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ShipBob fulfillment center in Moreno Valley, California
ShipBob

After ShipBob decided last July to let staffers work from anywhere, the logistics start-up had its landlord erect a wall in the middle of its Chicago headquarters so half the space could be rented out to another company.

On March 1, the office reopened at reduced capacity for socially distanced meetings.

But while it’s using less office space, ShipBob’s real estate needs have been expanding at a breakneck pace. The company, which provides fulfillment services to online retailers, has more than doubled its warehouse count since mid-2020 to 24 locations today, including four outside the U.S., with plans to reach 35 by the end of 2021.

The seven-year-old company is a microcosm of the U.S. commercial real estate market. While office vacancies have soared as employers prepare for a post-Covid future of distributed work, the industrial market is hotter than ever because of a pandemic-fueled surge in e-commerce and increased consumer demand to get more products at Amazon-like speeds.

Vacancy rates in industrial buildings are near a record low and new warehouses can’t get built quickly enough to meet the needs of clothing makers, furniture sellers and home appliance manufacturers. Real estate firm CBRE said in its first-quarter report on the industrial and logistics market that almost 100 million square feet of space was absorbed in the period, the third-highest amount ever, and that a record 376 million square feet is under construction.

Rents rose 7.1% in the quarter from the same period a year earlier to an all-time high of $8.44 per square foot, CBRE said. The firm wrote in a follow-up report last month that prices in coastal markets near population centers and inland port hubs are soaring by double-digit percentages. In Northern New Jersey, average base rent for industrial properties jumped 33% in May from a year earlier, and California’s Inland Empire saw an increase of 24%, followed by Philadelphia at 20%.

“The need to have facilities in these markets, coupled with record low vacancy rates, has often led to bidding wars among occupiers that are driving up rental rates,” CBRE said.

Skyrocketing prices

The wheels were well in motion before Covid-19 hit the U.S. in early 2020. Amazon was already turning next-day delivery into the default option for Prime members, and big box stores like Best Buy and Walmart were racing to add fulfillment space to try and keep pace.

The pandemic accelerated everything. Consumers were stuck at home and ordering more stuff, while physical stores had to go digital to stay afloat.

Grocery delivery added to the market tightness, as Instacart and Postmates were suddenly inundated with orders from customers who didn’t want to enter a Costco, Albertsons or Kroger store. Instacart is now planning a network of fulfillment centers loaded up with cereal-picking robots, according to Bloomberg, and Target has bolstered same-day fulfillment through so-called sortation centers.

In addition to the rapid change in consumer behavior, the pandemic also exposed the fragility of the global supply chain. With facilities in China and elsewhere shuttered, stores experienced dramatic shortages of apparel, car parts and packaging materials.

Retailers responded by securing more storage space to mitigate the impact of future shocks, said James Koman, CEO of ElmTree Funds, a private equity firm focused on commercial real estate.

“The reshoring of manufacturing is gaining momentum,” Koman said. Companies are “bringing more products onshore and need to have room for their products so we don’t fall into another situation like we’re in right now.”

All of those factors are contributing to skyrocketing prices, he said. Additionally, construction costs are higher because of inflation and supply constraints, and companies are building more sophisticated facilities, filled with robots.

“You have these automatic forklifts, conveyor belts, and automated storage retrieval systems,” Koman said. “All this is where the world is going.”

Amazon introduces new robots named Bert and Ernie to fulfillment center operations.
Source: Amazon Inc.

Betting on a long-term need for fulfillment and logistics facilities, ElmTree has acquired about $2 billion worth of industrial space over the past seven months, outpacing prior years, Koman said. He estimates the U.S. will need an additional 135-150 million square feet annually to support e-commerce growth.

For ShipBob, the e-commerce boom has played right into its business model. But competition for space is simultaneously forcing the company to reckon with higher costs.

ShipBob works with brands like perfume company Dossier, powdered energy drink maker Juspy and Tom Brady’s sports and fitness brand TB12, providing a wide network of fulfillment centers for fast and reliable shipping and software to manage deliveries and inventory.

Unlike the retail giants, ShipBob doesn’t go after large football field-sized fulfillment centers, and only has leases at a few of its facilities. Rather, it looks for warehouses that are typically family-owned with 75,000-100,000 square feet and some unused capacity. It then outfits them with ShipBob technology and pays based on order volume and the amount of space it uses.

While ShipBob isn’t signing leases, it is competing for space in warehouses that are now sitting on much more valuable property than they were a year ago. ShipBob CEO Dhruv Saxena said that his company has to be in areas like Southern California and Louisville, Kentucky, a major transportation and logistics hub, despite the rapid increase in prices.

“We have to find ways of placing inventory closer to the end customer even if it comes at a lower margin for us,” Saxena said in an interview late last month after his company raised $200 million at a valuation topping $1 billion.

ShipBob competes directly with a number of fulfillment outsourcing start-ups, including ShipMonk, Deliverr and Shippo. Those four companies have raised almost $900 million combined in the past year.

Not just Amazon

Saxena said a major reason smaller retailers turn to ShipBob is to avoid the costs and hassle of finding fulfillment space and hiring the requisite workers. He likened it to companies outsourcing their computing and data storage needs to Amazon Web Services and paying for how much capacity they use rather than leasing their own data centers.

“The same math applies,” Saxena said. “I can open a warehouse, hire people and rig the software or I can convert those fixed costs into variable costs where I pay on a transaction basis.”

ShipBob employees with CEO Dhruv Saxena in middle
ShipBob

Nate Faust is in the very early stages of building Olive, an e-commerce start-up that’s working with brands to offer more sustainable packaging and delivery options by using recycled boxing materials and bundling items.

Olive opened its first two 30,000 square foot warehouses last year, one in New Jersey and the other in Southern California. Faust, who previously co-founded Jet.com and then worked at Walmart after the acquisition, said if he were entering those leases today, they’d easily be 10% to 15% higher.

Olive isn’t actively in the market for more fulfillment centers and doesn’t face a lease renewal until February, but Faust said start-ups have to be opportunistic. He’s working with real estate firm JLL, which he said is constantly on the prowl for attractive space.

“We have them looking all the time because industrial space is so tight right now,” Faust said. “If we find something perfect for what we’re looking for, it’s not unreasonable to have overlapping leases.”

Olive package
Olive

Vik Chawla, a partner at venture firm Fifth Wall, which invests in property technologies, said the challenges in the real estate market are driving more emerging brands and sellers to the outsourcing model.

“It’s very difficult as a single e-commerce business to try to secure attractive space and run your business,” Chawla said. “The line of people trying to get into industrial buildings is out the door.”

Many tenants occupying that line are traditional big third-party logistics providers (3PLs), like C.H. Robinson and XPO Logistics as well as UPS and FedEx. At the top end of the market, Amazon, Walmart and Target are mopping up space to speed distribution and, in Amazon’s case, to manage fulfillment for its massive marketplace of third-party sellers.

Prologis, the largest U.S. owner of industrial real estate, said in a May report that utilization rates, which indicate how much space is being used, reached close to 85%. Vacancy rates are at 4.7%, close to a record low, the company said.

Amazon is the real estate firm’s biggest customer, occupying 22 million square feet, followed by Home Depot at 9 million and then FedEx and UPS, according to Prologis’ latest annual report. Walmart is seventh.

In April, an analyst on Prologis’ earnings call asked what types of clients were most actively pursuing leases.

“E-commerce is a big component of it, but it’s certainly not all about Amazon,” Michael Curless, Prologis’ chief customer officer, said in response. “Certainly, they’re the most active customer. But we’re seeing a lot of activity from the Targets, the Walmarts, Home Depots, and lots of evidence of the Chinese players making their way to the U.S. and Europe as well.”

WATCH: EY on how Covid has boosted digitalization in the retail industry

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Top Amazon exec says it’s a ‘myth’ robots steal jobs

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Top Amazon exec says it's a 'myth' robots steal jobs

A robot prepares to pick up a tote containing product at the Amazon Robotics fulfillment center on April 12, 2019 in Orlando, Florida.

Nurphoto | Nurphoto | Getty Images

A top Amazon executive told CNBC Thursday that it’s a “myth” that robots and other technologies take jobs away from people.

Stefano La Rovere, director of global robotics, mechatronics, and sustainable packaging at Amazon, said that, rather than replacing jobs, advanced robotics, artificial intelligence, and other technologies are enhancing people’s roles.

He added that new technology is leading to the creation of entirely new job categories.

“It is a myth that technology and robots take out jobs,” La Rovere told CNBC’s “Street Signs Europe” on Thursday.

Amazon says that the introduction of new technologies has enhanced more than 50,000 jobs across its fulfilment centers in Europe.

It's a myth that technology and robots take jobs away, Amazon director of global robotics says

The e-commerce giant says it has installed more than 1,000 new technologies across its European fulfillment center network over the last five years, for an overall investment of more than 700 million euros ($751 million).

“Robots and technology help our employees … by reducing walking distance between assignments, by taking away repetitive motions, or [by] helping them to lift heavy weights,” La Rovere  said.

“In turn, our employees can learn new skills, they can learn new competencies, they can acquire new capabilities that allow them to progress towards their career objectives,” he added.

La Rovere added that, “Over the last years, more than 700 new categories of jobs have been created by the use of technology.”

He cited the example of his own team, the Amazon robotics and AI division, which is focused on bringing automation to Amazon’s vast network of fulfillment centers that are responsible for getting orders packed and ready for delivery to customers.

 WATCH: Factories are heading for a ‘dark’ future — and it’s not what you think

Factories are heading for a 'dark' future — and it's not what you think

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China remains crucial for U.S. chipmakers amid rising tensions between the world’s top two economies

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China remains crucial for U.S. chipmakers amid rising tensions between the world's top two economies

US-China chip war graphic

Wong Yu Liang | Moment | Getty Images

China remains an essential market for most American chipmakers despite Washington’s efforts to restrict chip sales to the country and amid Beijing’s push for self sufficiency in the semiconductor sector. 

Data from S&P Global showed that U.S. chip giants Intel, Broadcom, Qualcomm and Marvell Technology all generate more revenue from China compared with the U.S. 

The U.S. has passed a series of export controls starting in October 2022 aimed at restricting China’s access to advanced chip technology, particularly those used in AI applications.

“China remains an important market for U.S. chipmakers, and the U.S. restrictions on selling advanced AI chips to China have been designed specifically to allow most U.S. firms to continue selling most types of chips to Chinese customers,” Chris Miller, author of “Chip War,” told CNBC.

Used in a wide range of products, from smartphones to electric vehicles, semiconductors have become a top priority for governments globally. 

According to data from tech consultancy Omdia, China consumes nearly 50% of the world’s semiconductors as it is the biggest market for assembling consumer devices. 

U.S. chipmakers, which enjoy technological leadership over Chinese competitors, have been able to tap this demand as the U.S. export curbs are focused on some very specific products.

“There are still plenty of ‘high end’ chips with all types of allowable use cases that are good to go where U.S. based chip companies have the dominant, leading edge,” said William B. Bailey, lead technology, media, and telecommunications analyst at Nasdaq IR Intelligence.

Navigating export curbs 

U.S. chipmakers, even those with a majority of business in the U.S., such as Micron Technology, AMD, and Nvidia, have strived to serve their Chinese clients even in the face of export controls. 

When the first wave of U.S. restrictions came into effect late in 2022, Nvidia and Intel designed modified versions of AI chip products for the Chinese market. 

A year later, the U.S. updated the export rules to tackle these perceived loopholes. But, soon after, it was reported that Nvidia was working on a new chip made for China.

Intel has reportedly continued to sell hundreds of millions of dollars worth of laptop processor chips to U.S.-sanctioned Chinese telecoms company Huawei, thanks to an export license issued by the Donald Trump administration.

The company did not respond to a request for comment on their plans for the China market.

U.S. strategy to limit China's rise as a technological power is working, analyst says

AMD has also designed an AI chip for China but will need to apply for an export license after failing to get it past U.S. regulators last month.

Executives of Intel, Qualcomm, and Nvidia, had reportedly been part of a group that planned to lobby Washington against tighter chip restrictions in July last year.

The companies are also members of Semiconductor Industry Association, a major U.S. semiconductor trade organization, which released a statement around the same time requesting an easing of tensions and a halt on further sanctions due to the importance of the Chinese market for domestic chip companies.

Amid a tough policy stance by the U.S., China has also responded in kind. In May last year, chips produced by America’s Micron were banned from critical information infrastructure in China after failing a review by the country’s Cyberspace Administration. 

Micron is constructing a new assembly and test manufacturing facility at an existing site in Xi’an, China, as the country “remains an important market for Micron and the semiconductor industry,” a company spokesperson told CNBC. Production is estimated to start in the second half of 2025, they said.

Market share worries

China could catch up to U.S. in the semiconductor sector, says Insights & Strategy CEO

The Chinese government is “increasingly focused” on getting its firms to buy locally made chips, Miller said. “Unless foreign companies have a substantial technological advantage over domestic Chinese competitors, they will lose market share in China.” 

However, Phelix Lee, equity analyst at Morningstar, said it does not expect “an overhaul of the supply chain” even as Chinese firms could be innovating legacy chips found in everything from household appliances to medical equipment. 

Legacy chips are typically mature or lower-end semiconductors. U.S. Commerce Secretary Gina Raimondo said about 60% of these chips are manufactured by China

According to Brady Wang, associate director at Counterpoint Research, in the AI GPU market segment, American companies such as Nvidia and Intel are estimated to have a technological lead of about three to five years over Chinese competitors.

“We believe China can still build up its local GPU supply chain for specific market segments, but the amount will be limited, and the cost will be much higher,” he added.

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Apple shares just had their best day since last May

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Apple shares just had their best day since last May

Apple CEO Tim Cook greets customers as he arrives for the release of the Vision Pro headset at the Apple Store in New York City on Feb. 2, 2024.

Angela Weiss | AFP | Getty Images

Apple shares climbed 4.3% on Thursday to a share price of $175.04. It is Apple’s best day since May 5, 2023.

Apple’s rise came during a strong day for technology stocks, especially those in artificial intelligence, as the Nasdaq Composite rose 1.77%.

Apple shares are down more than 5% so far this year. On Thursday, JPMorgan analysts wrote that sentiment over Apple shares is improving with hedge fund investors, partially due to its recent stock slide.

Despite some negative trends around iPhone sales in China, and recent reports of canceled projects such as its effort to build a car, JPMorgan analyst Samik Chatterjee said investors may be more comfortable with its current valuation after recent losses and the potential to benefit from AI.

The JPMorgan analysts predicted a strong iPhone sales cycle in 2026 due to forthcoming AI features. Apple CEO Tim Cook recently told investors to expect an AI announcement later this year. That is expected to occur during Apple’s Worldwide Developers Conference event in June.

“Hedge fund investors are increasingly warming up to the opportunity of the AI upgrade cycle, but the uncertainty still pertains to whether the upgrade cycle starts with iPhone 16 in September 2024 or iPhone 17 in September 2025,” Chatterjee wrote.

Separately, Apple is also preparing new Mac laptops and desktops with next-generation “M4 chips” that emphasize AI, according to a report Thursday from Bloomberg. Apple declined to comment on the report. The current generation of Apple’s chips is called M3.

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