The Case for a Better Year

We will all look back at 2011 as the most tepid rebound from a recession this country has ever experienced. The U.S. was still experiencing 8 to 9 percent unemployment, and the housing and construction industry did not pick up. What will this mean for global supply chains, transportation and logistics this year?

There are a few things we know for certain.

We will see higher expenses across the supply chain. Ocean carriers, intermodal rail and trucking operators all are expected to increase their yields. However, the “last mile” will be where the cost increases will be felt the most.

Several industrial real estate markets will finally improve as the “overhang” in the industry is absorbed. Lease rates in these markets will have nowhere to go but up.

And trucking, labor, clean air initiatives and new regulatory rules are coming into play, which will make that last-mile capacity tight, and push larger companies to consolidate their customers.

What isn’t certain is how much this economy will improve. I think I can point to some answers, and to some outcomes on the horizon.

The developers that survived the 2008-2009 recession are stronger than ever. The money that backs them has been on the sidelines for more than three years, and there is pent-up demand for that money to be put to use. But that money must get a better return than it would at banks (1.5 percent) or than the Treasury gives (2.8 percent), and that means the next safest bet is industrial real estate.

The shippers of this world who are also the tenants or buyers of big box industrial warehouses have been looking at this three-year dry season as a chance to lock in very low rental rates and have been consolidating in all major markets. They have leased all the supply of large buildings (more than 300,000 feet) in Greater Los Angeles and the Inland Empire, Phoenix, Houston, New York-New Jersey, Chicago, Kansas City, Miami-Fort Lauderdale, and the Washington-Baltimore Corridor.

The only “supply” of these buildings left is in Atlanta, Dallas and Columbus, Ohio.

Industrial shippers that use intermodal services and containerized shipping will have a much better choice in getting their goods to their customers either through their distribution centers or with a third-party logistics service provider.

The sophistication in these industry sectors is increasing, and the choices are growing. Shippers looking to move goods through West Coast ports are finding more options for cross-dock, transload, DC-bypass, and full 3PL management of their supply chains than ever.

The growth of domestic intermodal service providers has never been as robust as it will be in 2012. Therefore, a distribution center location in Columbus or Atlanta can pit service providers, carriers, East Coast versus West Coast railroads and ports against each other to come out with the best pricing, delivery times and contingency planning.

Shippers are getting much more sophisticated in selecting sites for DC consolidations and for new e-commerce fulfillment centers, and these strategic decision models will become more refined in 2012.

The most sought-after incentives will remain jobs-related tax credits, foreign trade zone benefits and economic development grants for businesses to locate within a region. Arizona, for instance, has been marketing its unique FTZ benefits that add a 75 percent reduction in real and personal property taxes to federal FTZ benefits. South Carolina has a similar property tax reduction law on the books. Texas has its Enterprise Fund, which has helped lure GE Locomotives, Caterpillar and other large manufacturers to the state.

These incentives will be the hot topic this year.

The e-commerce phenomenon is probably the most intriguing, and should have industrial real estate professionals ecstatic. This industry sector, with its specialized site requirements, is expected to grow 15 to 20 percent annually for the next 10 years. Every major (and many minor) retailer is moving strongly into this market, which is expected to account for more than 40 percent of all retail sales in the U.S. by 2025.

Strong brands such as Amazon and others actually are acting as 3PLs for smaller and larger retailers. These companies already have technology platforms in place to provide an online shopping environment, access to bulk shipping rates and the expertise to perform order fulfillment. A broad array of transportation and logistics operations will benefit from this growing retail phenomenon.

All in all, 2012 should be a much better year than 2011, with improved GDP growth, lower unemployment numbers, improved housing and construction starts and an election that will determine the country’s economic course for the future.

This year will offer new investment opportunities for industrial development, more choices and options for shippers and an increase in e-commerce activity, fostering greater incentive-based site selection and industrial real estate demand in key market locations.

Curtis Spencer is president of IMS Worldwide, a supply chain security and industrial real estate consultant in Webster, Texas. Contact him at curtis.spencer@imsw.com.

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