Moving the Goods
Increased foreign trade begins a new day for warehouse and distribution development.
"America is a nation of distributors," says
Brian P. Hayes, CCIM, senior director of national accounts at Opus National
LLC, in Rosemont, Ill. "The macro trend driving [warehouse] spec
development is the greater distribution of consumer goods."
Even macro does not fully describe the source of today's
distribution chain - U.S. foreign trade growth. In 1970, the U.S. imported and
exported $85 billion of goods. In 2005, the U.S. traded that amount in the
first 12 days, reports the Center for Innovative Entrepreneurship. Most
imported merchandise arrives by ship from China, Korea, Japan, Australia,
Southeast Asia, Mexico, the Caribbean, and Latin and South America, in 20-foot
equivalent containers known as TEUs.
Forty-six million TEUs came through North American ports
in 2005, according to Ocean Shipping Consultants. That's a lot of shoes,
computers, and wine, among other items: Wal-Mart's 2005 delivery alone would
require a line of trucks 3,750 miles long, says Christopher L. Koch, president
and chief executive officer of the World Shipping Council in Washington, D.C.
The New Manufacturing
Today's big-box stores have given birth to big-box
warehouses. While the retail revolution has changed the landscape of America's
downtowns and suburbs, an equally profound revolution is occurring in U.S.
warehouse and distribution corridors. The properties aren't as pretty as
lifestyle centers, but they sure are big. "The standard bulk warehouse
used to be 120,000 square feet with 24-foot clear heights," says J.
Jeffrey Castell, CCIM, SIOR, senior vice president of industrial services with
Colliers Turley Martin Tucker in Indianapolis. "Today it's 400,000 sf to
800,000 sf with 36-foot heights." At midyear, Indianapolis had added six new bulk warehouses larger than
It's no surprise that big warehouses are crowding the
western port cities and established inland distribution hubs. But big warehouses
are popping up in second- and third-tier cities such as Louisville, Ky.,
Columbus, Ohio, Denver, Jacksonville, Fla., and St. Louis. In Kansas City, Opus
is building a 750,000-sf project where the largest existing facility is
probably around 300,000 sf, Hayes says.
The big and bigger trend marks a change in the way
corporate America thinks about distribution. "It reflects the reworking of
supply lines," Hayes says. Retailers and other end-users are searching for
ways to avoid port and highway congestion and find the fastest, cheapest way to
move their goods.
What's clear as companies seek efficient distribution is
that one route does not serve all. A whole new logistics industry has sprung up
to help navigate the path from port to store. And increasingly it is opening
opportunities in smaller markets that invest in infrastructure and intermodal
capabilities to attract third-party logistics companies, known as 3PLs, that
often handle warehouse and distribution.
Some experts tout logistics as the new manufacturing - a
source of jobs for communities still smarting from overseas outsourcing. All
over America, economic development councils are pulling out maps to see where
they fit into the new distribution routes. Lack of a port is not necessarily a detriment
today. Good highway access is a must, but given the high cost of gasoline, rail
access is taking on increasing importance. Being situated on the North American
Free Trade Agreement corridor may be of greater importance down the road, but
right now being within a day's drive of 8 million or more consumers may be the
key to W&D growth.
Increased demand and a healthy investment market are
fueling a national spec warehouse building boom. Of the 126 million sf of new
warehouse space coming online this year, only 40 percent is expected to be
preleased, according to Marcus & Millichap, a big drop from the 90 percent
preleasing of 2002 to 2004. But capital keeps chasing more commercial real
estate product, and although glitzy retail has been the belle of the ball for a
couple of years, investors now are asking Plain Jane industrial to take a few
spins around the dance floor. In particular, institutional investors are
kicking up their heels, accounting for more than half of all warehouse deals
this year, up from 20 percent, Marcus & Millichap says.
Chances are the dance card will fill up for at least the
next year. National demand, particularly for large warehouse space, is expected
to outpace supply until 2008, when the economy and international trade may subside
a bit, RREFF says. Nationally warehouse rents should increase about 3.5 percent
to $5.10 per sf. In addition, new product demand is rendering older warehouse
stock obsolete and in some very tight markets, ready for redevelopment. And as
smaller markets close to major distribution routes figure out their place in
the logistics game, bigger warehouses soon may appear on their horizons.
The Land Grab
The move to bigger warehouses is not without challenges.
"Bigger footprints mean more land absorbed with each development,"
Castell says. In Indianapolis, which has a good supply of reasonably priced land,
new development absorbs "40, 50, 60 acres at a time, so developers are
looking farther out."
Even in a small market like Lakeland, Fla., spec warehouse
developer Greg Ruthven, CCIM, president of The Ruthvens, is competing with real
estate investment trusts and residential developers for land. "They are
driving up the cost of land because they use such huge tracts of it. Flagler
[REIT] just bought 600 acres."
Ruthven builds and leases warehouses in the 60,000 sf to
100,000 sf range and plans to develop about 500,000 sf in the next two years.
Lakeland's location halfway between Tampa and Orlando, Fla., on the Interstate
4 corridor puts it within 100 miles of 8 million people. Typical leases range
from 12,000 sf to 45,000 sf, and nearly 1 million sf is under development as of
midyear, according to Cushman & Wakefield. And building and lease sizes are
creeping up: Southern Wines & Spirits built a 650,000-sf facility and Home
Depot Supply leased 55 percent of a 400,000-sf building.
Florida's growing population is a double-edged sword: It
creates greater density for distribution but it also strains resources.
"Water and sewers are two big problems," Ruthven says. "Nobody
expected the growth to happen as fast as it did, and as a result, utilities
have not kept up with the growth. Land is harder to find, harder to permit, and
impact fees have gone up tremendously."
Hayes sees similar challenges throughout the country.
"Opus is [building] in 28 cities, including Kansas City, Columbus,
Atlanta, and Indianapolis. Each one has a different dynamic but the biggest
issues overall are land and entitlement costs: trying to find bigger acreage
and reining in the cost of the time and effort it takes to build." Not
only is the actual product larger, but users want more land either for future
expansion or truck parking. "Because of the new rules [limiting drive
times] for truckers, developers have to provide additional land for truck
parking," he says.
But new spec warehouse development keeps Indianapolis in
the game. "Part of the demand is driven by corporate America's short
timeline," Castell says. "When they decide to execute a project, they
want to be in it in 90 to 120 days. For that reason, with its ready supply of
product, Indianapolis is always shortlisted as a possible location. We compete
favorably with other markets in occupancy costs and labor costs and our central
location and highway infrastructure allow trucks to reach two-thirds of the
U.S. in a day's drive." While Indianapolis' new warehouse construction has
almost doubled last year's total, net absorption at midyear 2006 already
matched 2005's year-end figure.
Rail access also comes up in warehouse discussions.
"It's more of a potential issue," Castell says. "Right now, of
the 20 million sf of new construction in the Plainfield submarket, only one
building is rail served. So it's not critical today, but it has the potential
to be critical down the road."
But up the road from Lakeland, little Haines City, Fla.,
decided five years ago to spend $5.5 million to build a railroad line after
losing its citrus groves to a frost. This year, REIT First Industrial bought
165 acres in Haines City to build a 1.6 million-sf industrial park. The site
was chosen because of its rail access.
West Coast Squeeze
Only an ocean ride away from China, "the Los
Angeles/Long Beach ports are the two busiest ports in the United States,"
says Michael J. Bouma, SIOR, senior vice president of Voit Commercial
Brokerage's Anaheim office. Not surprisingly, Los Angles County has the
tightest W&D market in the country, with a vacancy rate of 1.9 percent as
of 2Q06, according to Grubb & Ellis. Average Los Angeles County W&D
rental rates increased 11 percent over last year. And rates are expected to
increase further, given the current supply and demand factors.
Despite higher rents, more companies are leasing instead
of buying, Bouma says. "Prior to 2005, companies wanted to purchase their
buildings, but now companies may be unable or unwilling to purchase buildings
at today's higher prices and interest rates, plus they may be disillusioned
with the lack of alternatives for sale."
The market is running out of land. "Most of the
current development is on previously developed sites," Bouma says. Another
factor is increased competition from residential builders: "Much of the
limited industrial zoned or redevelopment land is being re-entitled by
residential developers to high-density residential in areas such as Anaheim's
Platinum Triangle, the Irvine Airport, and Costa Mesa."
East of Los Angeles County is the Inland Empire in San
Bernardino and Riverside counties, home to the largest explosion of W&D
spec development in the country. Comprised of about 49 cities clustered near
Interstates 15 and 10, the two principal trucking routes through the San
Bernardino Mountains, the Inland Empire is "dominated by big-box retail
distribution tenants," says James V. Camp, senior vice president of
development and acquisitions for Voit Development Co. in Los Angeles. Once the
home of cheap available land, the Inland Empire now has more than 290 million
sf of W&D product, with another 19 million sf under construction as of
2Q06. Still, the W&D vacancy rate is 3.8 percent.
The Inland Empire's expansion capabilities and
competitive rents have attracted tenants from the Los Angeles/Long Beach port
area. However, such decisions are not based solely on rent. The farther
companies are from the port, the more it costs to transport containers. With
the western edge of the Inland Empire built out, developers are moving
eastward. The question is, how far east of the ports can tenants locate before
any rental savings are eaten up by higher fuel and drayage costs?
East Coast Teardowns
The same question is causing companies to rethink their
East Coast warehouse locations, says Brian S. Knowles, CCIM, principal of
industrial services with Staubach's REALogistics in Murray Hill, N.J.
"Despite higher rents, companies are moving back closer to the ports
because they can save in other ways - in time and other costs, so higher rents
are not the only deciding factor. Rent just becomes a business plan item,
because of the benefits accrued by being 20 miles closer to the ports," he
Northern New Jersey's industrial market has about 1
billion sf of space up and down the turnpike exits, but current interest is on
redeveloping port infill sites. The ports of New York and New Jersey rank just
below Los Angeles and Long Beach, handling about $132 billion of cargo in 2005.
Asia is the port's largest customer, with a 17 percent increase in Asian cargo
The two states' economic development councils have
created the Portsfields Initiative to identify infill sites that can support
redevelopment into large W&D. Although 20 sites have been identified,
Knowles says that many of them have environmental problems and soft soil, as
well as outmoded industrial buildings. For Port District properties - all
within a 25-mile radius of the Statue of Liberty - developers receive $250,000
for feasibility studies, as well as low interest bond financing and help in
assembling land and securing permits. Already 17 sites ranging from 3.6 million
sf to 406,000 sf are being developed, almost all of it speculative. And they
are paying a premium for the location. "In the port areas, land is going
for $400,000 to $1 million an acre. Investors and developers are trying to
acquire sites based on the rents several years down the road," Knowles
Further south, Jacksonville, Fla., is hoping a new
contract with Japanese shipping line Mitsui will catapult it into the fast lane
of Asian shipping, says Walter Reed, CCIM, principal with Commercial Florida
Realty. "The city bought about 500 acres on the water about 10 to 12 miles
from the river's mouth. Mitsui has signed a 30-year lease on 150 acres to 200
acres to develop its first East Coast container port, mainly because it's hard
to find that much land on a deep water port," he says.
Currently 75 percent of Jacksonville's trade comes from
the Caribbean and Latin America, but Mitsui's lease is putting the city on
national retailers' radar. Michael's Crafts developed a half-million sf
distribution center and the grocer BG's Warehouse has taken another half
million, Reed says. Auto parts and building supplies are common warehouse
tenants, and recently a records management and data protection company leased
100,000 sf in the area. Currently Jacksonville has more than 76 million sf of
warehouse space, but that figure should double by the time the Mitsui facility
opens in 1Q08, Reed says.
Touting itself as the next great trading port, Kansas
City will open the first Mexican customs clearance facility on U.S. soil next
year, the first step in the NAFTA trade corridor. The city signed agreements
with Mexican port cities Manzanillo, Colima, and Lazaro Cardenas, Michoacán, to
facilitate rail transportation of Asian shipping containers. Containers can be
offloaded in Mexico onto rail cars and sent to Kansas City for truck
distribution throughout the U.S. - a less expensive route than going through
Long Beach ports. In addition Kansas City is working on agreements with
Canadian cities Winnipeg and Montreal to continue the trade corridor northward.
The result has been a boom in Kansas City W&D construction in the past two
years. Currently there are 17 distribution facilities larger than 400,000 sf
Denver hopes to benefit from the development of new
logistics routes, says Steve Poole, CCIM, a senior associate with Grubb &
Ellis in Denver. Already big-box distribution centers are springing up in the
Airport/Montbello submarket, where land is available. "Right now there is
about 1 million sf of spec development coming out of the ground or planned.
Larger players such as ProLogis, Majestic Realty, and Panattoni Development Co.
are out by the airport. Home Depot has leased about 400,000 sf in the airport
area, and Lowe's also is there. With Interstate 70 access, Denver should become
a trucking distribution center along the NAFTA corridor," he says.
Denver has a strong supply of older industrial product in
the central submarket that still is functional and used locally, but may be
ripe for development as time goes on. "The challenge is how to tear down
and redevelop when the cost of the land is somewhat prohibitive," Poole
says. Demand continues for larger tracts of land, leading to infill development
such as the Panattoni redevelopment of the old Samonsite headquarters. Options
for users seeking more than 100,000 sf are limited in the market; however, the
1.5 million sf of industrial development planned for the next year along the
Interstate 10 corridor may change that condition.
To remain competitive in the global supply chain, the
U.S. must develop new port facilities, logistics analysts say. Container
shipping traffic is growing 10 percent annually, yet, as Washington Post
columnist Steven Pearlstein pointed out, "China is building close to 100
new container-loading berths, each capable of shipping about 250,000 containers a
year, most of them to the United States. Meanwhile, five berths are planned for
the West Coast to receive them. Something's got to give."