The pandemic saw people staying home and ordering more stuff online than ever. Now, after more than two years of living with COVID as a perpetual threat, companies looking to expand their warehouse space or secure new square footage are finding it nearly impossible. Why is demand for warehouse space at an all-time high?
The pandemic shifted the way a lot of consumers do their shopping. Fully online companies struggled to keep up with demand and those that didn’t already have an online presence were scrambling to go digital to compete. The concept of e-commerce has been around for decades, but it’s gained a lot of momentum in the last few years. Industry experts expect the industry to exceed $1 trillion in sales by 2024, representing more than 18% of all retail sales.
The growth of e-commerce sales isn’t expected to go away anytime soon. Online market shares are predicted to reach 27% by 2025 and 33% by 2030. Consumers likely won’t see the death of brick-and-mortar storefronts in their lifetime, but the shift to online purchasing is underway. The bigger e-commerce grows, the more companies will need to store their goods in, and fulfill orders from, warehouses.
Keeping up with the demands and constantly shifting trends can seem nearly impossible for large online retailers. Traditionally, a retailer could put in a soft inventory allocation order – which involves getting a general idea of what they’re going to need for the season long before the order needs to be completed. Then, as the seasonal shift occurs, switching that to a hard inventory allocation helps keep up with demand without ordering too many items that aren’t going to sell and end up taking up space in the warehouse.
Switching between soft and hard inventory allocation might have worked well in the past when companies only shifted their inventory quarterly as they followed the seasons. Today, changes can happen in the blink of an eye and companies must be flexible enough to adapt to these split-second alterations if they hope to keep their clients.
High Demand, Low Supply
Industrial building vacancies in 2022 are at a record low, dropping to 4.2% during the first half of the year. On the opposite side of the coin, rent prices are climbing as building owners seek to capitalize on this rising demand. Industrial building rent has climbed an average of 9% during the first quarter of 2022 and that rise isn’t expected to drop off anytime soon.
In response, developers are working to create new warehouse spaces, but it isn’t as easy as breaking ground in neighbourhoods zoned for industrial development. Urban centres are running out of space, so building new sprawling warehouses isn’t always an option. In tight urban spaces, vertical warehouses might prove more useful, but they can be challenging from a picking and fulfilment standpoint.
Some companies have looked into setting up their bases of operations in suburban or even rural areas where it’s easier to find the space they need to take and fulfil orders. This positioning can put them at a disadvantage when delivering orders as quickly as possible.
Rent isn’t the only thing going up in 2022. Opening a new warehouse or fulfilment centre requires installing racking and obtaining material handling equipment. Supply chain shortages in the steel industry are creating massive lead times when companies start placing orders for new racking. The industry is beginning to rebound and demand will remain high due to many backlogged orders that still need fulfilment.
This steel shortage is causing lead times varying from six weeks to nine months or longer, which can leave companies in limbo while they struggle to keep up with demand and manage orders from a woefully undersized facility.
The rising steel price isn’t the only challenge when setting up new warehouse space. Labour shortages in many industries are making it harder for manufacturers to keep up with the growing demand for all the equipment necessary to set up these new facilities.
Metal builders have been facing a shortage of skilled labour for years. Even before the pandemic, the lockdowns and constant vacillation between whether construction and manufacturing industries were considered essential – and allowed to continue working – threw a wrench into a lot of supply chains.
Robotics and automation can help plot a course through some of these challenges and labour shortages. Still, the construction and manufacturing sectors need an influx of new employees to help overcome the growing labour shortages when tackling warehouse construction projects.
The perpetual growth of the e-commerce sector means the demand for warehouse space will continue to climb for the foreseeable future. Companies looking to expand their warehouse footprint will struggle with a lack of square footage and a lack of racking necessary to turn a space into a functioning fulfilment centre.
E-commerce might not be the only reason behind this growing demand for warehouse space, but it will continue to fuel this growth for years to come.