As the owners of several freight yards across Southern California, we have recently seen robust demand from local trucking companies.  The seemingly insatiable appetite for yards has pushed lease rates to over $1.00/land sf in the South Bay, a previously unthinkable level.  As value investors, we are constantly asking ourselves, is this demand sustainable?

Since the COVID pandemic began, the trucking industry has been restructured from large carriers employing drivers on guaranteed contracts to now tens of thousands of small carriers that scoop up long-haul e-commerce requirements. Owner-operators used the inefficiencies and increased demand stimulated by the pandemic as an opportunity to start their own businesses. As a result, there has been an explosion in the amount of “for-hire” carriers from just under 203,000 in March of 2020 to approximately 320,000 in March of 2022.

These small companies are suddenly experiencing challenging headwinds, which has caused many investors to wonder whether this is a sustainable business model or one that emerged to solve a short-term problem in the market.

First, these for-hire carriers have been hit hard by rising fuel prices. Significantly, fuel prices increased by 25% in March and are now 60% higher than the same time last year. The new trucking companies typically rely on long-haul requirements that are particularly vulnerable to rising diesel prices.

Second, the rampant consumption of goods stimulated by COVID appears to be over. Government subsidies related to COVID have ended, and people have resumed some semblance of normalcy. This reduction in consumer demand is demonstrated by trans-Pacific freight rates between China and the Ports of Los Angeles, which are down by half between January and March 2022. As a result, the long line of vessels waiting to anchor in the Ports of Los Angeles has decreased by more than two-thirds from the peak in January.

A concerning indication of the financial health of the industry may be the stock prices of two leading freight companies, Yellow Corporation and Schneider National, which are down 85% and 22%, respectively, since the beginning of March.

Now is the time for landlords to proceed with caution.  When making decisions on tenants, landlords should sacrifice return for credit in order to protect themselves from a looming downturn. Historically, the trucking industry has been extremely volatile, and this cycle will be no different.