Industrial

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 500,000 sf.

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 says.

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 last year.

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 says.

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.

Inland Ports

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 under construction.

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."