Freight rates are dropping as volumes are culled in the midst of inventory-to-sales reconciliations

Freight rates are dropping as volumes are culled in the midst of inventory-to-sales reconciliations March 3, 2023

As freight volume declines across multiple transportation modes (trucking, rail, ocean bound, air cargo, et al), the U.S. and shippers work through issues with capacity, cargo demand, issues with contracts or bookings, in addition to ongoing worker shortages – Avison Young explores how this important segment of the industry is faring, what it may foreshadow, and the potential impact on industrial demand.

Erik Foster

Head of Industrial Capital Markets
[email protected]
+1 312.273.9486

The bearish outlook on freight

A review of U.S. freight markets shows declining activity, with capacity exceeding demand in most modes of transportation. Some freight rates have now dropped to levels compared to pre-pandemic and the downward trend in rates is expected to get worse for carriers before it gets better.

Recently released annual freight volumes through mid-February shows rail carloads and intermodal volumes down by 3.9% and 8.8%, respectively. Intermodal volumes have been down in 16 of the past 17 months. Other modes of delivery are currently following similar patterns.

While the industrial sector continues to show its resilience–with a national vacancy rate below 5% and even lower in some markets–freight volumes are an important indicator of what is potentially ahead for industrial leasing for the next six to nine months. However, the current moderation in freight volumes are not expected to notably impact vacancy levels–or investor interest in this top asset class–but it is a dynamic to track for its long-term trajectory, especially as a leading indicator.

Here is a look at the various freight segments and how they might influence leasing demand:

Uber Freight, the logistics service provider arm of Uber, recently issued a bearish outlook on global freight markets. The company is predicting lower truck usage, a slowdown in inventory needs and, ultimately, a decline in manufacturing production as consumer spending slows.

As noted in FreightWaves, the truckload industry in the U.S. is currently oversupplied with capacity, with many of the smaller carriers that entered the market due to the robust activity levels in 2021 now cycling out of the market as demand weakens. Uber Freight also noted that it expects recessionary pressures that are impacting the spot market to spread to a broader-based volume recession sometime in 2023.

Freight labor issues persist

The trucking industry is being hit with large job cuts in the freight brokerage sector, which has increasingly become more technology-oriented, and companies have cut nearly 1,000 jobs this year through mass layoffs–not dissimilar to other tech companies. Many of these intermediary brokers are the conduit between carriers and shippers and the layoffs are another sign of how the freight transportation sector is cooling after the unusually high levels of activity from the middle of 2020 to the end of 2021. During that time, there was a mad dash to scale up hiring to meet demand from consumers during the pandemic.

Conversely, demand for freight transportation has been moderating since early 2022 when consumers began to shift some of their spending to travel and in-person activities, such as restaurants and entertainment venues. By year-end 2022, some of the largest freight brokers and freight forwarding companies had reduced their head counts. If this continues, there may be some smaller local and regional carriers forced out of business, which could exacerbate the industry’s struggles with truck driver shortages.

U.S. rail carload and intermodal volumes decline

U.S. rail carload and intermodal volumes for the week ending February 18, 2023 showed annual declines, according to data issued by the Association of American Railroads (AAR). Total carloads were down 3.9% (to 229,227) while weekly intermodal volume was down 8.8 percent (to 237,705).

Four of the 10 carload commodity groups, including motor vehicles and parts, petroleum and petroleum products, farm products, and food showed annual gains. Commodity groups posting annual declines were: coal, grain, and miscellaneous products. Analysts expect minimal change for the intermodal sector in the near term as strong growth is not likely to occur before 2024. North American rail volume for 12 railroads serving U.S., Canada, and Mexico for the same week was up 0.3% annually, while intermodal units were down 8.3%.

The movement of goods across the U.S. railway system was in the spotlight recently with the tragic and still-ongoing derailment and chemical spill in East Palestine, Ohio. While more than a million train carloads of coal, chemicals, and other commodities moved through U.S. railways in the first five weeks of 2023 without incident, this disaster has focused attention on rail regulation rolled back during the Trump administration. In the coming months, discussions will likely center around potential new and enhanced regulations that would impact and hopefully protect residents living near rail lines, as well as the culpability of the industry itself.

Ocean shipping declines for several quarters

Ocean shipping has also shown declines over the last several quarters, but there are indications of a turnaround later in the year. As demand slowed due to overall economic issues, volume, and congestion eased, pushing some rates back to pre-pandemic levels. This sector is dealing with shake ups in carrier alliances and strategies, a looming surge of new vessels adding capacity to the market, and the impact of economic uncertainty on consumer demand.

The world’s largest container line, Mediterranean Shipping Company (MSC), is predicting the ocean container market will grow in the second half of 2023. The shipping company says inventory levels in North American and Europe are still high, but there are positive signs from activity in China, which recently re-opened its economy following a strict pandemic lockdown.

MSC also mentioned that the company sees the U.S. in a positive position, given its increasing role as an energy exporter, along with its strong employment numbers and efforts to reduce inflation.

Pull-back in air cargo as flexible traffic increases

The days of retailers shifting to the more costly air cargo mode of transport due to supply chain constraints appear to be over. Several CEOs of major air cargo operators expressed optimism for industry activity in 2023, but also noted expectations of a more moderate year for performance compared to 2021 and 2022. The outlook points to declining air cargo volumes, yields, load factor, and revenues – based on softening of the global macroeconomy and international trade, according to the International Air Transport Association (IATA). Air cargo is expected to fall by 4% on an annual basis, following an 8% annual drop in 2022.

The air cargo industry is also experiencing softening demand and lower market rates due to increased capacity and shippers moving more volume back to ocean freight services. This is prompting FedEx Express, which moves an average of 6.3 million packages per day, to redirect a small portion of its overall volume to other carriers as it goes through a long-term cost savings program. Growth in e-commerce has also created an increase in parcels with more flexible transit time requirements, known as deferred traffic. This trend, as well as technology advances, has prompted FedEx to revamp its Express unit’s network as it looks to capture long-term savings.

Sources: Uber Freight, FreightWaves, Association of American Railroads, Logistics Management, Railway Age, Supply Chain Dive 

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