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Supply Chain News: Virus Crisis Likely to have Varying Impact on Demand for Distribution Space


Space for Food, eCommerce Remains Hot, but Overall Demand Likely to Fall Sharply; On-Demand Waehousing Seeing a Bump

April 14, 2020
SCDigest Editorial Staff

After many years of torrid demand for warehouse and distribution space in the US comes the coronavirus crisis, which, like everything else it touches, is likely have a major impact for good or ill on the demand for space, depending on your place in the supply chain.


Real estate firm CBRE, for example, believes that for some time there will be strong demand for what is generally called "on demand" warehouse space, in which warehouse owners temporarily lease out space they don't need to other companies that are looking for non-permanent, usually small-sized storage space.

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That's a lot of goods that don't need to be stored any more. And the numbers are sure to fall even further in March and maybe beyond.

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"This era of uncertainty over the ability to maintain necessary inventory levels is why on-demand warehousing may become more widespread in the coming months," CBRE said in a March report.

It adds that "The emergence of flexible warehousing is a response to the growing supply chain challenges faced by industrial occupiers, who are up against limited warehouse space options, rising rents, longer-term leases and inventory fluctuation."

While on-demand warehousing, enable by Cloud software platforms such as Flexe and others, is gaining some momentum, it still represents just a small fraction of the total market for warehouse space.

There are similar but different companies such as Cubework that offer what are now called "industrial co-warehousing spaces" for ecommerce companies and entrepreneurs. But again these models have just a tiny sliver of the total warehouse space market.

That market of course is dominated by third-party logistics (3PL) firms, especially those in those in the "public warehouse" sector, in which the operator leases space and related inventory and picking/shipping services to multiple clients within a given building.

Generally, such arrangements are for longer periods and have a larger space commitment than the on-demand warehouse sector.

CBRE suggests that it is possible that 3PLs may also utilize co-warehousing facilitators to capitalize on location, technology and labor for shippers looking for greater flexibility.

Meanwhile, retailers such as grocery store and mass merchant chains tare seeing a surge in demand from consumers staying home and stocking up on food and suppliers.

Those retailers, the Wall Street Journal reports, are looking to source secure additional storage space beyond their current DC footprints.

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Some experts believe that much of the changes are here to stay. The result will be more expanded and robust ecommerce operations and more "safety stock" positioned around the country as businesses pull a bit from existing and aggressive Lean inventory practices, at least in the short term.

"There's this move away from just-in-time [inventory], so the tenants are getting fatter," Kevin McGowan, president real estate firm McGowan Corporate Real Estate Advisors, told the Wall Street Journal.

The demand for refrigerated and freezer space is especially in demand, CBRE says, from both retailers and food makers.

CBRE predicts that an additional 75 million to 100 million square feet of this kind of conditioned space will be needed to meet demand generated by on-line grocery sales.

Meanwhile, retailers that have shut their doors to meet state lock down requirements are perhaps surprisingly in some cases looking for more warehouse space, as goods ordered months ago from offshore suppliers continue show up in containers at US ports.

However, falling demand amid what could be a significant recession will reduce demand in other sectors.

Just this week US Commerce Dept. reported that in February, the trade deficit in goods with China dropped to $16.0 billion, the lowest since March 2009. Imports from China in February were the lowest since May 2009.

That's a lot of goods that don't need to be stored any more. And the numbers are sure to fall even further in March and maybe beyond.

Warehouse developer Prologis said this week that it expects the overall market for warehouse property to weaken as the economy weathers a coronavirus-driven recession, even as demand for space for efulfillment and consumer staples grows.

What's your take on where the US warehouse space market will go? Do you expect the on-demand warehouse to grow? Let us know your thoughts at the Feedback section below.




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