More warehouse operators are following Amazon’s lead (NASDAQ: AMZN) and pricing warehouse space by the cubic foot; proximity to labor has become just as critical as proximity to consumers; robotics have become increasingly important sources of flex labor during demand surges.
Those were a few of the insights shared during a warehousing third-party logistics provider (3PL) panel at the Armstrong & Associates 3PL Value Creation Summit this week in Chicago.
The conventional narrative is that warehouses are getting smaller and closer to city centers, but big box construction — warehouses of 200,000 square feet and larger — has not slowed down. Ward Richmond, executive vice president at Colliers International (NASDAQ: CIGI), said that the third quarter numbers for Dallas just came in and that there were 36 million square feet of big box space under construction in that market alone. Average clearing height inside those spaces has risen from 32 feet to 38 feet in the past five years as warehousing operators look for ways to maximize throughput.
“In the overall industrial market, building is at a record pace, there’s more product under construction than ever, rents are higher than ever, vacancy lower than ever, but absorption rates are a little off,” Richmond said. In response to a weakening macroeconomic environment and uncertainty around trade policy, “companies are being conservative with major capex.”
Instead, they’re looking at new kinds of equipment that can help them avoid or delay the acquisition of another large building.
“Customers are making huge investments in racking to increase capacity and get out of overflow spaces — they’re more open to that capital investment,” said Paula Hise, vice president of operations at Kenco Logistics, a leading privately-owned warehousing 3PL. “Popping up an overflow facility was the easy answer a few years ago.”
Hise went on to say that Kenco is starting to build clauses into its commercial service agreements governing warehouse capacity and service levels, because when customers overfill their facilities, efficiency suffers.
Warehousing customers are still weighing the arbitrage between labor and automation; many are hesitant to invest in expensive robotics because they think the cost will come down significantly in the next few years. But Brian Smith, president and chief executive officer of Kansas City-based Wagner Logistics, said that companies offering warehouse robotics have gotten creative with financing. Low-cost, short-term leases are becoming more common.
“For us, unemployment is 0% — we never hire anyone that doesn’t already have a job,” Smith said. “When it’s seasonal and you need to increase workforce by 25-100%, if you can put in some automation and can reduce it by half, you have a huge gain. It’s not as much about direct [return on investment] and saving money, but about just getting the work done.”
But it appears there are still gaps in the kinds of warehouse robots that are available. Russell Leo, the president and CEO of RLS Logistics, a family-owned cold chain solutions provider in the Northeast, said that in frozen facilities at temperatures of zero or -10 degrees, “robotics goes out the window.” Instead, to free up capacity and increase throughput, RLS has implemented mobile racks that can slide together or come apart to give workers access to SKUs when they’re needed.
Wagner’s customers are becoming more open to innovation conversations, Smith said, but Hise said that Kenco has defined innovation as “the implementation of an idea that creates value,” and that Kenco’s customers were willing to enter into commercial arrangements to fund innovation if they think the value is there. Kenco has dedicated headcount that works solely on innovation and they’re experimenting with drones in their lab, although they haven’t been deployed commercially yet.
Evan Armstrong, president of Armstrong & Associates, mentioned a recently constructed underground warehouse in Tel Aviv, Prologis’ three story warehouse in Seattle, and asked if the future of warehousing would be building up or down.
Richmond said that he thought more multi-story warehouses would be built, not in markets like Dallas where his office is based, but rather “we will see it in Los Angeles closer to the city and definitely in New York.”
Colliers’ customers have learned that there’s a tradeoff between the cost of rent and access to workers.
“Amazon has 12 million square feet in Dallas, and they’re paying their employees a lot of money,” Richmond explained. “You have to manage expectations — in markets where there’s no low rent, there’s no employees. You’re going to pay to be close to good labor. Three years ago it wasn’t on my radar; in 2015 and 2016 we started hearing about labor, and now we talk about it on every deal.”
Kenco is looking for deals to gain more exposure to the growth of e-commerce, and Hise said that Kenco’s board has granted the company’s officers permission to make an acquisition to that end.
To retain workers that Amazon is competing for, warehouse operators have started emphasizing workplace culture. Hise said that workers in Kenco facilities skew younger than in previous years and want to feel like they’re contributing to something. Leo called out small ways of appreciating employees like throwing cookouts.
“We can usually find people, but then it’s how we keep them,” Smith said. “We try to be the employer of choice. We try to take care of people, make them feel like part of the family, not just a number. Are they greeted on day one? Do they have a buddy taking them to lunch? After 90 days, do they get a gift?”
