CSCMP's Supply Chain Quarterly
October 18, 2018
Forward Thinking

Increase in warehouse, DC labor costs has ripple effect on rental rates, CBRE study finds

A dollar-an-hour wage increase is equal to a 37-percent jump in industrial rents, says a recent study.

A $1-per-hour wage increase for the typical U.S. warehouse and distribution center employee would be equal to jacking up the annual rent on a 500,000-square-foot industrial property by about 37 percent, according to a report issued today by real estate services giant CBRE Group Inc.

The report found that a $1-an-hour rise in wages would add about $1 million in annual labor costs for a 500-employee facility. That added cost is equivalent to a $2.08-per-square-foot rent increase for a large building, according to the report. The average U.S. industrial rent is about $5.65 per square foot, the report said.

The average wage for a warehouse and DC worker is $11.82 an hour, according to CBRE, citing data from Economic Research Institute Inc. There has been speculation in recent years that businesses will be facing a chronically acute shortage of labor—especially e-commerce firms, which have experienced tremendous growth and whose fulfillment centers normally employ twice as many workers as do typical warehouses and DCs. (That figure spikes to four times normal during the peak holiday period.) In response, many businesses have turned to automated solutions, notably robotics, to drive throughput with a static number of workers. Labor accounts for about 20 percent of a company's supply chain expenses, CBRE reckons.

Not surprisingly, under the CBRE scenario, e-commerce firms—which are more likely than traditional merchants to operate big-box DCs and hire a lot more people—would take the biggest hit from the impact of a wage hike.

The current federal minimum wage is $7.25 an hour. Spurred by increasing concerns over income inequality, minimum wage increases went into effect at the beginning of the year in 17 states and the District of Columbia. San Francisco, Seattle, and Los Angeles have passed laws mandating that their minimum wage be gradually increased to $15 an hour during the 2018-to-2020 time frame.

In already-tight labor markets, the push toward a markedly higher minimum wage could result in wage increases that move up the pay scale, possibly driving up warehouse and DC wages even further, CBRE said.

Though some companies may pass on the higher labor costs to customers, many businesses worried about losing customers may choose to eat the increases. Besides investing in more automation, firms not tied to a specific location could relocate to areas with lower minimum wage requirements, according to the report.

To some extent, however, a firm looking to relocate to a region with more land at affordable prices may find its hands are tied. David J. Egan, Americas head of industrial research for CBRE, noted that large e-commerce firms need access to an abundant labor pool, which is generally available only in densely populated urban areas, where property costs are higher. "In a perfect world, many of these facilities would be located a little further out, where land is more plentiful and cheaper, but the labor limitations in those locations are a big problem and (are) often a deal breaker," Egan said in an e-mail.

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