February 25, 2008

When Looking at Distribution Center Sites, be sure to Factor in Drayage Costs, Especially for Inland Ports

Differences in Costs for Container Movement Can Often Overwhelm Differences in Land or LeasePrices; One Retailer Learns the Hard Way

With the continued rise in imported goods, companies continue to look for distribution space near ocean or inland ports. Often, it appears that drayage costs – the costs for moving containers by short haul truck from ocean terminals or intermodal hubs to a DC – are not adequately factored into site selection decisions.

For example, one retailer recently built a distribution facility in Oklahoma, based in large part on an offer of basically free land from the state to construct the facility. The only problem – the extra drayage costs from the inland ports near Dallas made the

Oklahoma decision a very poor economic choice versus something closer to the ports, despite the free land.

In some cases, it appears site selection consultants and brokers overlook drayage costs in their analysis of the economics of a particular site location.

There are always trade-offs. According to Jon Cross, Director of Corporate Marketing at The Allen Group, lease rates at DCs close to the port of LA/Long Beach can be as high as $20-40 per square foot, versus $10-15 per square foot at the Inland Empire areas of Riverside and San Bernardino counties. However, drayage costs will be considerably higher for those Inland locations. Trade-off analysis must be performed.

The Allen Group is a developer of so-called inland ports, such as the firm’s 6000 acre Dallas Logistics hub. That project is one of many inland ports being developed or considered across the US (see Are Inland Ports an Answer to Congestion – or a Waste of Public Money?).

Cross believes distribution centers built or leased within the direct property of these inland ports can offer substantial overall savings in many cases due to lower drayage costs, even if the lease rates are higher.

For example, The Allen Group has worked to develop a flat drayage cost of $100 from Union Pacific’s intermodal hub in the Dallas Logistics Hub to any warehouse facility also in the park– a rate that may soon fall to $75.00.

While Cross obviously has a vested interest, he says he sees companies often being attracted to slightly lower lease prices per square foot outside the park, but not fully or adequately considering the impact of drayage costs on the total cost. Either they just aren’t looked at in detail in the analysis, or companies make a decision based on current goods flow, which may have little offshore container traffic today, but which could surge for a company quickly if it expands its offshore or global sourcing programs.

SCDigest believes that last point is especially important. A low level of inbound ocean containers would mean drayage costs differences between site options have little impact on total site logistics costs. But if imports rise substantially, making containers a significant part of the total inbound goods flow, what seemed like the best choice at the time might not seem so smart later.

Companies can often use estimate drayage costs to compare total effective lease prices for DCs. For example, consider facility A, which has a lease cost of $3.85 cents per square foot for a 300,000 square foot DC, and brings in 5000 containers a year at a drayage cost of $125 per container.

Obviously, this is a simplistic analysis, and there are other cost and non-cost factors to consider, but companies need to ensure current and future/potential drayage costs are fully considered in any economic analysis.

As shown in the table below, its effective cost considering both elements is $5.91 per square foot. Another DC site with the same square footage and container flow, but with a lower lease cost of $3.50 per square foot but drayage costs of $150 per container is actually the more expensive choice ($6.00 per square foot).

Have you seen drayage costs being poorly considered in site selection decisions? How have you balanced facility, drayage, speed and other factors in considering site locations? Let us know your thoughts at the Feedback button below.

Lease Cost/Square Foot	Total Drayage Costs	Drayage Cost/Per Square Foot	Total Effective Costs
$3.83	5000 X $125 = $625,000	$625,000/300,000 = $2.08	$3.83 + $2.08 =$5.91
$3.50	5000 X $150 = $750,000	$750,000/300,000 = $2.50	$3.50 + $2.50 =$6.00

 

February 22, 2008

Bustling Dallas Logistics Hub rising from farmland
Dan McAuliffe has a hand everywhere in the huge industrial park

By Sheryl Jean

Dan McAuliffe stands in the middle of a vast dirt clearing, watching the foundations of two large buildings rise from the dust.

Like a king surveying his domain, he points to where a road will be widened, where a bridge will be built and where hotels and restaurants are planned. He takes in the view of the downtown Dallas skyline to the north. Mr.

McAuliffe isn’t royalty, but he is in charge of a small province: developing 6,000 acres in southern Dallas County into more than 60 million square feet of industrial, office and retail space. The Dallas Logistics Hub is one of the nation’s largest commercial projects.

“This will look completely different in a few years,” said Mr. McAuliffe, 49. The site at Interstates 45 and 20 will have easy access for trucks and trains and could become the first development in North America with two major rail freight facilities.

The Dallas Logistics Hub is expected to create more than 60,000 jobs and have a total economic impact of $5.4 billion when completed in about 30 years, according to a report conducted by Insight Research for the Allen Group, which owns the land. The first two warehouses are under construction and should be done by June.

Real estate in his blood

Although Mr. McAuliffe’s family is deeply rooted in the real estate business, the Arkansas native who grew up in Houston wanted to work in the oil industry.

So after earning a finance degree from the University of Texas at Dallas in 1981, he found work as an oil landman, securing mineral leases for a small oil company. He moved into real estate after “interest rates hit 20 percent and the price of oil fell.”

It was tough going at first. “I was trying to sell land in Frisco in the mid-1980s during the S&L crisis,” Mr. McAuliffe said about his first real estate job as a land broker for Stone Lewis Realty in Dallas. It took him 13 months to make his first commission.

His mother, Patricia McAuliffe of Dallas, wasn’t surprised by the career change. “Everyone in the family is a broker,” she said. “I guess they heard a lot about it at the dinner table.”

Mrs. McAuliffe started a residential real estate company in Houston in the 1970s. Her daughter is a real estate agent, another son is a real estate appraiser and a third son handles land acquisition for the city of College Station.

“I’ve never seen him so excited about a project,” Mrs. McAuliffe said about Dan’s current job.

The Allen Group hired Mr. McAuliffe as vice president of development in 2005 after an eightmonth search for someone to lead its Dallas operations. Last year, Mr. McAuliffe became the California-based company’s Texas president.

The Allen Group liked Mr. McAuliffe’s 25 years of real estate experience, but the clincher was his development of a similar project called RailPort, a 1,700-acre industrial park in Midlothian, chief executive Richard S. Allen said.

From 1998 to 2005, Mr. McAuliffe managed the construction of more than $60 million of infrastructure and rail facilities at RailPort, which is served by the Burlington Northern Santa Fe and Union Pacific railroads. While working on the project, he learned about rural rail transportation districts and specialty financing such as tax increment financing.

“I get a real charge out of what you call ringing the

bell,” he said. “It’s the thrill of the chase.”

Multitasking

The Dallas Logistics Hub keeps Mr. McAuliffe busy.

In a typical day, he may market the project to potential tenants and real estate developers, check engineering plans, visit a construction site and meet with city officials and lawmakers.

“Look at the trucks stacked up here,” Mr. McAuliffe said, pointing to a line of semi-tractor trailers 12 deep at Bonnie View Road and Interstate 20 at the northwestern edge of the site.

“The biggest challenge is getting the infrastructure for roads as quickly as possible and getting it funded.”

He has already helped line up about $90 million in public funds for roads, overpasses and a runway extension at nearby Lancaster Airport. Now he’s preparing for some of that major site work to begin.

Mr. McAuliffe is also spending much of his time negotiating with BNSF to buy more than 300 acres for an intermodal terminal at the Dallas Logistics Hub. Union Pacific already has a facility along Interstate 45 in Hutchins and Wilmer.

“He’s got a good poker face,” said Vann Cunningham, vice president for economic development at BNSF.

“We’ve had to put our cards on the table a couple of times and clear the air.”

In addition to being a savvy dealmaker, Mr. McAuliffe must be diplomatic. The site is larger than either of the nearby towns of Hutchins or Wilmer.

“We’re going to be here for a long time, and we need to make sure that what we’re proposing makes sense for the whole area,” he said.

Mr. McAuliffe has worked closely with officials in Dallas, Hutchins, Lancaster and Wilmer.

Mr. McAuliffe and Hutchins Mayor Artis Johnson have discussed annexation and rezoning for some of the Dallas Logistics Hub land that sits within city borders. Hutchins’ population is expected to grow from about 3,000 today to 17,000 in 20 years, Mr. Johnson said.

“I’m trying to help him, and he’s trying to help me,” Mr. Johnson said. “He’s always accessible. I know his direct line, and he answers it.”

Jimmie McClure, chairwoman of the Midlothian Development Authority Board since 1998, said she was impressed by Mr. McAuliffe’s sensitivity to RailPort’s impact on the city.

“At different times, his goals were a little bit different from the city – mainly before the tax increment reinvestment zone started – and he was pretty aggressive in negotiations with City Hall,” said Ms. McClure, who was also Midlothian’s finance director during RailPort’s development.

“I found Dan to be a very professional person, and we became friends at the end.”

Dan McAuliffe
Age: 49
Born: Little Rock, Ark.; grew up in Houston
Education: Bachelor’s degree in finance from the University of Texas at Dallas
First job: Assisting the milkman with home deliveries and collecting and selling red ear turtles to neighbors
Experience: President, Allen Group’s Texas operations, 2005-07; vice president of real estate marketing, Texas Industries Inc., 1992-2005; executive positions in real estate organizations J.E. Robert Cos. and Brookhollow Corp.
Family: Wife Mary, two daughters, one son
Hobbies: Bird hunting and fishing

February 13, 2008

Developers Betting on Texas-Size Warehouses

By Maura Webber Sadovi

Even in the face of a possible national recession, bullish Dallas-Fort Worth Metroplex developers aren’t backing down from building more Texas-size warehouses.

This year, the region plans to develop the largest amount of warehouse-distribution space of any of the country’s 54 major markets tracked by Property & Portfolio Research Inc., a Boston-based real-estate research firm.

Developers are betting that companies looking for regional and national distribution and storage hubs will continue to be lured to the Metroplex area, the informal name given to the region of about six million residents anchored by Dallas, Fort Worth and Arlington, Texas. Besides its location in the fast-growing Southwest, the region has rail access to West Coast ports, and its location along Interstate 35 facilitates trucking in and out of Mexico. Longer term, developers hope to benefit if the Panama Canal’s expansion attracts more goods from China into the Port of Houston, about 240 miles from Dallas.

That optimism has helped fuel the planned delivery — or completion — of about 18.6 million square feet of warehouse-distribution space for the region this year, up 12% from last year, when about 16.6 million square feet were completed. The new development slated for the Dallas-Fort Worth Metroplex is sharply more than that expected in the Riverside-San Bernardino, Calif., region, which is in second place with 10.6 million square feet of new warehouse space on tap.

The warehouse-building surge in the Dallas-Fort Worth region has been “astounding,” says Aaron Jodka, a real-estate economist with PPR. The new supply for 2007 and 2008 will add to the area more new-warehouse space than the total that already exists in the Austin, Texas, market, he notes. Leasing demand for warehouse space by shippers, retailers and manufacturers of everything from cellphones to soap and toys has been equally impressive. Last year about 17.4 million square feet of net space was leased, nearly one million more than was delivered.

The Dallas-Fort Worth area’s economy for now is outperforming the national economy, thanks in part to its strong energy sector. Employment growth in December topped the national average, with an annual pace of 2.2%, according to the Bureau of Labor Statistics.

But the market isn’t insulated from the chill settling over the nation. Employment growth has downshifted from a 3.4% annual rate in December 2006. Also, home prices that were already well below national averages are falling, and retail rents are declining. The office market is also dealing with the hangover resulting from Texas’s aggressive building tradition, while construction is expected to surge in the apartment sector. While rents are rising, they are well below national averages.

Warehouse vacancies are expected to rise about two percentage points by the end of the fourth quarter and average rents to slip from a year earlier, PPR says.

Many developers in the Dallas-Fort Worth region are nevertheless pushing ahead with new warehouses, although the new supply will likely taper off next year, according to PPR. Builders say they are hopeful that rents, which were 28% below national averages at year end, will be attractive to penny-pinching tenants during leaner times.

Duke Realty Corp., an Indianapolis-based real-estate company, just completed what it believes will be one of the biggest “speculative” distribution buildings in Texas, or one built without tenants in hand. The roughly 1.1 million-square-foot Grand Lakes II building in Grand Prairie, near Arlington, contains about 24 acres of space. Jeff Thornton, senior vice president of Duke’s Dallas operations, is confident he can get the property leased, though he acknowledged that the decision to build it was made before the credit crunch in August. If the market softens, will Duke continue building “spec” space? “We’re probably not going to turn off the speculative machine, but we’ll reign it in,” Mr. Thornton says.