June 2014 | Commentary | 3PL Line

Need Warehouse Capacity? Outsourcing Gives You an In

Tags: 3PL, Warehousing

Brian Smith is CEO, Wagner Logistics, 800-817-1264

To find the right solutions to today's complex warehousing, real estate, and supply chain challenges, growing companies have three options: hire someone with the expertise you need; train someone on your staff; or enlist help from someone outside your company who already has the skills you need.

Shippers should consider seeking that outside help from a third-party logistics (3PL) provider—but only one that demonstrates the ability to truly understand your unique needs. To develop strategic solutions, 3PLs need to be subject matter experts in multiple areas. They must understand elements of the marketplace shippers don't have the resources or time to focus on.

For example, one critical area of expertise should be a deep understanding of the real estate market. In the past, a company could lay out its needs for a warehouse broker, then practically dictate both terms and price.

Those days are over. A significant tightening of industrial space is partly to blame. Think back to the financial calamity of 2008 and 2009, when real estate developers basically stopped building.

Now, fast forward to the present, as the economy continues its slow recovery. Businesses need facilities, but new development has been slow to start, causing an extreme lack of available space in some markets, especially areas such as Dallas and Kansas City.

In other cases, physical space may be available, but unsuitable for shippers' needs. It could take the industrial real estate market several years to catch up with demand, and build the right kind of warehouse space that will allow rents to stabilize.

Looking High and Low

Warehouse vacancy has declined for 14 consecutive quarters, after peaking in the first quarter of 2010. Consequently, rental rates are trending up. The U.S. direct weighted average triple-net rental rate is $5.73 today, up from $5.59 in 2012, according to commercial real estate broker Cushman and Wakefield.

While rents remain well below prior highs, they probably won't stay that way for long. Some studies forecast rents will rise as much as 25 percent during the next three years. Select markets such as Southern California and Houston are rapidly approaching all-time high rates.

These factors suggest companies seeking logistics space face a relatively inflexible market. Businesses are increasingly forced to accept more risks, such as signing longer-term leases—even if their line of business dictates they won't need the space for the full term.

Outsourcing logistics can benefit shippers because 3PLs can help balance needs among companies that work in different industries, but face similar challenges. Consider a business that experiences its peak season during the winter holidays. The company spends the first six months of the year building inventory, but doesn't need warehousing space until June.

A 3PL could match that business with a company that produces charcoal for the outdoor grilling season. For the first six months of the year, charcoal replaces holiday seasonal items on the warehouse shelves—a perfect solution that allows both companies to save significantly on warehousing costs.

Making such connections would be difficult without 3PL assistance—the odds of two companies independently knowing about each other's needs are slim. But the odds are good that consulting a 3PL about your warehousing needs can create a beneficial relationship.