By Michael D. White, author and freelance writer
More than 2,000 years ago, the Romans constructed a network of spacious buildings just south of the capital city of Rome.
Called horrea, the facilities—one of the largest covering more than 225,000 square feet—were located near the navigable Tiber River and housed a vast array of commodities such as olive oil, grain, clothing, wine, foodstuffs, and even building materials such as timber and marble.
While on a much more expansive and technologically advanced scale even the Romans could never have imagined, the horrea of today serve essentially the same dual function—to house an inventory of domestically-produced goods for internal use and/or handle the importation, storage and distribution of goods imported from all over the world.
Though warehouse automation and new material handling technologies were far in the distant future, Roman shippers had issues to deal with not too unlike those faced by their modern counterparts—inbound and outbound transportation costs, inventory costs, maintaining desired service levels, estimating the necessary capital expenditures for facility investments, and, most importantly, meeting customer expectations.
The number of warehouse/distribution facilities in the U.S. grew at an increasing rate every year—from 15,152 in 2010 to 18,741 in 2019, according to a consensus of the most recent industry analyses with two primary reasons given for the swing upwards:
- First, the general improvement in the output of the nation’s manufacturing sector following the great recession, although this has started to decline in recent months due to the COVID-19 pandemic and increasing friction between China and the U.S.; and,
- Second, the skyrocketing growth of eCommerce is built on a foundation of enhanced, sophisticated warehousing/distribution capabilities. The nation’s transition to online purchasing at an unprecedented pace has created ripples of change with the increase in eCommerce driving demand for more distribution space at a rate of an estimated 1.25 million square feet for each $1 billion increase in online sales.
Such developments “are applying increased pressure on the supply chain, pressure that demands a counter-balance of adaptability and resilience,” according to CBRE Global, the Dallas-headquartered commercial real estate investment firm.
In the first quarter of this year, alone, “Companies are leasing [warehouse/distribution] space at a historically robust pace to accommodate the large increase in eCommerce sales,” the firm said. “Nearly 100 million sq. ft. was absorbed, the third highest mark on record. This was on the heels of a record 116 million sq. ft. of net absorption in the previous quarter. Despite strong demand, construction completions dropped in Q1 to 58.2 million sq. ft., the lowest amount since Q2 2019.”
However, CBRE says in a cautionary addendum: “A record 376 million sq. ft. is currently under construction with the increased demand from eCommerce and the need for safety stock to guard against supply chain disruptions further pushing up asking rents and keeping vacancy rates near record lows despite a large supply of new development coming on stream.”
Shipping volume “has surged over the past year as retailers and manufacturers rush to replenish depleted inventories during the pandemic. This has resulted in rising demand for warehouse space, as manufacturers look to compensate for the shortcomings of just-in-time (JIT) production networks and increase ‘safety stock’ to offset supply chain disruptions.”
Supply chain volatility “further heightens the need for additional warehouse space to stockpile goods and mitigate future disruptions,” concluded CBRE.
A few illustrations of recent past, current and future corporate and state warehouse/distribution project growth and developments:
- Indiana: Retail giant Walmart operates more than 150 large scale distribution facilities across the U.S. with a combined total capacity of 143 million square feet. The largest to date is its 1.5-million-square-foot distribution center in Buckeye, Arizona. However, last year the company unveiled plans to build an even larger distribution facility—a 2.2-million-square-foot distribution center in Hancock County, Indiana. Expected to begin operations in 2024, the planned facility “should employ 1,000 people by the end of 2025 and provide more fulfillment capabilities for the company as it continues to meet increasing online demand,” according to the Indiana Economic Development Corporation.
- New Jersey: World Distribution Services (WDS) is expected to open a new 480,000-square-foot warehouse/distribution facility in Linden, just south of the Port of New York/New Jersey, in July 2021. The facility “will be equipped to partner with customers on a wide variety of logistics and e-commerce needs,” the company said. “WDS experienced considerable growth in 2020, despite the logistics and supply chain challenges the global pandemic created. Customer requests to handle more volume, along with the recent import boom, prompted us to accelerate our expansion plans into Newark.”
- New York: Earlier this year, the Rockefeller Group, a New Jersey-based real estate investment and development firm, bought a vacant 10-acre parcel in Bay Shore, Long Island, for $3 million per acre. The company, says one source, “is a record for industrial-zoned property here and reflects the strength of the area’s white-hot industrial market and demand for warehousing and distribution facilities from e-commerce businesses. The property is approved for a 180,000-square-foot industrial building and the buyer is currently seeking building permits for that development.” The Rockefeller Group is a subsidiary of Japan’s Mitsubishi Estate Co.
- Connecticut: Last fall, a subsidiary of The Travelers Companies of Hartford, Connecticut purchased a newly constructed, 195,610-square-foot warehouse and distribution complex in Hicksville. The facility has been leased to retailer Home Depot for $74.5 million, or $380 per square foot. The vacancy rate for industrial property in Suffolk County in the first quarter of the year was just 3.5 percent, according to a report from commercial real estate services firm Cushman & Wakefield. According to the Hartford Business Journal, the low vacancy rate “reflects the overwhelming demand for industrial space.”
- Missouri: Kansas City is unique in its real estate offerings, which include the availability of underground warehouse space. Kansas City is home to over 22 million square feet of underground business complexes, leasing large blocks of space for distribution, warehousing, light manufacturing and mission-critical data centers. The largest is SubTropolis, with nearly seven million square feet of leased underground buildings and the ability to grow to 14 million square feet. Underground industrial buildings offer four key attributes that beat out surface industrial buildings: lower lease rates, reduced operational costs, flexibility/speed to market and space that is naturally temperature controlled. These benefits allow companies to meet their immediate needs to store temperature-sensitive safety stock – such as medical supplies or pet food – without incurring the major expense of building out surface warehouses. A tenant can move into a new state-of-the-art 100,000 to 200,000-square-foot building in just 120 days.
- Georgia: Target’s two-million-square-foot import warehouse and distribution facility in Savannah, Georgia is the company’s largest is import warehouse. The warehouse was opened in 2006 to serve the Southeast United States with goods ranging from fashion and home furnishings to electronics and office supplies.
- Nevada: For the past few years, the City of Fernley has developed itself into Northern Nevada’s logistics hub. The power sports company Polaris has opened a 475,000-square-foot distribution center there with even larger facilities planned for construction in Fernley, including an 815,000-square-foot warehouse/distribution facility that will be part of a 4,300-acre Victory Logistics District. The new facilities, developers say, will have “unmatched access to an extensive transportation network including Interstate 80, U.S. Highway 50, and the future I-11 Interstate Highway connecting Mexico to Canada. The development will also benefit from connectivity to the Union Pacific/BNSF rail line and a planned transload facility.”
- Alabama: Birmingham is a natural distribution point because the city sits at the juncture of four major interstates and is served by six rail lines. In October 2019, the Birmingham Business Journal reported that Amazon was preparing to build a nearly 100,000-square-foot warehouse, which industry analysts said would help the eCommerce giant increase capacity and reliability for same-day delivery. The Business Journal revealed that the warehouse would be up and running by the end of 2020. This facility followed an even larger one—an 825,000 square footer—that the company built in 2018 in Bessemer is just minutes away from Birmingham.
- Tennessee: Since 2012, three million square feet of warehouse space has gone up in Nashville. In late June 2020, Amazon said that it would construct a 200,000-square-foot warehouse in Nashville. Just a few weeks later, the behemoth online retailer announced plans to build a, 855,000-square-foot distribution center on a 79-acre site in Mt. Julien, just east of Metro Nashville. The new facility is slated for completion later this year. The facility will be the seventh Amazon facility in Tennessee. The others are located in Charleston, Chattanooga, Lebanon, Murfreesboro, Memphis and Nashville. The Mt. Juliet facility will also be Amazon’s second fulfillment center in Tennessee to use innovative robotics technology that will utilize hundreds of robots to map out the best routes to bring human employees to the inventory, help remove items from shelves, reposition inventory, and stack boxes on pallets.
- Ohio: Even before the COVID-19 pandemic lockdowns, growth in demand generated by eCommerce was far outstripping the number of warehouses needed in Cleveland. Last year, Amazon leased a 434,000-square-foot facility in Cleveland to use as a new distribution facility. Around the same time, the online global sales giant also announced plans to start operations at two other smaller warehouses in the Cleveland area.
- Colorado: Warehouse and distribution have been growing in the greater Denver area for nearly 20 years, the Denver Post reported in February. And while Amazon already operates four large centers there, growth is also coming from FedEx, Walmart, Tempur-Pedic and even industrial hemp, the newspaper said. In early 2019, GE Appliances cited Denver’s rapidly rising population growth as reason for it to open a new high-tech Denver Area Distribution Center, complete with RFID-tracking and parking for 100 trailers. The new facility would allow the company “to deliver products in three days or fewer to 90 percent of U.S. homes,” the company said.
- Illinois: John Deere’s 2.6-million-square-foot North American Parts Distribution Center in Milan, Illinois, distributes parts to the North American market as well as dealers and customers around the world. First opened in 1975, the facility has been expanded over the years and stocks over 500,000 different spare parts for the company’s product—including obsolete parts—which are picked, packed and shipped all over the world around the clock.
And Then, There’s California
The bloom, it would seem, is off the Golden State’s rose.
The state is home to three of the nation’s Top Ten container ports—Los Angeles, Long Beach, and Oakland—that, as of this writing, have experienced historic surges in container shipping volume since the beginning of the year—24.2 percent, 32.1 percent, and 19 percent, respectively.
Year-to-date, though, as import volumes have increased, so has the ongoing Tylenol-inducing congestion at the mega-ports that continues to have serious implications for retailers, wholesalers and manufacturers across the country as container-laden ships sit at anchor waiting to unload their box cargoes or boxes wait in nearby terminals for movement inland.
The bottlenecks equate to major disruptions in the entire supply chain as import demand continues to soar and the Christmas retail season rapidly approaches.
The causes of the chronic congestion? Quite simply, a serious shortage of chassis and containers, a dearth of truckers, and the sheer volume of containers flooding into the ports’ over-crowded terminals.
Whatever the reasons, the reality adds up to importers of everything from sporting goods and apparel to toys and auto parts having to deal with longer delays than usual, higher all-in freight rates, and a cap on how much can be shipped at just about any price.
The chronic bottleneck at the three ports has had a serious impact on the operations of warehouse/distribution facilities, particularly those in Southern California’s Inland Empire (IE) region, located in Riverside and San Bernardino counties.
Many companies would prefer to store additional inventory or distribute their goods closer to ports of entry; however, what little warehouse space is available in those markets is getting expensive, thus the popularity of regions such as the Inland Empire, which prides itself on being one of the densest concentrations of logistics facilities in the entire country.
Last year, the region, in fact, accounted for 21 percent of the largest lease deals in the nation in 2019—17.5 million square feet of warehouse and distribution centers.
“The growth of eCommerce has been driving warehouse construction in California’s Inland Empire for at least the past five years, and there’s no end in sight,” wrote the Riverside Press Enterprise in January 2020, pre-COVID-19 and before the worrisome congestion at the ports of Los Angeles and Long Beach.
But another issue is taking the stage that will seriously impact the operations of the IE’s warehouse/distribution facilities as a growing number of state and local government agencies and others are pursuing ways to make the operations at those logistics centers both “cleaner and greener.”
In what was, perhaps, the most drastic move, in May, the San Bernardino City Council voted 5-2 to approve a moratorium on the construction of all new logistics facilities.
The city—with 70 logistics facilities within its 70 square mile jurisdiction— is the epicenter of the IE’s logistics activity and, over the past two decades, has successfully attracted warehouse operations along the I-10 and I-15 Freeway corridors, and areas adjacent to the San Bernardino International Airport.
Over the same period, nearby Colton, Rialto, Redlands and other unincorporated San Bernardino County communities have also seen a marked increase in warehouse and logistics businesses located nearby.
The move by the San Bernardino City Council was spurred by the adoption of a new rule issued May 7 by the South Coast Air Quality Management District (SCAQMD) that mandates the reduction of nitrogen oxides (NOx) and diesel particulate matter emissions tied to warehouse activity—specifically, the operations of the diesel trucks that move container cargo between the region’s logistics facilities and the ports of Los Angeles and Long Beach, some 60 miles away, and, then on to points throughout the region and the country.
The SCAQMD has jurisdiction over “stationary sources” of pollutants in the Southern California region. And while a truck moving in and out of a warehouse/distribution center is not a stationary source, the agency holds the position that it “has limited authority over mobile sources as we can regulate indirect sources, facilities that attract mobile sources, such as warehouses.”
Known as the Warehouse Indirect Source Rule (ISR), the mandate “requires warehouses greater than 100,000 square feet to directly reduce nitrogen oxide (NOx) and diesel particulate matter (PM) emissions, or to otherwise facilitate emission and exposure reductions of these pollutants in nearby communities.”
Warehouses and distribution centers with more than 100,000 square feet come under the rule. The program’s formal name is Warehouse Actions and Investments to Reduce Emissions (WAIRE), and the number of warehouses that are expected to fall under its rules total 2,902, according to the more than 360-page document the staff of SCAQMD prepared to set out the rationale and implementation of the rule.
According to the agency, which was stated in a media release, “Warehouses are a key destination for heavy-duty trucks and have other sources of emissions like cargo handling equipment all of which contribute to local pollution, including toxic emissions, to the communities that live near them. Emissions from sources associated with warehouses account for almost as many NOx emissions as all the refineries, power plants and other stationary sources in the South Coast air basin combined.”
Reductions in NOx “are essential to meeting upcoming federal clean air standards,” the agency said. “The warehouse rule is a menu-based points system requiring warehouse operators to annually earn a specified number of points. These points can be earned by completing actions from a menu that can include acquiring and using natural gas, Near-Zero Emissions and/or Zero-Emissions on-road trucks, zero-emission cargo handling equipment, solar panels or zero-emission charging and fueling infrastructure, or other options.”
A system of carrots and sticks has reportedly been created to incentivize compliance to what is, basically, a points-based system that will allow warehouses to earn points to be used to determine whether a warehouse has met SCAQMD requirements.
Alternatively, the agency said, “Warehouse operators can choose to pay a mitigation fee. Funds from the mitigation fee will be used to incentivize the purchase of cleaner trucks and charging/fueling infrastructure in communities nearby. The warehouse rule is expected to reduce smog-forming emissions by 10-15 percent from warehouse-related sources.”
The rule has already taken effect with a report required to be filed by warehouses on September 1. But, the agency said, “enforcement dates will be implemented over time.”
Each warehouse/distribution facility will have a compliance number that Whitaker said will be based on the number of truck trips into the facility during that particular year. But if a company fails to reach its target through the various mitigation measures, then there will be financial penalties.
The rule is encountering strong opposition from the warehouse industry.
According to estimates compiled by the Inland Empire chapter of the Commercial Real Estate Development Association (NAIOP), the costs of compliance would amount to 90 cents per square foot, with a total bill of $1 billion spent to, for example, “buy or use zero-emission or near-zero-emission trucks (if available); install additional solar panels beyond the current solar panel requirements; install additional EV charging or hydrogen fuel stations beyond the current requirements.”
The NAIOP’s fact sheet is pessimistic about the industry’s ability to meet those standards just through mitigation measures.
“Most warehouses will end up paying the fee (tax) because it will not be feasible or possible to comply with the regulation mandates,” the group says. “If this is the case, then the ISR regulation did nothing to improve air quality and only increased costs to business/consumers.”
Companies with logistics operations in other regions across the country, said one source, “shouldn’t think these developments are just another ‘whacko California thing.’ As it stands, the political and economic climate of today means that tomorrow or the next day such regulatory moves by state and local governments and regulatory bodies could happen just about anywhere.”
Bio: Michael D. White is a published author with four non-fiction books and well more than 1,700 by-lined articles on international transportation and trade to his credit.
During his 35 year career as a journalist, White has served in positions from contributor and reporter to managing editor for a number of publications including Global Trade Magazine, the Los Angeles Daily Commercial News, Pacific Shipper, the Los Angeles Business Journal, International Business Magazine, the Long Beach Press-Telegram, Los Angeles Daily News, Pacific Traffic Magazine, and World Trade Magazine.
He has also served as editor of the CalTrade Report and Pacific Coast Trade websites, North America Public and Media Relations Manager for Mitsui O.S.K. Lines, and as a consultant to Pace University’s World Trade Institute and the Austrian Trade Commission.
A veteran of the United States Coast Guard, White has traveled in both Japan and China, and earned a degree in journalism from California State University and a Certificate in International Business from the Japanese Ministry of Trade & Industry’s International Institute for Studies & Training in Tokyo.