation between parties, he said. The company has also just added a dock management system that third-party trucking companies can join, for further efficiency.

“When we work with a company, it’s to overhaul their product distribution, to help them scale to new markets … not to solve just a short-term demand,” he said.

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