E-Commerce, Distribution Users Spar for Labor
Industrial users in Texas, particularly e-commerce firms operating out of large-format distribution centers, are finding it harder and harder to staff their facilities with experienced, talented workers.
Development of both speculative and build-to-suit warehouses and distribution centers has been on fire in major Texas markets over the last several years, driven by an abundance of land, exceptional infrastructure and climbing populations.
According to CoStar Group, Dallas-Fort Worth’s (DFW) industrial supply grew by 3.5 percent, or roughly 30 million square feet, in 2017. That figure represents the highest single-year inventory growth in more than a decade. Approximately 21 million square feet of new space hit the market in 2018, and for 2019, CoStar forecasts that nearly 24 million square feet of product will be delivered.
Houston’s supply growth has been tamer, averaging about 12.2 million square feet annually between 2015 and 2018. But the market is projected to add another 13.2 million square feet this year, per CoStar. With a couple exceptions, more than 90 percent of the new product delivered in DFW and Houston in each year between 2015 and 2018 was distribution space.
The distribution building booms in Texas’ two biggest markets have occurred in the face of escalating land and construction costs — two expenses that are hitting the bottom lines of developers of all property types in all markets. But amidst the struggles to find developable sites and general contracting bids that don’t break the bank, the war for labor in industrial real estate often gets overlooked.
In October 2018, Amazon created a major disruption within Texas’ industrial labor pool by announcing it would pay all its U.S. workers a minimum wage of $15 per hour. According to the latest data from the U.S. Department of Labor, the median hourly wage among American warehouse workers is $13.50.
“Amazon has become a labor vacuum,” says David Eseke, an industrial tenant representative specialist in Cushman & Wakefield’s Dallas office. “Amazon has a footprint in almost every DFW submarket, so every industrial user here is competing with them to some degree. Users are also realizing that employees have a lot of options, and as a result, the battle for labor is really heating up.”
Eseke adds that industrial users are appealing to local bureaucracies for incentivized labor packages in making their site selections. In addition, brokers representing these users are increasingly turning to labor analytics software and technology to answer key workforce questions.
For labor analysis has become much more complex in today’s industrial market — users not only require basic information like average wage rates and supplies of qualified workers by location; they must also consider commuting costs. Eseke says that in general, users want a labor force that lives within a 20-minute drive, and that users have become especially attuned to the labor needs of their immediate competitors.
“Established industrial parks prove that labor exists, but as a user in that setting you’re guaranteed to have competition,” says Eseke. “A lot of focus is placed on the quantity of labor, but the quality is often more important. Employee turnover can be significantly more costly that paying top-of-market wages.”
Ironically, Amazon is considered the market leader in automated labor innovations. In 2014, Amazon purchased Massachusetts-based Kiva Systems for roughly $775 million, giving the Seattle-based e-commerce giant its own robotics division. Today, machines that pick items off shelves, stack them and prepare them for shipping can be found throughout Amazon’s fulfillment centers, where they work in tandem with the company’s 125,000-plus human laborers.
By and large, however, Amazon is one of the few industrial users with the capital to invest heavily in automated labor. According to multiple sources interviewed for this piece, a number of companies have used savings from the Tax Cuts & Jobs Act to experiment with automation.
Columbus, Ohio-based The Pizzuti Cos. recently broke ground on a $55 million, 800,000-square-foot distribution center for Whirlpool Corp., a manufacturer of home cooking appliances, in Tulsa. The facility is located adjacent to Whirlpool’s manufacturing plant, and incorporates automated technology via a large outside conveyor system that transports products coming off the line directly to the storage and distribution space.
“Labor has been a huge factor for the past couple years, and users are going where the workers are,” says Jim Miller, executive vice president at Pizzuti. “While the labor market has tightened across the country during that time, especially for warehouse workers, wages have been especially impacted in markets where Amazon is active.”
Creating an Environment
Particularly within industrial facilities that house e-commerce firms, human labor is still at a premium. The technology more commonly found in non-Amazon or -Walmart e-commerce facilities — wire-guided forklifts, mezzanine-level storage — isn’t really the kind of automation that phases out jobs, but rather promotes basic efficiency and workplace safety. So e-commerce centers still have a strong emphasis on human labor, the competition for which is only heightened by tight labor market. (Texas closed 2018 with a 3.7 percent unemployment rate.)
Much like office users in DFW are paying higher rents to be located in highly amenitized buildings and neighborhoods, industrial users are increasingly working to create employee-friendly atmospheres within their spaces. In both cases, the goal is to attract and retain the best talent possible.
Reid Bassinger, SIOR and principal at Lee & Associates’ Dallas office, notes that industrial developers are paying much more attention today than in years past to the office portions of their projects. They aren’t so much increasing the amount of office space as they are investing in its ambiance and physical appeal.
“Developers are taking more pride in their office finish-outs and in fostering the type of environment new hires are looking for,” he says. “It’s not uncommon today to see $85 per square foot for office space, whereas three years ago it was probably closer to $60 per square foot, though some of that is due to construction pricing.”
Bassinger points to features such as creative workspaces, break rooms, training rooms and call booths as manifestations the evolution of office space within industrial settings. But perhaps the most critical and ubiquitous feature within new distribution facilities is lounges for truck drivers, a segment of the industrial labor market that is particularly undersupplied.
“Even though they aren’t employees, truck drivers are a big part of the operation and industrial users want to keep them happy,” says Bassinger. “Keeping drivers on the payroll is a challenge, but distributors don’t want to skimp on hiring the right people for that job, because if you’re late in your fulfillment, you can easily lose your customer.“
A 2018 study published by The Washington Post, which sourced data from the American Truckers Association, found American e-commerce firms collectively need about 50,000 more truck drivers to keep pace with demand for delivery and distribution services.
The study noted that the shortage of drivers, combined with a payscale that is still catching up to the natural rate of inflation and industry averages for comparable positions, is forcing distribution users to pay these workers more. While this expense is borne by drivers’ employers in theory, in practice the additional expense is passed on to users, adding to the cost of fulfillment and delivery to the consume and the overall operating cost.
As such, industrial developers are keeping the happiness of these workers in mind when designing spaces for them. These lounges can include indoor features like fitness centers, break rooms with coffee and locker rooms with showers, as well as outdoor amenities like designated smoking and picnic areas.
“We are definitely seeing a greater focus on the environment and the build-out of the space for employees,” says Robert Clay, owner of Houston-based Clay Development & Construction Inc. “A lot more industrial users that want to own their own facilities have come into the market during this cycle, and these firms are especially concerned with creating the right environment for their labor force.”
Clay Development recently broke ground on Pederson Distribution Center I, a 622,000-square-foot project in the western Houston suburb of Katy, which will be marketed to both e-commerce and logistics users seeking distribution space. The site is expandable by up to 1 million square feet and could include as many as 256 employee parking spots and 170 trailer parking spots. Completion is slated for August.
Another major reason that competition for industrial labor is increasing lies within the layouts of the warehouses and distribution centers themselves. At the most fundamental level, demand for larger facilities stems from the simple fact that consumers are demanding more goods via online platforms.
At a more complex level, the expanding sizes of new facilities are a factor of the requirements of e-commerce users. These companies tend to demand flat floors and high clear heights to accommodate new types of racking and shelving equipment and to maximize the amount of product they can store and deliver. Additional trailer storage is another key requirement of many large-scale e-commerce users. This feature helps users manage inventory and provides additional storage space.
Bigger slabs, higher ceilings and more loading docks all contribute to larger overall facilities, and larger facilities translates to more people being needed to operate them.
“The assembling and packaging within an e-commerce facility requires more workers,” says Syed Ahmed, project coordinator at Dallas-based architecture firm GSR Andrade. “So developers are really attuned to the local employment situation; they want their facilities to be situated close to employment pools where they can have a labor force ready to go when the distribution facility comes on line.”
GSR Andrade was part of the project team for one of the metroplex’s larger projects that captures a number of key design requirements for large-scale e-commerce users.
In November 2017, Indianapolis-based Duke Realty broke ground on an 875,000-square-foot, build-so-suit distribution facility for online furniture retailer Wayfair in Lancaster, a southern suburb of Dallas. The project, which is situated on 47.1 acres fronting Interstate 35, features 36-foot clear heights, 187 trailer storage stalls and 250 automobile parking spaces for employees. In addition, the project includes 14,000 square feet of office space, a further testament to the need for higher percentages of office finishes and flexible spaces for employees within large-scale distribution facilities.
The construction of Wayfair’s project, which included some basic automated technology such as the aforementioned wire-guided forklift routing, also included expanding the thoroughfare on the north side of the building by two lanes to allow for easier access to the surrounding infrastructure.
—By Taylor Williams. This article first appeared in the February 2019 issue of Texas Real Estate Business magazine.