Traffic World Magazine

PRICES STACKING HIGHER

June 11, 2007
Tag: 0706070030
Section: LOGISTICS MANAGMENT Edition: TRAFFIC WORLD Page: 16 WILLIAM HOFFMAN Memo: Warehouse prices growing at twice inflation rate, safety stock, longer supply chains driving up costs

Warehouses are filling up faster and prices for distribution centers appear to be stacking up just as rapidly as shippers look for space to mitigate risks of disruption to their ever-lengthening supply chains.

Commercial real estate developer ProLogis' survey of the top 30 U.S. warehousing markets showed asking rents rose 2 percent in the first quarter this year, for an annualized increase of 8 percent. That's up from 7.5 percent growth in asking rents during 2006, or roughly double the overall rate of inflation, and the latest sign that costs for shippers are scaling up across the supply chain. ProLogis' survey covers all providers surveyed in the top 30 markets, not just ProLogis' properties. Part of the upward pressure is simply a function of supply and demand - the survey found first quarter 2007 vacancies in the top markets averaged 7.5 percent, down slightly from 7.6 percent in fourth quarter 2006, and 8.25 percent in first quarter 2006. But experts say broader changes also may be at work on warehouse rents and leases. Shippers are anxious about the risks of supply chain disruption from longer transit times and more stops in more unfamiliar foreign territories during transit. Some are building up safety stocks of components and even finished goods or pushing inventory into wholesale supply chains. Both those strategies place more demand on warehouse space. John H. Boyd, president and CEO of warehouse site selection consultant The Boyd Co., said he's seeing more shippers build up inventories throughout their supply chains to reduce risk of disruption. They are relying on advanced inventory management technologies to keep better track of goods in storage and transit. 'Logistics has become a very sophisticated and mature industry and technology is allowing them to do more,' Boyd said. A.J. Wilson, senior vice president, sales and marketing at e*Fill America, a warehouse network provider, says warehouse prices have gone up 'exponentially' in recent years. The company's operators cited 10 to 15 percent annual growth among third-party logistics providers hungry for warehouse space as the prime reason for the real estate price inflation, rather than inventory redeployments, Wilson said. Boyd noted an escalation of warehouse real estate prices that could underlie some of the increase in rents. Land that went for $4 or $6 per square foot four years ago in industrial North Las Vegas, Nev., climbed to $10 a foot starting 18 months ago, he said. Rents are still climbing faster than inflation not only in popular distribution markets such as Los Angeles and California's Inland Empire, but in secondary inland markets such as Phoenix and Salt Lake City. Another factor could be the proliferation of transloading and deconsolidation centers away from congested ports that encourages more distributed warehousing. Boyd cited the increasing frequency of Canadian manufacturers looking for warehouse space near their U.S. customers, as well as the steadily growing influence of NAFTA-oriented shippers extending their distribution networks across the continent. Leonard Sahling, first vice president, research, at ProLogis Research, said he didn't doubt shippers redeploying their stocks to reduce disruption risks was one factor increasing warehouse demand generally, but that underlying trends of demand and supply still trumped. Sahling said the slowing U.S. economy may take some of the pressure off warehouse prices. But it won't happen in lock-step with the economy, and other factors, such as renewed U.S. manufacturing export demand, could counter any downward trend. Sahling said it typically takes a company three months to look for distribution space and move into a site. If the U.S. economy continues to slump, that could show up in lower warehouse rents as soon as the third quarter of 2007. But if, as many expect, the economy recovers, warehouse prices likely will rise near their present rates. 'Our sense is that rents will continue to rise over 2007 but probably not by as much as they did last year,' he said. But the direction of goods traffic may have plenty to do with the direction of pricing. 'The big elephant in the room is China,' said Boyd. While rents are growing more than double the rate of inflation, demand for warehouse space is booming with the explosion of global trade in spite of the U.S. domestic slowdown. Where 400,000 square feet was considered mammoth for warehouses five years ago, said Boyd, sites of more than a million square feet are being snapped up quickly.

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