When developers of industrial real estate make a pitch to potential clients, they want to talk to someone in charge of transportation logistics.
“Decisions are being based now on logistics,” Michael Mullen, CEO of CenterPoint Properties, told The Journal of Commerce’s inaugural Inland Ports Conference in Chicago last month.
Certainly, retailers and other shippers consider many factors — from location and cost of labor and land, to lease rates and tax incentives — when they’re in the market to build or lease a distribution facility. Traditionally, decisions based on those criteria were made by a company’s real estate division.
But with so much sourcing occurring in Asia, the cost of transportation from the overseas plant to destination stores now is the determining factor in the site selection process.
Lakeland, Fla.-based third-party logistics provider Saddle Creek surveyed clients about the factors they consider in site selection for their warehouse facilities. The cost of transportation for moving merchandise to the facility, and the transportation costs from the facility to customers or stores were easily the chief factors in the decision-making process, said Michael DelBovo, senior vice president.
The trend is to build distribution facilities as close as possible to customers, while minimizing the cost of moving DC-destined merchandise from ports of entry. The number of import distribution centers a company has is closely aligned with the company’s revenue, Saddle Creek said.
Smaller importers or retailers normally have one import distribution center, usually in the center of the country and within a day’s truck haul from the bulk of its customers. Larger importers typically have two distribution centers, one on the West Coast and the other in the center of the country. The largest importers usually add a third import DC on the East Coast, DelBovo said.
The challenge in measuring transportation costs is to have up-to-date information based on factors such as ocean freight rates, vessel slow-steaming, the cost of diesel fuel and inventory carrying costs, all of which are moving targets. At any given time, minimizing the cost in one area may result in increasing the cost in another.
“It’s all about managing trade-offs,” said Rich Thompson, executive vice president of Chicago-based real estate services company Jones Lang LaSalle Americas.
A spike in oil prices, for example, will result in higher diesel prices, driving up the cost of delivering merchandise from an import or regional DC to the stores and seemingly dictating a need for multiple distribution facilities near customers or stores.
But high oil prices also increase costs for bunker fuel, and ocean carriers are responding by slow-steaming their vessels. That adds several days to the ocean voyage from Asia to the East Coast, increasing the inventory carrying costs for high-value merchandise. This might call for a strategy of shipping cargo through the West Coast and sending it via stacktrain to the eastern half of the country.
That appears to be happening. The use of intermodal rail has increased during the oil price climb, for domestic as well as international shipments. Diversion of freight from over-the-road trucking to intermodal rail, with a short truck haul to the destination, is a growing trend.
Inland ports are growing more popular with big-box retailers and 3PLs. Chicago is the nation’s largest inland port, although locations such as Dallas, Kansas City, Ohio and Atlanta also are important regional inland ports.
The defining features of inland ports are excellent intermodal rail service to the park, efficient handling of containers at the rail hubs, and an assortment of logistics providers to transload or transship the containers from the inland port to regional distribution facilities or directly to stores.
Until now, most of the action at inland ports involved handling marine containers or domestic 53-foot containers shipped by rail from West Coast ports. With last fall’s opening of Norfolk Southern Railway’s Heartland Corridor from the Virginia ports to the Ohio Valley and Chicago, and construction under way of CSX’s National Gateway project from Virginia to Ohio and Chicago, East Coast ports are emerging as gateways for inland ports.
Construction of new warehouses languished during the 2008-09 economic recession. Building has resumed, with big-box facilities of 500,000 square feet and larger being in highest demand, said William Frain, senior vice president of CB Richard Ellis’s industrial services group. Large, efficient distribution facilities located close to the end customers cut down on transportation costs.
“The focus is on transportation because that’s the biggest bucket,” Frain said.
The largest inland ports still will be located in major markets such as Chicago because retailers and railroads seek density. Secondary markets have potential if they are located on rail lines and are able to attract a large anchor tenant, said Michael Berry, president of Hillwood Properties in Dallas. Also helpful is attracting two-way hauls, such as imported merchandise inbound and agricultural exports outbound.
Local governments offer tax incentives to attract import and regional distribution facilities because warehouse jobs are considered good-paying positions, said Tim Feester, senior vice president and director of global logistics at Grubb & Ellis. He noted, however, site selectors generally have a particular region in mind, so incentives will help only if the retailer is interested in that region.
Because transportation is the highest cost factor in supply chain logistics, and the price of diesel is expected to remain high, industrial real estate developments must have access to competitive intermodal rail service, and the facilities should be close to population centers. If proposed changes in the federal hours-of-service restrictions on truckers become law, being close to the end market will become even more important; a day’s drive will be reduced to about 450 miles from 500 miles now, Feester said.