As we approach the fourth quarter of 2023 we see many factors impacting warehousing and 3PL services, as well as the wider supply chain and logistics environment. The West Coast remains a challenging environment for food and beverage, consumer packaged goods, and other manufacturers and distributors to operate. Yet, with California being home to one-eighth of the nation’s population and critical to manufacturing and development, demand for warehousing and logistics services continues to drive vacancy rates to near-all-time lows.

Adding to these pressures in recent months has been the ongoing labor shortage and continued negotiations with unions, which have only been tentatively resolved in the past few weeks.

As companies begin to rationalize their inventories following COVID-19, the industry is still seeking a new norm between lean operations and resiliency. We will not retain the high stockpiles of goods that we saw building up during and right after the pandemic, but it appears we will continue to have heightened demand as we are also not headed to the low pre-pandemic levels either.

This means for the remainder of 2023, we will continue to see high absorption rates and upward pressure on costs, with both space and labor being the driving forces.

Among the bright spots in the market seem to be Sacramento and California’s Central Valley – areas that can provide respite from some of the wider market pressures for companies willing to explore rail and truck service to the more heavy-demand Southern California and Bay Area sub-markets. Many find both cost-savings and strategic advantages in seeking solutions in these hidden gems. Read below for details on the California and West Coast markets.

Industrial Market Overview

High demand has not wavered despite economic uncertainty and increased tensions in China-US relations. In fact, demand continues to outpace supply, leading to increased new construction and continued near-record high rents and sales prices for industrial and warehousing space.

Rents and Prices

Looking at the factors underlying pricing pressures, Greenstreet data shows continued upward pressure, with properties nationwide up 100% since 2016 and down only 2% since the highs of late 2021.

A key factor among the upward pressure is consistently increasing prices in California. Average industrial rents in Los Angeles, the Inland Empire, Orange County, and the Bay area lead the nation. Their proximity to manufacturers and the leading West Coast ports of Los Angeles and Oakland add to the heightened demand.

The Bay Area reported average rents in July 2023 of $12.49 psf, with the Inland Empire at $8.97, Los Angeles at $13.06, and Orange County at $13.83.

According to Commercial Edge, Southern California leads the U.S. in rent growth, with lease rates “rising 17.6 percent year-over-year in the Inland Empire, 12.6 percent in Los Angeles, and 10.2% in Orange County in July (2023).”

CBRE projects continued resiliency will drive demand through 2023, in spite of efforts to normalize inventories. They project a 13th consecutive year of positive net absorption to combine with the near record-low vacancy rates and continued rent growth.

Industrial Vacancy

Vacancies in the Bay Area stood at 3.8%, with Inland Empire at 2.9%, Los Angeles at 3.8% and Orange County at 3.5%. These primary California markets are lower than national averages as well as other major port destinations such as New Jersey (6.3%) and Miami (4.5%).

Vacancy rates nationally remain very low as industrial users have retained high levels of inventory, with stock levels not retreating toward pre-COVID levels. There seems to be a slow lowering of inventories, but declining from unusually high levels that companies built out during and immediately after COVID-19.

What we are seeing now is only a slight reduction or rationalization of inventories compared to what they used to be – not a retreat to pre-COVID levels. As we go back to normal inventory levels, the new normal will remain higher than pre-COVID levels, as there is a greater emphasis on supply chain resiliency. As a result, companies will look to have a few extra weeks of inventory than we would have otherwise seen. This is why our vacancy levels remain extremely low and will for some time to come.

Construction

The US has nearly 600 million square feet of industrial capacity in construction as of summer 2023, which would be about a 3% increase over current levels when completed. According to Commercial Edge, 94 million square feet of manufacturing facilities have been initiated, mostly focused on manufacturing.

In the western region, Phoenix has 56.69 million square feet under construction, with the Inland Empire, Los Angeles, and the Bay Area coming in at 31.94, 3.69, and 7.52 million square feet, respectively.

Overall, construction starts are down 50% from the peak, which all sources indicate will put further pressure on rents upward due to a lack of quality available space coming to the market.

Industrial and Warehousing Sales

There is still an appetite among investors for industrial and warehousing space, with California leading the way. The Inland Empire, Los Angeles, and the Bay Area remain the top three regions in industrial sales through the first half of 2023.

The Bay Area also leads in terms of sale price per square foot – at $344, compared to Los Angeles ($335 and Orange County ($317). New Jersey comes in fourth place ($221) with all other markets under $200 psf.

Ports and Facilities

California’s three major container ports (Los Angeles, Long Beach, and Oakland) account for nearly half of the nation’s total container cargo volume. Because of their proximity to key rail and interstate infrastructure and a large portion of the U.S. population, these ports play a critical role in the U.S. economy.

Port of Los Angeles

The Port of Los Angeles remains the nation’s largest container port and accounts for 16% of the market share among all of the U.S. port traffic.

In terms of containerized trade, combined with the nearby Port of Long Beach, the two ports handled 29% of all containerized international waterborne trade in the U.S.

Traffic through the Port of LA has dropped in 2023 over 2022 levels, however – with trade levels off 9.44% from June 2022 to June 2023. Most of this comes from a substantial drop in total imports (down 11.16%). It is important to note that exports are up 8.46% year-over-year. This overall drop could be due to nearshoring and onshoring resiliency efforts many manufacturers have undertaken since the peak of the COVID-19 pandemic. As 38% of the Port’s trade is related to China, the increased U.S.-China political trade tensions could also be a factor.

The Port has struggled in recent years with labor shortages and a long-fought deal with dockworkers only recently being voted on in August 2023. The Port itself has proven resilient, having moved past the backlog crisis of a couple of years ago and ongoing staffing shortages. While its top-ranked status may be challenged in the coming years, Los Angeles will remain a top choice for global trade due to its proximity to critical transportation infrastructure and close proximity to a large portion of the U.S. population.

Port of Oakland

Another major player on the West Coast is the Port of Oakland. It is responsible for more than 99% of the containerized goods moving through Northern California and remains the ninth busiest container port in the United States.

75% of the Port of Oakland trade comes from Asia, with Europe accounting for 16%. Like the Port of Los Angeles, Oakland has seen lowered demand pressure. March 2023 marked the first month since November 2020 that the Port’s exports exceeded imports. Imports were down 23.3% year-over-year, and overall traffic remains suppressed.

Labor

Labor issues have challenged the West Coast in recent years. On multiple occasions, Port negotiations with dockworkers and rail workers have nearly shut down operations, creating uncertainty in an area still seeking some level of resiliency in a post-COVID world.

After years of near-crisis and multiple engagements by the federal government, rail workers recently ratified an agreement leading to some level of stability for a few years.

Dockworkers similarly have had a tense relationship with the ports in recent years, with both the Port of Los Angeles and the Port of Long Beach being shut down temporarily due to a labor shortage – leaving shippers struggling to make alternative arrangements. With the multi-month backlogs at ports during COVID still at the forefront of shipper’s memories, a labor standstill stoked fears of a repeat.

After 13 months of start-stop negotiations, a tentative contract was agreed to that will apply to all dockworkers along the U.S. West Coast, providing a 32% pay increase through 2028, along with a one-time bonus for working through the pandemic. The vote took place August 15-17, 2023. Final approval is expected this fall.

Regulatory Environment

Regulations continue to impact supply chain and logistics efforts. Implementation of the Warehouse Actions and Investments to Reduce Emissions Program (WAIRE)  has created substantial challenges for operators across the southern part of California. This has left many users exploring options for their warehousing and logistics in the nearby Central Valley – an area not impacted by these increased burdens.

Many find it cheaper and more efficient to come into California’s Central Valley. This provides a way to avoid the added WAIRE costs while still being able to achieve daily or next-day deliveries to Southern California locations. At Prism, we receive calls regularly from companies struggling to preserve margins in this new regulatory environment.

Conclusions

Depending on a company’s turn factor, they may be able to save substantially by utilizing 3PL services further inland from the Port of Oakland or outside the reach of the WAIRE program.

Because of the substantially lower price per square foot realized in California’s Central Valley, Port of Oakland users with a larger storage need combined with a reasonable turn factor could see savings in the thousands of dollars every month. In an era of shrinking margins, this offers a definite strategic advantage that many of their competitors may not consider.

Skyrocketing facilities cost per square foot driven by irrational inventory levels coupled with WAIRE program costs passed through to southern California users is leading companies to seek a solution in the Central Valley. The cost difference here tends to be even more pronounced, and the ease of access via both rail and I-5 makes Central Valley warehousing and 3PL solutions an attractive option for companies seeking to increase their cost efficiency and competitive advantage.

Prices in Southern California and the Bay Area will likely remain high throughout 2023 and the coming years. Food and CPG companies that look to have 6 to 12 weeks of inventory on hand and see turn factors of six or ten times a year are examples of firms that stand to gain by making a turn to the Central Valley.

The Bay Area now is geared toward a more high-value goods concept and rates are going to go up. For Food and CPG companies, you can only afford to go so high. Many of these food and commodity-based businesses should look toward the Central Valley.

2025 could bring more rational inventory levels. But a simple back-of-napkin calculation using cost psf, turn factor, and transportation cost can tell a company if they could save tens of thousands of dollars every year through strategic location of their warehousing and 3PL partner selection.