Urban Multistory Warehousing & the Future
What is happening:
An article written by a Motley Fool analyst at the start of 2023 reported that it could take years for Amazon to recover from years of overproduction in warehouse space. Unused warehouse space measured by the millions is likely to have a nasty impact on any organization's cash flow. The solution the e-commerce juggernaut has apparently adopted is a reliance upon sub-leasing warehouse space to other companies. It sounds like a simple solution, one that other organizations similar in size are already replicating. The simple solution has one glaring problem. You need a market that is consistently going to need warehouse space it can sub-lease. To be fair, Amazon is not alone in this challenge.
The warehousing market became a red hot commodity in the wake of the pandemic. Organizations, across the full spectrum of industries, began using a brutal cycle of overproduction. Producing significantly more than market-demand, a sin no organization should ever do, resulted in record levels of occupied warehousing space across the US. Available space in warehouses fell the lowest levels in more than 25 years. After all, a lot of organizations needed space to put a lot of stuff. Added warehousing space was needed for finished goods that couldn't be sold yet, and raw materials that were not scheduled for use had to stored somewhere. The entire production cycle for goods and services went into overdrive. Private warehouse construction grew from $7.05 billion in 2010 to $61.5 billion in 2022.
Overproduction is an expensive mistake for any organization, and the culprits are certainly not going to be the only ones to feel the pain from their mistakes.
Why it matters:
Trucking is already seeing the impact from overproduction losing it's cool. Truck freight volume and spending in Q2, of 2023, declined by the highest levels since the early days of the COVID-19 pandemic. Spending by shippers dropped 10.9%, while shipment volume dropped 9%. As companies begin to work the inventory levels down, which I will add should NEVER have gone up in the first place, freight volume continues to plummet.
The global shipping industry was mired in a freight recession throughout 2023, and the challenges are expected to continue. High inventories held by companies who dramatically overproduced market demand, combined with a pullback in consumer spending are the reasons behind the unpleasant outlook. Freight volume in trucking is not the only transit mode to take a hit from the downward trend in volume. Ocean freight prices for the first and second quarters will be unchanged or down — after a 2023 in which rates cratered by as much as 50%. Looking at air freight, the majority anticipate rates to be unchanged to down anywhere from 10% to 20%. FedEx recently told pilots to look for additional work with American Airlines as cargo demand slows. The low freight prices coupled with diminished cargo volumes were among the reasons behind global shipping bellwether Maersk’s announcement of 10,000 layoffs.
On of the most overlooked reasons this matters is the demand for warehousing in the US, which shot to unprecedented demand, is going to quickly shift in the next 24 months. That does not mean that it is going to evaporate; but it does mean the demand for warehousing in remote areas is going to dissipate in 2024, and then disappear in 2025. Demand is going to skyrocket for warehousing in an entirely different location. Commercial real estate is feeling the pain of the new normal. Vacancies are at levels nobody previously considered possible, and multiple cities are calling for RFP's (request for proposals) that address the new foot print that needs to be created. The warehousing solution is a perfect place to start for the developers, and the courier business is the perfect place to start for the trucking companies that need to make an immediate pivot in the right direction.