The Future of Warehouse Building Is Urban

Melinda McLaughlin by Jerry Hirsch

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LONG BEACH, Calif. — Accelerating e-commerce purchases and continuing supply chain disruptions are reshaping the warehouse and distribution industry, driving up costs and creating robust demand for storage facilities in urban areas and near ports.

“The future of logistics real estate is urban,” Melinda McLaughlin, the senior vice president, global head of research at warehouse giant Prologis, said as the keynote speaker for the Metrans International Urban Freight Conference May 25-27.

Metrans, a joint partnership of the University of Southern California and California State University-Long Beach, studies how freight and goods movement affects urban areas.

With supply chains as volatile as ever, how will this shape demand for logistics real estate? Prologis' Heather Belfor shares our latest outlook for the industry in 100 seconds: https://t.co/vM6qLdgdZH #cre pic.twitter.com/4g4cwOqovL — Prologis (@Prologis) May 24, 2022

Competition for urban distribution space is increasing as retailers look to store inventory closer to consumers.

That helps shippers fulfill customer expectations of rapid delivery and also reduces emissions.

“If you are close to the residential populations, your van routes are much smaller,” McLaughlin said.

But urban rents are two to three times higher than those in peripheral locations.

Warehouse rents are soaring as customers compete for limited space, McLaughlin said.

Rents for warehouse and distribution space in Southern California have grown 60% to 70% in a year and a half.

“That is a huge change for our customers, and those costs get passed through to consumers,” McLaughlin said.

The push is fueled by growth in e-commerce spending.

Prologis expected e-commerce to grow at a 15% rate in 2019, but it jumped 20% as people redirected spending from services to goods during the COVID-19 pandemic.

“At some peak moments, the number was 30%. That’s a big change in what the supply chain needs to handle,” McLaughlin said.

Globally, consumer demand surged during the pandemic, but “the U.S. was the most extreme example,” she said.

“That demand came against a backdrop where it was harder than ever to bring a building online. We have not been able to respond as an industry because of the same supply chain disruptions that have affected our customers,” McLaughlin said.

Consumers powered large jumps in online sales of electronics, appliances, apparel, furniture, toys and entertainment goods. That, in turn, increased warehouse space demand.

“You need three times as much warehouse space to sell goods online. That’s because 100% of your goods are in the warehouse. There are no store shelves to put them on,” McLaughlin said.

E-commerce retailers also need more space because of how many items they stock and the depth of their inventory.

“A typical Walmart stocks about 150,000 items, but a Walmart.com warehouse has millions,” she said.

Prologis, which operates about 1 billion square feet of warehouse space globally, wants to develop more facilities in urban areas but has found that space is scarce and building expenses are soaring.

It now costs about $330 a square foot to acquire the land and build a warehouse in Southern California’s Inland Empire, east of the Los Angeles and Long Beach port complex. That is up from $141 in 2020, McLaughlin said. Even regions known for a friendly development environment are suffering from the same trend. Dallas’ land acquisition and warehouse building costs have jumped to $146 a square foot from $89 two years ago.

Containerships moored off the ports of Los Angeles and Long Beach on Oct. 9. (Tim Rue/Bloomberg News)

According to McLaughlin, the freight and logistics industry is at a pivotal moment where it must revamp supply chains and become adept at working with shortages of labor, trucks and warehouse space.

There is “persistent disruption and it is going to continue,” even as the pandemic subsides, she said.

Extreme weather events like the recent Texas deep freeze and wildfires in California are one example of the ongoing challenges for the freight and logistics industry.

“Climate change is real … we are seeing more and more weather-related disasters every year,” McLaughlin said.

A Prologis analysis of weather-related events in recent years found that an increasing number are causing $1 billion or more of damage.

The labor shortage will continue as the workforce in both Western economies and China ages, she said.

“That has some pretty serious implications for production centers. It means the risk of not being able to find enough people, the risk of strikes and labor turmoil — all that is going up,” she said.

Geopolitical risks also are growing, as evidenced by the war in Ukraine and trade frictions with China.

McLaughlin said the industry needs to move to a more decentralized supply chain closer to both consumers and labor.

“It needs to be more flexible and more sustainable,” McLaughlin said.

The industry will have to digitize to take better advantage of data and technology to find efficiencies and solutions to problems. It will have to deploy automation to support and augment the human workforce in warehousing and logistics.

And, she said, it will have to deal with a continuing space shortage that growing development restrictions will hamper.

“There are fewer permits issued for logistics space around the world. That makes it hard to be responsive when you can’t bring space online in the places where it is needed the most,” McLaughlin said.