Warehouse Rent Hikes: The Impact on Supply Chains & 3PLs

The cost of warehousing in the U.S. has been skyrocketing. According to a report by CBRE Group Inc., rental rates for expiring multi-year warehouse leases have surged. This appears to be on trend with pricing increases in numerous sectors of the economy over the same period, though the exact causes seem to be multi-faceted. Whether or not these increases are completely justifiable is currently under debate, but the fact that they are occurring is not. On average, industrial property rents have increased by 25% compared to rates paid at the end of five-year contracts that expired in 2021. This surge is driven by several factors:

E-Commerce Boom: The outbreak of COVID-19 transformed consumer behavior, leading to a significant rise in e-commerce sales. Real estate firms saw a surge in demand for industrial space as retailers and manufacturers expanded their e-commerce offerings. For every $1 billion (about $3 per person in the US) in incremental e-commerce sales, 1.25 million square feet (about half the area of The Vatican) of warehouse space is needed.
Low Vacancy Rates: During 2021, U.S. national vacancy rates hit their lowest levels since 2002. Real estate firms are confident in demanding higher rates when renewing contracts with existing tenants.

Direct Financial Impact on 3PLs

Third-party logistics providers (3PLs) have doubled their leasing volume between January and July 2021. As warehousing costs rise, most of these costs are being passed on to consumers according to numerous sources. Transportation costs, which can account for 50-70% of a company's total logistics expenditure, are of a significant concern. To mitigate the negative financial impact of this current situation; many companies are expanding their domestic warehouse footprint to reduce long-distance shipping, moving from a single or centralized warehousing model to using multiple more broadly distributed local warehouses.

Here's how:

Efficient Inventory Management: Provides real-time visibility into inventory levels, reducing the risk of stockouts or overstocking. Accurate inventory tracking ensures smoother movement of goods.

Streamlined Order Fulfillment: Order accuracy can improve. Efficient picking, packing, and shipping processes lead to faster order fulfillment and happier customers.

Reduced Costs: By automating manual tasks, a WMS cuts labor costs and minimizes errors. It optimizes warehouse layout, labor allocation, and inventory placement.

Enhanced Customer Satisfaction: Faster order processing and accurate inventory levels lead to better customer experiences.

While the use of an affordably priced, customizable, and scalable WMS, fully supported by a dedicated implementation team, cannot halt the current supply/ demand and inflation fueled trends of rising commercial real estate prices, rising transportation costs, labor shortage fluctuations and sporadic unforeseeable supply chain disruptions; it can help offset some of the negative impact on profitability.

According to some reports, companies that utilize a WMS experience more than 25% reduction in time spent on warehouse operations. This efficiency translates to fewer errors, as automated systems can handle repetitive tasks with greater accuracy than manual processes. Additionally, a study by PTS Corp highlights that warehouses using a WMS have seen a 50% reduction in picking errors, which directly impacts customer satisfaction and reduces costly returns. These improvements not only streamline operations but also lead to substantial cost savings, contributing to higher profit margins.

Moreover, the financial benefits of a WMS extend beyond error reduction. Industry reports indicate that some companies that have adopted a WMS report up to a 1.67x increase in profitability growth compared to those that do not use such systems. This is primarily attributed to the enhanced speed and accuracy in order processing, which allows businesses to handle larger volumes of orders efficiently. For instance, warehouses that can process orders in under 30 minutes are significantly more profitable, as they can meet higher customer demands and reduce labor costs.

By optimizing inventory management and reducing waste, WMS also helps in maintaining lean operations, further driving profitability. These statistics clearly demonstrate that investing in a WMS is a strategic move for any warehouse looking to improve its bottom line.

Conclusion

While you may not be able to alter the current “financial winds of change” in the real estate or other related sectors of your logistics or 3PL business, you can “adjust your sails” in the day-to-day functioning of your business by leveraging current and ever improving technologies and the knowledge base of experts.

Relevant Industry Reports

For deeper insights, consider industry research reports from sources like IBISWorld1 and Statista2. These reports provide data, trends, and forecasts across various sectors.

References below if you'd like to keep reading about this topic:

The Impact of

Rising Warehouse Rents

on Supply Chains & 3PLs

Direct Financial Impact on 3PLs

How a Warehouse Management Solution (WMS) Can Help You Address :

Here's how:

Conclusion