Your Package is out for DeliveryLogistics in Nevada

Rapid growth during COVID led to growing pains for the logistics industry: the need for the industry to, if not shrink, at least contract, and the need for increased rates and decreased overhead. Logistics continues to grow while recovering from a recessionary environment it’s functioned in for the last 18 months, a far cry from the boom of 2020 when COVID-19 made supply chain management and logistics everyday terms. Consumer spending remains strong, but stimulus cash is over, credit spending is up, rates clients are willing to spend on logistics are down. The pandemic was an industry driver.

“The truckload market has been on a downward spiral in terms of volume and rates for the last 18 months,” said Josh Allen, COO, ITS Logistics. “They’re hovering at the bottom and there are a lot of folks asking if we’ve hit that bottom. I think the jury’s still out on that one.”

There’s still capacity that needs to exit the marketplace. “You see pockets of activity and starting to see some flickers of capacity contraction in different markets, so we’ll see. If we’re not at the bottom [of the recessionary cycle], we’re near the bottom,” said Allen.

Capacity means the physical space to store, transport, or deliver goods, and/or the assets to do so. Basically, capacity sums up the ability to do what logistics is.

Pandemic Payday

COVID created an 18 to 24 month period of consumer spending that spurred entrepreneurial activity in a variety of markets, especially the truckload carrier space.

“After the initial fears that the world was melting down, everybody turned to buying products,” said Allen. With no way to spend COVID stimulus money on activities or travel, consumers started buying goods, which had to be delivered somehow.

New trucking companies grew up overnight. “People bought new trucks, started trucking companies, hired drivers and owner operators, etc.,” said Allen. “There were a significant amount of new entrants. All of a sudden you had significant amounts of supply.”

Twenty months later demand started to weaken and for close to two years the industry has faced oversupply and weakening demand. Until that levels out, or significant demand picks up, the market will remain lopsided, Allen said.

“After COVID you had a huge number of trucking companies getting into the industry, owner operator to hotshot trucking in pickup trucks and trailers that people were doing,” said Paul Enos, president, Nevada Trucking Association. “At the time it was hard not to do well in trucking. Where we are now is coming out of a freight recession that we’ve been in for about a year. The industry right now is probably shrinking a little from where it was at its high.”

That doesn’t mean individual companies aren’t growing. One Nevada Trucking Association member told Enos his company’s year over year was only 21 percent. That sounds impressive, but every dollar was harder to make and matched with higher overhead costs.

“The rates clients are paying are staying really low, but cost of overhead is increasing dramatically,” said Tiffany Novich, CEO, Full Tilt Logistics. Overhead includes fuel, insurance, labor rates, paying drivers, and contract work with brokers for different lanes of transport. With an increase in overhead and decrease in rates, even big logistics companies are facing bankruptcy, decreasing fleet sizes and selling equipment. Others are pivoting to find new industries to work with. Working with small to medium-sized clients allows them to work with multiple clients and diversify their portfolio. “That way we’re not top heavy with one client and we can assist in getting their work out and growing with them,” said Novich.

Fuel costs are among the biggest operating expenses for logistics companies. “With gas prices going up 47 percent over the last five years, it’s caused additional pressure on profit margins, caused logistics companies to better optimize delivery and route planning, and it’s playing a role in the push for battery operated delivery vehicles,” said Suzette LaGrange, senior vice president, Colliers.

Higher fuel prices mean higher consumer prices. Costs are pushed onto the consumer, impacting food prices and building material costs, which in turn drives up construction costs and the price of houses. Currently California is considering passing a windfall profits tax on all its refineries, said Enos, which will make it less profitable to make fuel in California, and make it more expensive for Nevada companies to buy fuel—88 percent of Nevada fuel comes from California.

Ever-changing regulations, especially in California, are challenging to work with. The California Air Resources Board, working with original equipment manufacturers, wants to ban diesel trucks in the state by 2040.

“Last year they came out with a rule that said you can have a truck for 18 years or 800,000 miles, and a lot of folks are hoping they change that rule, because where we’re at now with battery electric vehicles that would be the only available zero emission vehicle on the market,” said Enos.

Insurance rates for trucking companies have skyrocketed in recent years, driven by massive verdicts against trucking companies in trials concerning vehicle accidents.

Industrial Space

Logistics is the movement of goods from Point A to Point B, and requires both transportation and warehousing. The biggest challenge real estate brokers see while working with industrial properties is shrinking profit margins.

“There’s an increase in property rents of 55 percent in the last five years. There’s a 115 percent increase over the last 10 years,” said LaGrange. “Say a tenant did a lease in 2014 and they’re coming up for renewal, that rent is doubling and sometimes more than doubling. That’s causing a lot of pressure on their operations because it’s just been rapid growth over the last 10 years.”

There’s also a skilled labor shortage in Southern Nevada, said LaGrange, and low unemployment makes it harder to find employees. Nevada’s overall unemployment rate is 5.1 percent, 6.75 percent in Southern Nevada. That makes Nevada’s workforce a little more accessible than California’s 5.3 percent unemployment, Utah’s 2.8, Arizona’s 3.6.

Companies are also trying to meet social responsibility requirements, reducing packaging waste and carbon emissions, going green with battery operated equipment and fleets, and trying to right-size operations.

“Many companies took too much space during COVID,” said LaGrange. “In the last five years it was so difficult to find space for warehousing and logistics operations, we leased too much space and now we’re seeing it was a reflection of COVID. People weren’t sure what the long-term effects were going to be.”

In the last six months there’s been a slowdown in the sales and leasing of big box industrial. “If you analyze the amount of activity we have for the first six months of 2024 and compare it to 2023, the number of big box lease transactions is down 50 percent for space over 100,000-square-feet,” said LaGrange. It’s the same for smaller warehouses, and sales activity is down 53 percent from 2023 levels.

Rents have dropped about 7.5 percent this year, and LaGrange anticipates another 10 percent drop by year’s end. “It’s because we’re building so much space right now. We have about 170 million-square-feet in our market and we’re building about another 16.5-million-square-feet this year.”

Over 2022 and 2023 the industry absorbed about 7.5-million-square-feet. LaGrange expects the current 5.5 percent vacancy rate to jump to 11 percent by year’s end, causing more downward pressure on rents. “There’s just a lot of supply out there.” There are seven spaces over 400,000-square-feet standing available and nearly 30 buildings with more than 100,000-square-feet available to lease.

Industry Growth

Both warehousing and transportation have slowed over the last two years, but the industry continues to grow. Businesses whose core function isn’t supply chain operations are using third party logistics companies to perform those functions. Third party logistics companies are still moving to Southern Nevada. That aspect of the industry is not shrinking as much as slowing to more manageable levels.

“It continues to grow because especially on the domestic transportation portion of our supply chain world there’s a fairly low barrier to entry, so it’s great for entrepreneurs,” said Allen.

That’s not great from a macroeconomic standpoint, because as lessons in COVID proved, the market will overcorrect one way or the other. “So just like we have an abundance of supply created by entrepreneurs starting new businesses on the tailwinds of the COVID market, you’ll have the course correction where people will fold up and many of those small businesses simply won’t be able to support themselves or be supported,” said Allen.

Transportation, warehousing, and delivery operate differently than pre-pandemic, not just with the giants like UPS and Amazon taking different facets of the industry, but with smaller shipments and parcel execution part of everyday life.

Today logistics is used as a strategy for customer engagement, companies finding the best way to get product to customers, executing from a price standpoint, and being as efficient as possible. Many use their retail locations as last mile facilities: customers get online prices, free shipping, and DIY pickup at stores.

“Honestly, that’s probably better for trucking because last mile is the most expensive mile, so if you can take it to one place, that’s better and more efficient for that trucking company than last mile delivery,” said Enos.

There is concern consumer spending will decline. The pandemic-driven demand for goods has dropped off. Because companies had rushed to fill those needs, they overbought to account for future demand that isn’t there. “[The industry] kind of oversupplied the United States with all these consumer goods. Now the consumer credit spend is going up and debt is going up and consumer spend is going to go down,” said Novich.

Currently consumer spending continues to drive online shopping. “Over the last 20 years consumers have moved from brick and mortar to point and click,” said Enos. “The industry has gotten good at it.” It does mean more warehouses and more last mile delivery going directly to consumers. It’s mostly third party logistics companies—UPS, FedEx, Amazon—that really see a huge impact from e-commerce.

“Amazon is probably now the biggest logistics player in the space and with all the deliveries they make, they’ve created this ridiculously large logistics network but they also created the demand for it,” said Allen.

Amazon

“My goal is to take in product and move it to our fulfillment centers where it can be processed for customers to order,” said Jess Desautels, site lead, Amazon. “Which means the goal is to move as many units through my building to get to the right locations where history says the most of those units are ordered.”

Amazon reigns as industry leader when it comes to moving product. Five years ago Southern Nevada had zero Amazon cross dock locations. Today there are three. “We started with five Amazon buildings in 2019 and now there are over 20 including three that are cross docks. My location in Henderson [is one], the same sized building in North Las Vegas and then a go-between cross dock to help sort through units to get to the right fulfillment centers and get closer to the customer,” said Desautels.

Cross dock locations are facilities that essentially remove storage from the logistics equation. Products are moved from one form of transportation directly to the next. Products going to the same location may be consolidated to make shipping more efficient and time effective.

“We are building more of a national cross dock, so we will also take in product that Amazon owns,” said Desautels. “We are mainly the main hub that’s going to get the unit to the fulfillment center so customers can order it. We’re the first section of the supply chain where we take in all of the units and then get them sent out to the right locations for customers to order.”

Though Amazons still relies on partners like USPS for rural deliveries, it’s poised to expand into Fallon, and is in the process of adding 12 new buildings across the U.S.

Inland Ports

Inland ports are basically areas to offload freight from ports like Long Beach into Southern Nevada and Sacramento into Northern Nevada. Cargo is offloaded onto trains and brought inland. Neither area is technically an inland port, but companies treat them as such.

“It allows companies to more rapidly offload cargo from cargo ships, transport them to areas where they can be sorted, stocked, often assembled, without having to pay customs, and then transported at lower costs than coastal areas,” said LaGrange. “Imagine a lot of the freight coming into Long Beach and going to Inland Empire and the Southern California market is really expensive. We’re able to get that cargo into Southern Nevada and it can be repackaged, redistributed, sorted, assembled, and then distributed from Southern Nevada.”

 

You Can Get There From Here, but Slowly

Pull up an Interstate freeway map and it will show a huge swath of land between Northern and Southern Nevada with no connectivity other than two lane roads. I-11 could change that with an interstate freeway running from Mexico to Canada, skirting the western edge of Nevada. The completed section, the Boulder City Bypass, opened up the Eldorado Valley for Southern Nevada, but the full scale Vegas to Reno section is still probably more than 10 years away.

While the effect of I-11 will be largely felt in southern Nevada, “I think that effect for northern Nevada indirect fashion is the notion that this creates better efficiency and more trade opportunities flowing through Mexico. Mexico has quickly become a dominant trading partner for the United States. All the changes to international trade between the U.S. and China, and additional Southeast Asian countries, and the demand for more effective flows from Mexico all the way through to Canada will grow significantly over the next several decades,” said Allen.

In the meantime consumers will continue tracking packages out for delivery.