Small Businesses Getting Squeezed Out in Push for Warehouse Space

Karen Galena, president of First Logistics, which has four warehouses in the Chicago area that provide space for retailers and manufacturers, said bigger customers are willing to pay higher prices for increasingly scarce storage space.

“It’s tough for the small guy,” Ms. Galena said, noting labor and other costs are rising for warehouse operators.

If smaller firms “aren’t covering their costs and they can’t or don’t want to increase their rates,” then they may have to look for new space, she said. “I’m getting calls daily from smaller companies being displaced from larger warehouses.”

Andy Moses, senior vice president of sales and solutions at Penske Logistics, said warehouse operators are also focused on retaining customers with a high turnover of goods because the handling fees bring in higher revenues.

“It does put pressure on warehouse operators to take a hard look at their customer base and navigate in such a way they can serve the biggest, most important and most loyal customers,” he said.

The challenges small businesses face finding warehouse space mirrors difficulties many had securing room on container ships earlier in the Covid-19 pandemic, when ocean carriers drove up rates and bumped smaller shippers to make way for larger clients.

The nationwide vacancy rate for industrial real estate was 3.2% in the third quarter, down from 3.8% the same quarter a year ago, according to commercial real-estate services firm Cushman & Wakefield. The vacancy rate was over 5% in the third quarter of 2020.

Space is especially tight in the hottest logistics markets, including those near major ports such as Los Angeles and Long Beach, New York and New Jersey, and Savannah, Ga. In the distribution-heavy Inland Empire region of Southern California, the vacancy rate was 0.7% in the third quarter, according to Cushman & Wakefield.

The tight supply has pushed rental rates around the country to an average of about $8.70 a square foot in the most recent quarter, compared with $7.13 a square foot in last year’s third quarter, according to Cushman & Wakefield.

Warehouses are filling up for a variety of reasons. Some retailers are storing goods like patio furniture that got caught in supply-chain congestion and arrived too late for this year’s selling season. Others, such as Nike Inc., Walmart Inc. and Target Corp. , were caught short by a shift in pandemic-era consumer-buying patterns and are holding stockpiles of merchandise that they are trying to clear out ahead of the holidays.

Some retailers are holding goods in shipping containers and on railcars outside their warehouses and stores because of the tight space in distribution centers, said John Morris, president of industrial and logistics for the Americas for real-estate services firm CBRE Group Inc. He said some companies are even generating revenue from unconventional storage space.

“If a client has a site with a rail siding and isn’t using it, we’re helping some tenants lease out that rail siding by having cars on it that are holding excess inventory,” Mr. Morris said.

Ashley Epperson, co-founder of Springfield, Va.-based e-commerce retailer Salacious Drinks, struggled to find storage for her small business selling bottled water.

Ms. Epperson toured spaces already brimming with goods from bigger companies that were looking for even more storage. Eventually, she got her goods into a shared-space warehousing operator.

“It’s hard to find that specific thing that’s not going to be, you know, upfront cost needed, you need about $15,000,” she said. “You’re just like, ‘Holy smokes.’”

Write to Liz Young at [email protected] and Paul Berger at [email protected]