May 3, 2022
[Real Estate] Space, the Final Frontier
You might remember part of that quote from William Shatner as Captain James T. Kirk. The crew of the Starship Enterprise saw endless adventure in the limitlessness of space. Industrial real estate space is not nearly as adventurous nor is it limitless, but regardless, it may lead to some exciting times ahead.
In the near term, 2022 rent expense is expected to increase by 7%. That is a 7% new cost that will need to be offset with productivity gains, resulting in decreased profits, or passed on to customers. In the longer term, CNBC reports that 1 billion square feet of new warehouse space will be needed by 2025. That is A LOT of increased demand. With increased demand and limited supply, it is fair to assume upward cost pressures will not go away anytime soon.
What is driving this demand for space?
First, the current industrial vacancy is currently at record lows. So, supply is already constrained.
Second, another culprit is the expected growth of e-commerce. That alone will create the need for 330 million square feet by 2025 per CBRE.
Third, the demand for faster and faster deliveries is driving demand for smaller warehouses closer to the marketplace, akin to the e-commerce growth but using local delivery models rather than parcel shipments. Add to that the increase in demand for rapid delivery in businesses like food and beverage and you have new competitors for space.
Forth, the large parcel carriers are adding space to handle the growth associated with an increased e-commerce business. Not necessarily warehouse space but it increases demand in the industrial real estate locations.
Before taking on additional warehouse space, make sure your current space is used to maximum efficiency. As tempting as it may be, that doesn’t mean jamming everything you can into the building. As your warehouse gets too full, your operations can and will suffer, driving service issues and increasing costs. 85% capacity is a traditional benchmark before you start to lose operating efficiency.
A few things to consider:
Stop being a hoarder
The first thing to attack is the very slow-moving or obsolete inventory in your warehouses. It is taking up valuable space and not generating any income. It needs to go.
Take it outside
If you don’t have the financial reserves to scrap non-sellable inventory, consider storing the material in storage trailers secured in your yard.
Let the air out
Is your racking sized correctly for what you are storing? If not, make the adjustments and you’ll find some room.
Play hot potato
Are you putting quick-turning inventory in racks that can be cross-docked? Cross-docking can reduce handling, increase velocity, and free up space in your storage racks.
WMS option
If you have a WMS, is directed put away configured to control where the team puts up stock? If you don’t have a WMS, is it time to investigate one?
Look to the sky
Be sure that you are using vertical space to your advantage. Would a mezzanine fit in with your process? Vertical lift modules can save space as well.
Squeeze it
Very narrow aisle racking can create a lot of space. Therefore, it will likely require special equipment and may be further optimized with automated storage and retrieval technology.
While the projections are consistent that the demand for warehousing space will continue late into this decade, the fact is that available space is already at record low levels. This is an opportunity to step back and look at your storage strategy today and prepare to make logical changes. There certainly is no one size fits all solution to improve your facility utilization; however, there are some consistencies, and the unique characteristics of your operation dictate what strategy provides the best benefit. In conclusion, any suggested projects to change the configuration and material storage strategy in your warehouse need to be viewed with the impact on the entire operation.
