Production uncertainty of their customers translates into uncertainty of future inventory/real estate planning for logistics companies. As part of the recovery from the disrupted supply chains caused by the pandemic, logistics companies are forced to overcommit by investing in more space and resources while still facing uncertainties.

“We are at 130% capacity, but [are] uncertain about the future.”

There is a certain disconnect between resource allocation for transportation and storage by the logistics industry and the expectations by its manufacturing customers. Manufacturers mitigate their risks by lowering input volumes, changing frequencies of delivery, and opting out of long-term warehousing leases. That does not match the logistics industry’s standard lease terms dictated by the property market that usually require a 3 to 5-year commitment to space.

“So, it really is balancing the commitment of our costs and our space and our resources and balancing that with the expectations of our customers.”

The issue of space is tightly connected to difficult decisions between rent vs. new build. In the East Bay especially, the logistics industry is historically overburdened by aging infrastructure. It is not uncommon to see companies invest in new construction because the cost of new build is on par with the investment that would be required to retrofit the older inventory. 

A similar problem arises with other infrastructure associated with transportation in the East Bay. For example, maintenance of roads and grade separation between rail and roads will improve capacity, velocity, and safety; however, the cost of improvements is high and not shared by all participants of the ecosystem.

Labor has become a big challenge for East Bay logistics companies due to the rising costs and competition for labor with the gig economy and Silicon Valley. The likes of Google, Amazon, and Tesla compete for the same talent with deeper pockets. The likes of Uber and Lyft offer more flexibility, thus, contributing to the labor cost acceleration for other industries such as transportation and logistics. Both transportation companies and the manufacturing customers they serve must mitigate this type of acceleration of cost by finding new ways of making warehousing and even manufacturing work.

The source of labor for basic jobs in logistics, such as material handlers for example, expanded to include places like Tracy in the San Joaquin Valley and the Central Valley. East Bay companies now compete with businesses in these areas to attract workers to the East Bay. In addition, many of the industry’s workers come from immigrant families for whom warehousing jobs are an entry level position providing upward mobility.

Many companies would agree that the location in the East Bay provides convenience to access resources and serve local customers. However, the high cost of operating in the area, especially the increasing labor and real estate costs, pose great challenges to businesses.

In addition, there is little clarity on what exactly California’s Assembly Bill 5 (AB5), which requires companies that hire independent contractors to reclassify them as employees, does to the trucking industry and how this change affects the cost of trucking for the logistics industry. So far, the logistics companies feel the ripple effect from the issues created by AB5 and are gearing up to bear the costs associated with state and regional mandates for zero-emission trucks.

“Challenges of our customers are our challenges.”