December 17, 2007

Inland intermodal hub trend driven by numerous factors

Paul Scott Abbott

Driven by port-area congestion, high energy and drayage costs, US heartland labor availability and other factors, the trend toward inland intermodal cargo hubs close to the nation’s geographic center is accelerating.

Nowhere is this trend more evident than the Kansas City area, which not only provides a central location between East and West coasts but also is situated in the middle of increasingly important north-south rail links.

“There seem to be a lot of synergies for us right now, said Chris Gutierrez, president of Kansas City SmartPort, a not-for-profit arm of the Kansas City Area Development Council focusing upon growing the area’s role as a cutting-edge, high-tech inland cargo hub.

Indeed, Kansas City has a long history as a transportation locus, dating back to its days as a nineteenth-century trading post and site of the first permanent rail crossing over the Missouri River, with the construction in the 1860s of the Hannibal Bridge.

Rail continues to be a key component in the commercial role of Kansas City, which is served by five major railroads and is the leading US rail hub in terms of annual cargo tonnage. It also is situated at the convergence of three interstate highways – eastwest I-70 and north-south I-29 and I-35 – soon to be joined by another north-south corridor, I-49, and has more than 10,000 acres of foreign-trade zone space.

For shippers not wanting to depend upon a single seaport for entry into the US market, Kansas City affords ready rail connections to US Atlantic, Pacific and Gulf coasts, as well as to emerging non-US ports, such as those of Prince Rupert, British Columbus, and Lazaro Cardenas, on Mexico’s Pacific coast.

“It’s really starting to resonate as people think about spreading out risk,” Gutierrez commented, adding that cargo containers entering Kansas City by rail from any number of directions can be then delivered by truck to more than half the US population within a day.

Developers of intermodal logistics parks and distribution centers clearly are concurring with Gutierrez, speculatively building sprawling facilities along rail and roadway corridors in the Kansas City area.

Oak Brook, IL-based CenterPoint Properties, which in 2002 opened the first phase of a 2,200-acre intermodal center at the former Juliet Arsenal site in Elwood, IL, is a leader in the Kansas City initiative. Like that Illinois site, which features an expansive Burlington Northern Santa Fe Railway intermodal yard, CenterPoint’s Kansas City project is looking to rail as a crucial element.

CenterPoint is partnering with the Kansas City Southern Railway Co. to develop a 1,300-acre intermodal logistics park at a south Kansas City, MO, site, the majority of which was a US Air Force base.

“Everyone’s realizing the benefits of rail,” said Fred Reynolds, CenterPoint’s senior vice president of development, who noted that inland rail movements  have far lower energy costs than those by truck. The KCS main line that serves the property links the site to Lazaro Cardenas.

Matthew Tramel, CenterPoint’s manager of corporate affairs and marketing, commented, “The traffic congestion on the West Coast ports is driving a lot of this sea change about where you might locate some of these facilities.”

William F. Crandall, president of The Allen Group-Kansas City, whose firm is developing a 1,000-acre logistics park in conjunction with the BNSF some 25 miles south of Kansas City, said the adjacency to rail facilities can lead to shipper savings in drayage expenses so significant that they may even offset the cost of distribution center rental.

Of the central US location of logistics parks, Crandall said, “It’s almost solely a result of the consumer buying patterns, which are dependent on products made in the Pacific Rim. The most costefficient way to ship these products inland is by rail to the Midwest.”

The Allen Group also is developing the Dallas Logistics Hub, adjacent to the Union Pacific Railroad’s Southern Dallas Intermodal Terminal, a potential BNSF intermodal facility, four major highways and an airport. At 6,000 acres, the Texas project is being billed as the largest new logistics park project in North America.

David C. Hinchman, first vice president in the Kansas City office of CB Richard Ellis Industrial Properties, whose firm is marketing on behalf of speculative developer Trannell Crow Co. the 800-acre KCI Intermodal Business Centre adjacent to Kansas City International Airport, said of his hometown, “We’re right in the center of everything, we have excellent labor and people really like being in Kansas City.” Hinchman noted that, while in the 1990s, logistics hub development was burgeoning in such markets at Memphis and Indianapolis, attention now is increasingly shifting to Kansas City.

“It’s a combination of many factors that are coming together,” Hinchman said, citing congestion in other markets, Kansas City’s superb highway and rail infrastructures and changes in trucking regulations that are further limiting continuous road hours for drivers. Containers moved by rail also are not subject to highway weight limitations.

Companies that recently have built major distribution centers in the Kansas City area include Anaheim, CA-based Pacific Sunwear (with a 400,000-square-foot facility already slated for a doubling in capacity), Medford, OR-based Musician’s Friend, Inc. (with a 700,000-square-foot facility soon to expand to one million square feet) and Dallas-based Kimberly-Clark Corp. (with a 500,000-square-foot regional distribution center).

Of course, Kansas City is by no means the only place where inland intermodal hubs are being developed, nor is the concept entirely new. Some two decades ago, port authorities such as those in North Carolina and Virginia developed intermodal facilities a couple hundred miles inland from their busy containerports.

Will Friedman, a former executive director of the Ports of Indiana who now serves as vice president for leasing and supply chain for Indianapolis-based Duke Realty Corp., said he sees the trend toward inland ports as just beginning.

“It is hard to find land close to ports,” Friedman said. “And, if land is available close to ports, it will cost more than land at an inland location.”

Friedman, whose firm is engaged as master developer of the Rickenbacker Global Logistics Park on a former US Air Force base property in Columbus, Ohio, said the combination of on-dock rail capability at a seaport with the ability to run mile-long stack trains to an inland rail facility can make for “a pretty attractive package.”

The Columbus logistics park, some 600 miles inland from Norfolk, expects to benefit from the Norfolk Southern Corp.’s recently commenced Heartland Corridor project to raise tunnel roofs to accommodate double-stack trains.

So long as shippers continue to look to rail as a primary inland transportation solution, inland intermodal facilities and distribution centers should continue to flourish, saving shippers (and ultimately consumers) money while relieving coastal congestion and generating jobs in America’s heartland.

December 10, 2007

Logistics Gets Intermodal

By William Hoffman

The flood of containerized imports hitting U.S. shores from Asia is redrawing the country’s logistics facilities map, driving a boom in intermodal centers and inland hubs that developers say will last beyond this year’s slowing economy.

“The intermodal is the big paradigm shift, the realization that (global) trade is increasing and with that, intermodal is increasing, and that’s creating the development of these new logistics hubs,” said Richard Allen, CEO of industrial real estate developer The Allen Group.

As long as goods can be manufactured more cheaply overseas than in destination consumer countries such as the United States, real estate developers say demand for master-planned logistics hubs will balloon. “As long as populations grow and world economic vitality continues to expand, that will continue,” Allen said. “A slowdown in the current container traffic and trading volumes is not going to stop the larger trends.”

Logistics hubs have been around for 15 years, but they’ve only started to come into their own in recent years as container traffic from Asia boomed into West Coast ports. Approximately 11.7 million containers and trailers traveled U.S. railroads in 2005, compared with 6.2 million in 1990, according to the 2007 study “Integated Logistics Centers” by the Heitman real estate investment management firm.

The report suggests the impact of that enormous volume is doing more than pushing boxes onto railroads. The fat pipelines are attracting more demands for more specialized handling that include the more sophisticated logistics services that work in concert with intermodal transport.

The intermodal facility takes advantage of lower fuel, transport and labor costs available through rail providers and supply chain savings made from minimizing the unloading and repacking of containers as they proceed from manufacturing source to retail destination.

More than just a collection of warehouses or distribution centers, logistics hubs are masterplanned communities providing multiple modes of incoming and outbound transportation as well as accessible infrastructure, continuing development and services. “We’re almost like city hall,” said David Pelletier, director of communications for developer Hillwood. “If (tenants) are having a problem with their streets they come to us and then we approach the municipal and other authorities.”

“We feel with our Alliance Development we sort of developed the prototype of a logistics hub,” said Pelletier. Alliance, north of Fort Worth, Texas, opened in 1994 boasting a cargo-focused airport with an adjacent BNSF intermodal facility.

It was the intermodal business, rather than the airport, that helped build Alliance’s fortunes, and which developers say is the key to logistics hub success.

“Let’s face it: if you are in a 1 million square foot (distribution) facility and getting 30,000 containers a year, the drayage from six, eight or 10 miles away … is probably greater than or equal to the rent,” Allen said. “The point is, you can’t afford not to be adjacent to an intermodal facility if you’re receiving a great amount of containers.”

Most logistics hubs are near or have on-site intermodal facilities; with space at a premium at so many U.S. ocean ports, containerized cargo often goes direct from the container ship onto trains for processing elsewhere. Logistics consulting firm Tioga Group estimated 42 percent of containers arriving at the ports of Los Angeles and Long Beach is distributed this way to the rest of the country.

However, 58 percent is processed through distribution centers in Southern California, such as the ones at Tejon Industrial Complex, a masterplanned development 19 miles from the intermodal site. Barry Hibbard, vice president of commercial and industrial development at Tejon, said his hub’s proximity to West Coast consumer markets means it does not need as much intermodal service as inland ports.

“I think it depends on who you’re trying to serve and where you’re located,” Hibbard said.

Hibbard said corporate emphasis on sustainable development will further propel enthusiasm for large, master-planned logistics hubs.

“If you’re doing a one-off development, you could never afford the time to figure this out, or raise the money to do it,” he said.

“This is why green initiatives will push toward master planning, because you have to have a meaningful scale to afford to do these broader sustainable developments.”

For most users and developers, however, the key attraction to a logistics hub is a nearby intermodal facility, which Allen characterized as “oceanfront property.”

“Large distributors of consumer goods want to be close to the intermodal,” he said.

Winter 2007

Alternate Distribution Locations Serving New Routes from
Here to There

By Ellen Rand

Savannah, Dallas, Kansas City, Columbus. These may not be names that immediately leap to mind as major distribution centers, but maybe they should. Changes in goods movement are prompting big importers and third-party logistics companies to rethink their strategies – with the goal of cutting costs and time as well as boosting efficiency and easing the transport of goods from here to there. Hand in hand with this trend is the growing role of railroads, as companies seek to avoid the costs and congestion of truck traffic over roads that are straining under the current pressure of commerce. Thus, inland ports with intermodal facilities continue to be rising stars.

The Center for Transportation Research at the University of Texas at Austin defines an inland port as a “site located away from traditional land, air and coastal borders with the vision to facilitate and process international trade through strategic investment in multi-modal transportation assets and by promoting value-added services as goods move through the supply chain.” An intermodal facility consists of the movement of entire truck trailers and shipping containers by both highway and rail, using trains for long haul movement and trucks for local pick up and delivery. Such companies as Wal-Mart, Home Depot, Ford, Honda, The Limited, UPS and the U.S. Postal Service are among the many large users of intermodal transportation. Major trucking companies such as J. B. Hunt and Schneider are also large users, as are shipping companies calling at ports on both coasts.

Volume on the Rise

According to the American Association of Port Authorities (AAPA), U.S. ports and waterways handle more than two billion tons of domestic and import/export cargo annually. While the volume has experienced a significant hiccup this year, with a dropoff in housing-related, container-shipped products – such as furniture, lighting fixtures, flooring and tile — by 2020, the total volume of cargo shipped by water is expected to be double that of 2001 volumes. (According to Curtis Spencer, president of the consulting firm IMS Worldwide, 2007 will prove to be flat in growth of container traffic. The average annual increase has been seven and a half to nine percent in North America, but Spencer predicted it would be two percent on the West Coast and five percent on the East Coast.)

Spencer remarked that “Ships have gotten faster, but the supply chain has gotten longer and more complex. Our port capacity is what we have to deal with.” For example, there is little room for additional distribution facilities in Los Angeles.

The AAPA defines TEU (or “Twenty-Foot Equivalent Unit) as a standard linear measurement used in quantifying container traffic flows. As an example, one 20-foot long container equals one TEU while one 40-foot container equals two TEUs.

Assuming seven percent growth in container traffic in U.S. ports, there could be an increase from 35 million TEU’s shipped in 2006 to 90 million in 2020. Complicating the picture, transportation workers will need ID cards in 2008 and “30 to 40 percent of drayage truckers in Los Angeles won’t qualify,” he said. Moreover, thanks to the Safe Port Act of 2006, there will be 10 new data elements related to container-shipped goods. That will slow down the process of getting goods from here to there. Spencer also noted that rail infrastructure is growing faster than road development, with investments of $8 to $12 billion a year. Alternative routes will include shipping to the East Coast through the Panama Canal. The role of the Suez Canal will expand as well. Not to be ignored: a rail line from Prince Rupert, Canada to Chicago. As Spencer pointed out, the CN railroad can put an intermodal facility anywhere along the line in Chicago. The western route Punta Colonet in Mexico is expected to make its debut as a distribution hub in 2015, with service from Union Pacific and BNSX followed by Lazaro Cardenas, a Mexico-to-Kansas City connection. Those intent on staying current on goods movement trends would be well advised to pay attention to what such major companies as DHL/Exel, UPS and FedEx are planning, since they “would be number two, three and four after Wal-Mart if their [shipping] numbers were counted,” he said, adding that Wal-Mart accounts for one million TEU’s annually.

“The real value proposition is knowing where the box gets opened, where you build the building,” he said. According to Spencer, the “hottest new inland ports” are located in California’s Inland Empire; Dallas; Kansas City; Chicago; Memphis; Columbus; Harrisburg; and Front Royal, Virginia. The growth, unsurprisingly, matches up very closely with projected hot spots for population growth over the next two decades.

Ask the Logistics Experts

Phil Trabulsi, senior director, DHL International Supply Chain advised industrial real estate owners and developers that “Your customer is our customer.” He remarked that DHL’s customers believe they’re paying too much for the supply chain and not getting the service they should; all are seeking ways to improve. Trabulsi advised that there is no “one size fits all” answer for importers, but rather, a combination of traditional channels and innovative channels for distribution. Retailers are big users of innovative supply chain ideas, he said. “If you can move a container for $1,000 less per container, that’s a million dollars on 1,000 containers,” significant if you are a 10,000-container shipper.

One supply chain idea that makes industrial real estate owners nervous is distribution center bypass. In a case study example, Trabulsi showed that it takes 56 days for products originating in China to get to a North American consolidation center, a regional distributor and then to stores. However, there is another option that only takes 30 days. The North American distribution center can be bypassed, with products originating in China, going to a China consolidation center (where labor costs are dramatically lower than they are in the U.S.), and from there directly to stores. According to Trabulsi, fewer than five percent of DHL’s customers do distribution center bypass. Plus, deconsolidation centers are growing because 40 percent of TEUs are mixed.

Among the emerging programs DHL/Exel has done is Parcel Direct. For a specialty manufacturer of porcelain collectibles, for example, store cartons were built in Asia, with a UPS label in the carton. Shipping goes to two parcel hubs, then to stores. “The whole operation is done in China,” he said.

Retailers are also leveraging vendors to own inventory. Product is manufactured and sent directly to a vendor-managed distribution center. In East Coast and West Coast Flow Centers, shippers make decisions about where to send product while it is in transit, about five days before arrival. “It’s like a valve,” he said. What enables this type of operation is information technology. “You know exactly what’s on the ship. We see this becoming more important as retailer supply chains.

“Importers will continue to try to find the right combination of distribution channels in order to hold down costs and maintain high service levels,” he went on, adding that 60 to 70 percent will continue to flow through traditional distribution channels. He also noted that “our customers hire MBAs to understand how their cost elements match up with their customers.” Increasingly, the lines between skill sets among real estate developers, shippers and logistics are blurring, as pros from one discipline are hired by another to study and improve goods movement.

A Look at Savannah

The state of Georgia is the second largest importer and exporter of goods to and from China on the U.S. East Coast. Currently Savannah, number five of the top nine ports in the U.S., is the fastest growing on a percentage basis. As Sam O’Briant, executive vice president, southeast region, Duke Realty Corporation, pointed out, its Interstate system is an advantage. There are two major rail carriers plus an abundance of greenfield land not surrounded by the city.

The Port handled 2.3 million TEUs in fiscal year 2007. Savannah is expected to handle more than 6.5 million by 2017. There are intermodal rail connections for CSX and Norfolk Southern. Expansion projects include a new intermodal yard and four new super post-Panamax cranes by 2009.

The Panama Canal’s expansion, slated to be completed by 2015, will bring a new mega-sized class of ship to Savannah. How large is large? Here is an estimate from the Georgia Ports Authority: one 10,000 TEU vessel carrying capacity equals 188,000 foot double-stack trains, 5,800 trucks or 570 Boeing 747 cargo liners. O’Briant noted that several national developers have planted their flags in the Savannah market. Duke, which purchased a 4.5 millionsquare- foot industrial portfolio in Savannah, typically caters to retailers who have thin margins, and therefore appreciate the lower drayage costs associated with a location closer to the port. Savannah has also attracted logistics companies that work with shipping companies like Maersk, transferring goods to trains or trucks and continuing on to Atlanta. Duke, like most other companies involved in inland port real estate, follow decisions by shipping companies and railroads to see where they are investing. “It’s a function of population growth,” he said.

Everything’s Up to Date in Dallas and Kansas City

Richard Allen, CEO of the Allen Group, gave this company’s perspective on the “new paradigm” in world trade, intermodals and logistics at development ’07. The company is developer of four “logistics parks:” Dallas Logistics Hub on 6,000 acres in Dallas; Logistics Park on 1,000 acres in Gardner, Kansas; MidState 99 Distribution Center on 480 acres in Visalia and International Trade & Transportation Center (ITTC) on 700 acres in Shafter, California. The MidState 99 Distribution Center has eight existing buildings totaling over two million square feet of space, all of which are 100 percent occupied. Two new buildings are underway.

Allen has been involved in the Central Valley since the mid-‘90s. “Third-tier markets are wonderful if you buy for the right reasons,” he said. “If you control the land, you’ll control the market or the deal.” Visalia offered inexpensive land and labor plus next day UPS to 95 percent of the state.

Allen’s “aha!” moment about logistics came in 1997, when he visited the Alliance development in Ft. Worth and learned that the driver of that development’s success is its intermodal facility.

“Canada, Mexico and China were our primary trading partners in ’06; by 2020 China will be our number one trading partner,” Allen said. ITTC got Allen started in intermodalism, featuring three miles of BNSF railroad track, two-day trucking to 65 million people and a faster drive from the Port of Los Angeles than to the Inland Empire. From a real estate development perspective, Allen believes that changes in goods movement will influence where distribution centers should be built. “You want to be at the nexus of rail lines,” he said.

Allen had learned about a new Union Pacific (UP) intermodal facility being built south of Dallas in 2003. The company acquired large tracts of land around it over a three-year period – Allen refers to it as “oceanfront property.” The resultant Dallas Logistics Hub is being developed on 6,000 acres with two intermodal facilities. The nearby airport will be turned into a cargo airport. The Hub is also a key component of the NAFTA infrastructure and will serve as a major inland port by receiving products from the Ports of Los Angles, Long Beach, Houston, and the new deep-water ports in western Mexico for regional and national distribution.

“The savings [for tenants] are phenomenal,” he said. The company has developed a Drayage and Rental Equivalency Calculator that shows those substantial savings to prospective tenants. In a one millionsquare-foot facility that accommodates 15,000 containers per year, for example, it would cost $100 per container to dray to Allen’s container park versus going farther north in Dallas for $228. “So the north Dallas lease rate has to be lower to compete with us,” he said. Total per square foot savings for the tenant at the Allen facility: $1.92.

With the aim of improving the flow of goods between Mexico and the United States, Allen has partnered with a Mexican inland port developer to promote a new trade corridor. The agreement links Interpuerto, a Monterrey-Saltillo, Mexico-based logistics hub, and the Dallas Logistics Hub, a 6,000- acre logistics park currently being developed by San Diego-based The Allen Group. The connection of the two hubs is part of a larger movement to improve cross-border trade by expanding infrastructure to boost supply chain efficiency. The partners expect the new corridor to improve efficiency, speed and security, as well as the ability for the two hubs to compete on an international level. By adding a customs pre-clearance zone, imports can be cleared before leaving the port of origin, which should expedite shipment flow and provide additional security for companies operating within the two hubs.

Meanwhile in Kansas City, The Allen Group and BNSF Railway Company (BNSF) finalized the land purchase rights and related pre-development agreements for the development of the Logistics Park in Kansas City. BNSF currently owns 997 acres, with 418 acres dedicated to a new BNSF intermodal facility expected to open in 2009.

New Intermodal Center for Columbus

The major news in Columbus is that the Columbus Regional Airport Authority has partnered with Norfolk Southern Corporation to create an intermodal facility adjacent to Rickenbacker International Airport. The new Rickenbacker Intermodal Terminal is expected to be operational in early 2008. According to the Airport Authority, developing a new rail/truck intermodal facility at Rickenbacker is vital to Central Ohio remaining an advanced logistics center and a key player in global trade. The facility will be used for the interchange of shipping containers between trains and trucks.

Existing facilities are used to the fullest extent and the Rickenbacker area’s current intermodal facility, Discovery Park, has long surpassed capacity. Norfolk Southern has seen an approximate 15 percent increase in demand for intermodal services year-over-year for the past several years. Because Discovery Park is at capacity, Norfolk Southern is turning away business from the Central Ohio region. The new intermodal facility at Rickenbacker will provide increased capacity and improved levels of service, thereby allowing Central Ohio to regain and expand shipping and economic opportunities, including job creation and other public benefits.

Fall 2007

The Big D’s Big Hub

By Jennifer LeClaire

The Dallas Logistics Hub is open for business, and its first two buildings are under construction. The Hub boasts 6,000 acres master-planned for the development of 60 million square feet of distribution, manufacturing, office and retail. The new industrial buildings include a 635,000-squarefoot warehouse facility. Both will be available for occupancy in April 2008, marking the beginning of a new logistics era in Dallas-Fort Worth.

The Hub has the potential to be the first logistics park with two intermodal facilities serviced by the two largest freight carriers in the United States.

Union Pacific Railroad currently operates a 360,000 lift-per year intermodal terminal adjacent to the Hub, with BNSF Railway Co. evaluating a potential site on the western side of the project. The Hub is slated to become one of the biggest economic engines for North Texas. It is projected to create approximately 31,000 direct and 32,000 indirect jobs and increase the tax base for the communities of Dallas, Lancaster, Wilmer and Hutchins by $2.4 billion.