ShipBob Fulfillment Center in Moreno Valley, California
After ShipBob decided last July to let its employees work from anywhere, the logistics start-up had its landlord erect a wall in the middle of its headquarters in Chicago so that half of the space could be rented to another company.
On March 1, the office reopened with reduced capacity for socially distant meetings.
But while ShipBob needs less office space, the demand for real estate has increased at breakneck speed. The company, which provides fulfillment services to online retailers, has more than doubled its warehouse count since mid-2020 to 24 locations today, including four outside the US, and plans to reach 35 by the end of 2021.
The seven-year-old company is a microcosm of the US commercial real estate market. While office vacancies have risen as employers prepare for a future of distributed work post Covid, the industrial market is hotter than ever due to a pandemic surge in e-commerce and increased consumer demand for more products at Amazon-like pace.
The vacancy rate in industrial buildings is near a record low and new warehouses cannot be built fast enough to meet the needs of clothing manufacturers, furniture sellers and home appliance manufacturers. Real estate company CBRE said in its first quarter report on the industrial and logistics market that it absorbed nearly 100 million square feet of space during that period, the third highest ever, and that a record 376 million square feet is under construction.
Rents rose 7.1% for the quarter over the same period last year to an all-time high of $ 8.44 per square foot, CBRE said. The company wrote in a follow-up report last month that prices in coastal markets near metropolitan areas and inland ports are rising by double-digit percentages. In northern New Jersey, the median industrial rental base rent rose 33% year over year in May, and California’s Inland Empire was up 24%, followed by Philadelphia at 20%.
“The need for facilities in these markets, coupled with record-breaking low vacancy rates, has often led to bidding battles among tenants that drive up rents,” said CBRE.
The wheels were on the move before Covid-19 hit the US in early 2020. Amazon was already making next day delivery the default option for Prime members, and big stores like Best Buy and Walmart were trying to add fulfillment space to give it a try and keep up.
The pandemic has accelerated everything. Consumers were stuck at home ordering more items while physical stores had to be digitized to stay afloat.
Grocery delivery added to the market shortage as Instacart and Postmates were suddenly inundated with orders from customers who did not want to enter a Costco, Albertsons or Kroger store. Instacart is now planning a network of fulfillment centers equipped with grain picking robots, according to Bloomberg, and Target supported fulfillment on the same day through so-called sorting centers.
In addition to the rapid change in consumer behavior, the pandemic has also exposed the fragility of the global supply chain. With facilities in China and elsewhere closed, stores suffered dramatic shortages of clothing, auto parts and packaging materials.
Retailers responded by securing more storage space to mitigate the impact of future shocks, said James Koman, CEO of ElmTree Funds, a private equity firm specializing in commercial real estate.
“Manufacturing reshoring is picking up speed,” said Koman. Companies are “bringing more products onto land and need to have space for their products so that we don’t end up in a different situation to what we are in now.”
All of these factors contribute to the skyrocketing prices, he said. Additionally, construction costs are higher due to inflation and supply constraints, and companies are building more sophisticated plants with robots.
“You have these automatic forklifts, conveyor belts, and automatic warehouse picking systems,” said Koman. “All of this is where the world is going.”
Amazon introduces new robots named Bert and Ernie in fulfillment center operations.
Source: Amazon Inc.
ElmTree has a long-term need for fulfillment and logistics facilities and has acquired approximately $ 2 billion in industrial space in the past seven months, surpassing previous years, said Koman. He estimates the U.S. will need an additional 135-150 million square feet annually to support the growth of e-commerce.
For ShipBob, the e-commerce boom has played into its business model. At the same time, the competition for space also forces the company to expect higher costs.
Working with brands like perfume maker Dossier, powdered energy drinks maker, and Tom Brady’s sports and fitness brand TB12, ShipBob offers a wide network of fulfillment centers for fast and reliable shipping and software to manage deliveries and inventory .
Unlike the retail giants, ShipBob doesn’t run large, soccer field-sized fulfillment centers and has only rented some of its facilities. Rather, it looks for warehouses that are usually family owned, with 75,000 to 100,000 square feet and some unused capacity. It then equips them with ShipBob technology and pays them according to the order volume and space requirements.
While ShipBob doesn’t sign leases, it does compete for space in warehouses that are now on much more valuable land than they were a year ago. Dhruv Saxena, CEO of ShipBob, said that despite the rapid rise in prices, his business must be based in areas like Southern California and Louisville, Kentucky, a major transportation and logistics hub.
“We need to find ways to move inventory closer to the end customer, even if it has a lower margin for us,” Saxena said in an interview late last month after his company was valued at over $ 1 billion at $ 200 million -Dollars raised.
ShipBob competes directly with a number of fulfillment outsourcing startups, including ShipMonk, Deliverr, and Shippo. These four companies combined raised nearly $ 900 million over the past year.
Not just Amazon
Saxena said a primary reason smaller retailers turn to ShipBob is to avoid the cost and hassle of finding fulfillment space and hiring the necessary labor. He compared it to companies outsourcing their computing and data storage needs to Amazon Web Services and paying for the capacity they use, rather than leasing their own data centers.
“The same math applies,” said Saxena. “I can open a warehouse, hire people and manipulate the software, or I can turn those fixed costs into variable costs that I pay on a per-transaction basis.”
ShipBob employees with CEO Dhruv Saxena in the middle
Nate Faust is still in the early stages of building Olive, an e-commerce start-up that works with brands to offer more sustainable packaging and delivery options by using recycled cardboard materials and bundling items together.
Olive opened its first two 30,000-square-foot warehouses last year, one in New Jersey and the other in Southern California. Faust, who previously co-founded Jet.com and then worked at Walmart after the acquisition, said if he stepped into these leases today they would easily be 10-15% higher.
Olive isn’t active in the market for more fulfillment centers and isn’t facing a rental renewal until February, but Faust said startups need to be opportunistic. He works with the real estate company JLL, which he said is constantly looking for attractive space.
“We are constantly on the lookout for them because the industrial areas are so tight at the moment,” said Faust. “If we can find something suitable for what we are looking for, it is not inappropriate to have overlapping leases.”
Vik Chawla, a partner in Fifth Wall venture firm, which invests in real estate technologies, said the challenges in the real estate market are driving more emerging brands and sellers to the outsourcing model.
“As a single e-commerce company, it is very difficult to secure attractive space and run your business,” said Chawla. “The line of people trying to get into industrial buildings is at the door.”
Many tenants occupying this line are traditional large third-party logistics providers (3PLs) such as CH Robinson and XPO Logistics, as well as UPS and FedEx. At the high end of the market, Amazon, Walmart, and Target are clearing up space to expedite sales and, in the case of Amazon, manage fulfillment for its huge third-party marketplace.
Prologis, the largest U.S. industrial real estate owner, said in a May report that usage rates, which indicate how much space is in use, has reached nearly 85%. The company announced that the vacancy rate is close to a record low at 4.7%.
According to Prologis’ latest annual report, Amazon is the real estate company’s largest customer, covering 22 million square feet, followed by Home Depot with 9 million, and then FedEx and UPS. Walmart is seventh.
In April, on the Prologis conference call, an analyst asked what types of customers are most actively pursuing leases.
“E-commerce is a big part of that, but it’s certainly not all about Amazon,” said Michael Curless, Prologis chief customer officer, in response. “Sure, they are the most active customers. But we are seeing a lot of activity from Targets, Walmarts, Home Depots and a lot of evidence that Chinese gamblers are also traveling to the US and Europe.”
CLOCK: EY on how Covid has driven digitization in retail