Today's Third Party Logistics Market

What's Going On With the 3PL Market? 

After several years of disruption, volatility, and complexities, logistics companies are hoping for a more stable 2023.  Unfortunately, mixed economic indicators, cautious consumers and continued global uncertainty have provided little indication that the roller coaster ride for logistics companies will be smoother in the next 12 to 18 months. While GDP in the United States grew at an unexpected 2.9 percent in the fourth quarter of 2022, inflation remains high despite a drop for the past five consecutive months, particularly within the transportation and energy sectors. Following eight straight interest rate hikes since March 2022, the Fed is expected to continue increasing rates, but at a much more moderate pace in the next year as the strategy to curb inflation appears to be working.

Contrasting Economic Indicators 

Consumer spending dropped by the highest level in the past 12 months in December but has remained steady overall. Nevertheless, consumers are wary about the economy with the Consumer Sentiment Index remaining well below historic averages. There are reasons for optimism as the Bureau of Labor Statistics announced a shocking 517,000 jobs were added in January, dropping unemployment to 3.4 percent, the lowest level since the late 1960s.  Jobs creation within the logistics industry, including truck drivers and warehousing jobs, has been impressive, adding 336,000 hires in the last quarter of 2022.  Unfortunately, more than 100,000 jobs have been unfilled, requiring logistic companies to increase labor costs and incentives. All these contrasting economic, consumer, and labor indicators are resulting in companies having to make difficult decisions as supply chain problems improve, but still linger. 

New Construction to Stabilize Vacancy 

Occupiers of real estate in the logistics industry have faced a lopsided demand scenario as supply races to keep up.  The result has been leasing rates for warehouse/distribution space have increased more than 10 percent per year for the past two years. Prompted by e-commerce and the explosion of the digital economy, companies have been required to provide quick deliveries and add additional warehouse space to keep pace and remain competitive, seeking less reliance on Chinese product supply and labor. The optimization of locations is expected to decrease shipping and fuel costs, resulting in companies continuing to pay higher lease rates at well-situated sites. Lease rates are expected to slow their outsized growth in 2023 as new space is delivered, but that will not mean a discount in the recent run-up of rates.  More likely, rates will begin to fall back into historic three to four percent annual increases.  Although vacancy remains near historic lows, the record 600+ million square feet of warehouse/distribution space currently under construction will likely stabilize vacancy.

Amazon, the bell-weather for industrial warehousing, has begun to pull back, announcing they are looking to vacate at least 10 million square feet of space and delaying or abandoning several expansion projects. However, large third-party logistics companies (3PLs) and retailers will likely continue to expand as they look to avoid the product shortages of the past several years. New construction starts are also expected to slow down considerably as financing, economic uncertainty, and labor and building product shortages continue. As the current projects under construction begin to deliver in 2023, occupiers may have a brief opportunity, but it will likely be short-lived as the economy begins to recover and uncertainty begins to drop.