Activity in the industrial real estate sector is building after being in the doldrums for more than two years.
As in past years, big-box retailers and other large shippers are looking for sites where they can construct distribution facilities of 500,000 square feet or more. Small and midsize shippers may gravitate to the same locations, but they usually lease space from third-party logistics providers that handle a number of customers.
Cargo interests looking for Midwest locations tend to favor metropolitan areas that provide a large local base of consumers and access to markets within a day’s drive of the distribution facility.
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Chicago and Kansas City satisfy those requirements. Imported merchandise from Asia enters the country through ports on the West Coast and moves by intermodal rail to those cities. The long-haul rail, short-haul truck model is the most efficient and cost-effective way to serve the interior U.S.
In the past, the industrial real estate market was centered on the needs of importers. Now exporters are establishing a growing presence at these inland ports. Exporters of agricultural commodities and scrap products such as metals and wastepaper require access to empty marine containers, and import distribution hubs generate the equipment those exporters need.
Because rail is so important in this model, the Class I railroads have become active participants in the development of inland ports. In the 1990s, they began to establish intermodal hubs, known as integrated intermodal logistics parks, that combine a railyard and highway access with extensive warehouse and distribution facilities operated by big-box retailers and 3PLs.
The Chicago area is the favorite choice of the Class I railroads for the location of integrated rail logistics hubs. Chicago is served by all of the U.S. Class I railroads as well as Canadian National and Canadian Pacific railroads. It’s also the main rail hub on the east-west corridor.
Kansas City also attracts east-west rail traffic, but its location on the Kansas City Southern mainline makes it the hub for north-south intermodal traffic moving between the U.S. market and Mexico and Canada, the NAFTA corridor.
The 2008-09 economic recession devastated the industrial real estate market. Construction of warehouses and distribution centers came to a halt, and developers struggled to keep existing facilities rented. There was so much vacant property on the market in 2010 that even though the economy strengthened and imports increased about 15 percent, very little new activity was created.
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Interest in modern, strategically located properties is finally starting to pick up. “Absolutely,” said Neil Doyle, executive vice president of infrastructure and transportation development at CenterPoint Properties. “We are seeing more potential clients than we have in the past three years.”
Cargo interests are still cautious and taking extra time to perform due diligence, but when the numbers add up, they are committing to large properties. Home Depot, for example, will build a rapid deployment center of more than 500,000 square feet at the CenterPoint property west of Chicago.
Rapid deployment centers fit well into the regional logistics strategies of national retailers. Rather than having 100 stores in a region — each sending its purchase orders to a vendor — the retailer aggregates the purchase orders from all of the stories. In fact, the retailer aggregates the purchase orders from those stores for all of their vendors at the rapid deployment center. It then can build full truckloads of consolidated merchandise for all of the stores.
The merchandise usually doesn’t come to rest, but is cross-docked into outbound trailers, creating rapid deployment centers.
The CenterPoint development in Elwood, Ill., includes BNSF Railway’s Logistics Park Chicago; CenterPoint’s property in nearby Joliet includes the Union Pacific Railroad’s Joliet Intermodal Terminal. Given the proximity of the logistics parks, cargo interests that locate at either site can be served by both railroads, Doyle said.
The Elwood property is the older and more developed of the two. Cargo interests and 3PLs operating warehouses there include Wal-Mart Stores, DSC Logistics, Georgia-Pacific, Potlatch, Sanyo Logistics, Partners Warehouse, California Cartage, Maersk Inc. and Bissell. Union Pacific opened its logistics park in October 2010.
Third-party logistics providers likely will provide most of the new activity at CenterPoint. Smaller and midsize retailers can reduce their warehouse and distribution costs by working with a 3PL, leasing only the amount of space they need when they need it.
Like the big-box retailers, they benefit from the long-haul rail, short-haul truck model, but they may have access to even more ocean carriers than the big-box retailers have by working through a 3PL, Doyle said.
The tug-of-war between shippers of intact marine containers and transloaders on the West Coast ebbs and flows depending on factors such as fuel prices, intermodal rail rates, the availability of truck drivers and the cost of safety requirements mandated by regulators.
Doyle said CenterPoint tenants continue to receive intact marine containers from West Coast ports and domestic 53-foot containers whose content has been transloaded from marine containers on the West Coast. Both segments are growing as the economy recovers, although growth has been faster recently in the transload sector.
Exports also are growing rapidly. U.S. exports have been strong for several years because of the weak dollar, and the Obama administration’s goal of doubling exports in five years has intensified growth.
Agricultural exports are especially hot in the container trades, with corn, soybeans, feed grains and distillers’ dry grain moving in large volumes to Asia and Latin America. Chicago is a strategic location for agricultural exports because the import distribution centers generate empty containers and a cost-competitive repositioning move to the grain processing centers in the upper Midwest. CenterPoint recently signed a couple of deals with grain exporters, Doyle said.
The Chicago area also produces large volumes of scrap paper and metal, which likewise have access to the empty containers generated at CenterPoint. Margins on agricultural and scrap products are thin, so competitive container repositioning costs are important in making the export move work, Doyle said.
Kansas City also serves as an inland port in the east-west corridor, but it epitomizes the strategic location of an inland port serving the north-sou0th corridor by virtue of its location on Kansas City Southern’s mainline.
KCS offers single rail line ownership from Kansas City through the Houston area (Rosenberg) and across the Mexican border to Monterrey (Salinas Victoria), San Luis Potosi and Toluca, terminating at the Pacific Coast port city of Lazaro Cardenas.
While the U.S. and Mexico were working their way through the economic recession, KCS was investing $300 million to upgrade the track and facilities in that intermodal corridor. Now that an economic recovery is under way, especially in the cross-border trade, KCS is well-positioned to handle the growth, said Pat Ottensmeyer, executive vice president of sales and marketing.
“It’s a huge area of growth for us,” Ottensmeyer said. In the first 5 ½ months of 2011, volume was up 75 percent and revenue increased 85 percent over the same period last year, he said.
Intermodal volume will develop in several areas. There already is an established trade between Mexico and the U.S. Southwest and Midwest along the KCS route involving automotive parts, consumer goods, electronics, appliances and industrial products such as pipe for the oil industry.
In addition to the natural growth in the U.S.-Mexico cross-border trade, KCS sees significant potential for diverting truck traffic to intermodal rail. Annual truck crossings at the busy Laredo gateway exceed 2.2 million, with rail’s share of the cross-border traffic in the low single-digits. Now that KCS has expanded and upgraded its intermodal plant, Ottensmeyer said a shift of some truck traffic to rail is likely.
KCS also expects a growing volume of international freight passing through Lazaro Cardenas to move on the KCS system across the U.S. border to Houston, Kansas City and other population centers in the region.
Although the total transit time to destinations such as Houston and Kansas City is longer compared to intermodal services through Southern California, a KCS study determined that with lower port and transportation costs in Mexico, shippers can save 15 to 20 percent on transportation spending. The savings are attractive to shippers of low-cost and mid-priced merchandise, Ottensmeyer said.
The heart of Kansas City’s inland port complex is KC SmartPort. There are four intermodal logistics parks in the complex: Northland Park served by Norfolk Southern Railway, BNSF Railway’s Logistics Park Kansas City, CenterPoint Intermodal served by KCS and the Kansas City airport facility of Trammel Crow.
Kansas City’s advantage in the intermodal marketplace is its central location served by Class I railroads in the east-west and north-south corridors, and its interstate highway connections to the major population centers in the Midwest, said Chris Gutierrez, president of KC SmartPort.
The location and intermodal rail connections to West Coast ports produce excellent transit times, Gutierrez said, noting the announcement in December of a new service by Horizon Lines with a 15-day transit time from Shanghai to Kansas City.
BNSF, which is building a large integrated intermodal logistics park on its Transcon line from Los Angeles-Long Beach, said Kansas City has one of the largest dray areas of any inland port. Goods coming into Kansas City serve a large portion of the Midwest, spokeswoman Krista York-Woolley said.
Kansas City also is making gains in the agricultural export market. DeLong Co. recently purchased an 8.7-acre site at BNSF’s Logistics Park Kansas City and will build a grain export facility, with the opening scheduled for 2013.