September 29, 2008

Inland ports: Solving the logistics puzzle of growth in global trade

By Richard Allen

Inland ports: Solving the logistics puzzle of growth in global trade Editor’s Note: Richard Allen is founder and CEO of the Allen Group. Among the notable projects in the group portfolio are the 6,000 acre Dallas Logistics Park and, in 2006, the company was chosen by BNSF as the master developer for the 1,000 acre Logistics Park Kansas City.

During the past 40 years, the United States has experienced an unprecedented growth in global trade volume with both established and emerging trade partners. This increase in the shipment of manufactured goods and raw materials has played a central role in the growth of international trade and economic globalization, forcing the United States to search for faster and more efficient ways to move goods throughout the country. One of the most promising solutions to the challenges posed by this growth in trade is the development of Inland Ports.

To understand how the concept of the Inland Port has emerged as a solution to this new logistics puzzle, one must first understand the magnitude of growth of global trade. In 1970, the total volume of US foreign trade was $84 billion for the entire year. In 2008, US foreign trade volume surpassed $84 billion by the 10th day of January.

In 2007, international trade accounted for nearly 25% of the gross domestic product (GDP) of the United States, with a total of nearly $3 trillion in goods and services. Conversely, domestic production of manufactured goods decreased from 24% of our GDP in 1969 to less than 10% by 2007.

These statistics demonstrate how the increase in international trade can be attributed to the transformation of the United States into a servicebased economy that sources products from countries where they can be produced more economically.

While Canada remains the United States’ largest trading partner, the Pacific Rim region, whose countries offer inexpensive labor and goods, has become the number one source of US imports. More than $600 billion of the $ 1.9 trillion of total US imports is shipped from Asia, which represents a 91% increase over the past decade.

Growth in imports from these countries is projected to increase dramatically. Despite annual fluctuations in international trade and questions regarding the strength of the world’s economy, the United Nations sees no indication of a major prolonged economic slowdown.

Increasing global economic interdependencies require more efficient logistical shipping and distribution processes. American businesses are looking for ways to maximize speed, minimize costs and increase flexibility.

Defining Inland Ports The process involved in the sourcing, handling and transporting of goods between raw material suppliers, manufacturers, retailers and consumers across the world is remarkable in both its scale and sophistication.

According to a report produced by Heitman Real Estate Investment Management Firm, an Inland Port is characterized by seven key attributes:

– Access to major container seaport

– Intermodal facility serviced by a Class I railroad

– Minimum of 1,000 acres of total land

– Foreign Trade Zone status

– Strong local market access (e.g., near a major metropolitan area)

– Nearby access to north/ south and/or east/west interstate highways

– Access to a strong local labor pool.

Other organizations, such as the Texas Transportation Institute and the Center for Transportation Research at the University of Texas, have defined an Inland Port as any site meeting the above criteria, which is located away from traditional land, air and coastal borders.

Inland Ports 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. Inland Ports facilitate the movement of large volumes of goods from congested seaports to major population centers. Over 65% of the containerized freight arriving at West Coast seaports is consumed by markets east of the Mississippi River. The Allen Group’s vision and longrange planning efforts provide competitive advantages to those companies who are striving to achieve a flexible, efficient and well-organized supply chain.

Where do these imported goods actually enter the United States, and what are the already overloaded coastal ports doing to solve the growing dilemma of handling the overwhelming inflow?

Improving the Supply Chain Process

Most imported goods are processed upon entry into the United States at or near one of the major US shipping ports. The Ports of Los Angeles/Long Beach, combined, comprise the largest seaport facility in the United States, with more than $100 billion worth of goods moving through it every year.

As a result of the United States’ increasingly heavy dependence upon imported goods from the Pacific Rim, traffic at the Port of Los Angeles/Long Beach has reached record levels. In 2007, container traffic amounted to 15.6 million twenty-foot equivalent units (teus), roughly three-and-a-half times the volume processed at the Ports of Seattle and Tacoma, which combined, comprise the secondlargest pointy of entry on the West Coast.

Total cargo volumes are projected to triple over the next 20 years, and by 2020 every major US container port will see its total traffic volume double. Cargo traffic at all West Coast ports, which is projected to grow at an average rate of five to nine percent per year, is straining existing port infrastructure and creating serious bottlenecks in the flow of imported goods.

Because of this growth in imports, seaport facilities like L.A./Long Beach and their surrounding warehouse and logistics facilities have been heavily impacted, leaving limited room for future capacity. Add in the high costs of real estate, safety, pollution issues and increasing traffic congestion, it is apparent that imported goods no longer can be processed efficiently in the immediate vicinity of their port of entry. As a result, much of this freight is being transferred directly from ships to railcars at the docks and transported to Inland Port facilities for further processing.

The majority of containers arriving at the West Coast ports are bound for the Central and Eastern United States markets via double stack trains. With a focus on maximizing speed and minimizing costs, rail is the most fuel-efficient way to move goods to the major Inland Port facilities.

As the demand for imports overloads the capacity of US seaports, the country’s leading industrial development companies are recognizing that a wider national solution for the future is urgently needed.

New Dawn for Rail Infrastructure The US Class 1 railroads recognize the constraints facing the ports and are investing billions of dollars annually to increase significantly the capacity of the primary rail corridors. This additional volume expedites movement of containers from the seaports to the Inland Ports. As a result, import shipments can now make their way from crowded seaports to new state-of-the-art Inland Ports via dedicated double stack trains moving along the main line rail corridors. From there, these newly developed Inland Ports facilitate the transfer of containers from rail to truck, which provides the final mile of delivery.

For example, let’s compare two companies that are searching for the optimal location for a one million square foot distribution facility that receives 15,000 containers per year. Company A locates within an Inland Port adjacent to an existing intermodal facility, while Company B locates at a site 40 miles from the intermodal facility. Company A will spend $1.1 million in drayage costs per year vs. Company B. which will spend $2.6 million. Company A will save over $1.5 million in drayage costs alone. Ultimately, immediate adjacency to an intermodal facility is critical in the site selection process.

As the United States’ demand for imported goods continues to increase and as advances and refinements are made in transportation, shipping and inventory control, the importance of all Inland Ports will continue to grow. This is especially true of locations situated at the intersection of multiple shipping routes with several modes of transportation, including high-density rail, intermodal facilities and Interstate highways.

September 26, 2008

Tulare County expands business incentive zone

By Gabriel Dillard

Tulare County recently expanded its one-of-a-kind business incentive zone by 3,719 acres to include more cities and businesses.

The 59,000-acre zone now includes larger areas of the cities of Dinuba, Visalia and Tulare. It also includes parts of the unincorporated areas of Three Rivers and Terra Bella.

The zone is meant to stimulate business development and employment growth, said Lori Dunigan, business development director for the Economic Development Corporation serving Tulare County (EDC).

Tulare County and its incorporated cities were awarded the state’s sole “targeted tax area” in 1998. This is the second time the zone has been expanded.

The designation includes tax credits commonly offered within the state’s 42 enterprise zones in addition to incentives such as fee deferrals and a fast-track program for city or county permits.

Companies eligible for incentives include those in the industries of manufacturing, transportation, food processing, distribution and wholesale trade.

Incentives include:

– 21-day permit fast tracking for expansions and other building projects.

– A 5-year, no-interest development fee deferral allowing businesses to pay fees, including permit processing, sewer and water connections and traffic impacts, in five annual installments.

– A state hiring tax credit of up to $35,100 over five years for each employee meeting one of a list of qualifications, including being on public assistance or having a disability.

– State credits for sales or use taxes of up to $1 million for individuals, or $20 million for corporations, for the purchase of machinery for manufacturing, food processing, communications or other applications.

– A 15-year net operating loss carryover, allowing businesses to extend operating losses to future tax periods for the purpose of reducing the amount of taxable income.

Dunigan said more than 10,000 vouchers have been issued to businesses taking advantage of the hiring credit since the zone was established 10 years ago.

“The big incentive is the hiring credit,” Dunigan said. “We use it as a recruitment tool when speaking to businesses about Tlilare County.”

In addition to the business incentive zone, Tulare County boasts a U.S. foreign trade zone – a designated area considered to be outside of the U.S. for the purpose of avoiding customs duties or excise taxes on foreign merchandise entering the zone.

The county’s two foreign trade zones include 251 acres at the Midstate 99 Distribution Center in Visalia and the U.S. Cold Storage site at the Tulare Industrial Park.

The recycling zone includes eight of the county’s incorporated cities and all unincorporated areas not zoned residential.

For more information about Tulare County’s incentive zones, contact the EDC at (800) 7182332 or visit www.sequoiavalley.com.

September 19, 2008

Dallas-Fort Worth gaining prominence as logistics hub, study says

With its midcountry location and abundance of affordable real estate, Dallas-Fort Worth has long been one of the country’s largest warehousing and distribution centers.

And a new report distributed by real estate broker Colliers International suggests that the D-FW area will gain even more prominence as a logistics hub.

The credit goes, again, to location plus – the newer wrinkle – high fuel costs.

North Texas’ rail networks are a big factor in competition for warehousing, according to the study written by the University of North Texas’ Dr. Terrance Pohlen.

“The strategic location of the area has attracted many businesses seeking short transit times from a single point to the U.S. market,” Dr. Pohlen said.

“Intermodal freight from Asia can reach the metroplex within three weeks as opposed to four weeks to arrive in Houston or the East Coast.

“Trucks departing Dallas-Fort Worth can reach over 75 percent of the U.S. population within a two-day drive time.”

Colliers’ executive vice presidents Tom Pearson and Chris Teesdale say that increases in fuel costs are causing most distributors to take a look at how they do business.

“We think that has a big impact on why a lot of decisions aren’t being made on new distribution centers,” Mr. Teesdale said. “They are trying to figure things out.”

A decade ago, $500 worth of diesel fuel would have gotten a truck full of merchandise all the way across the country. At recent prices, that cargo will get only about 700 miles, the UNT study shows.

The increases in trucking costs may cause distributors to opt for multiple warehousing locations that are closer to the market they serve, rather than relying on central depots, Colliers predicts.

“That’s certainly a strategy these distribution operators are considering,” Mr. Teesdale said. “We are certainly going to see a lot more facilities being built here, although they would maybe not be the big million square-footers.”

Stoneleigh Hotel

One of the big questions in Uptown this summer has been what’s up with the Stoneleigh Hotel’s new condo tower.

Construction on the high-rise residential building has been going nowhere for the last couple of months.

While work crews have continued to toil away on the lower floors of the building on Wolf Street off Maple Avenue, the height of the tower has remained unchanged.

Right now it’s about half the planned 22 stories.

Execs with developer Prescott Realty – which is building the project in partnership with Apollo Real Estate Advisors of New York – say they are on track to finish the building but have been concentrating on the lower-level garage and other amenities shared with the landmark hotel.

The developers intend to close on financing for the tower soon, according to Prescott CEO Jud Pankey. “As you can imagine, securing new financing in today’s market has become more and more difficult, but it is still possible to accomplish for strong projects with strong sponsorship,” he said in an email. “But this is a more tedious and timeconsuming process than ever.

“Despite all these challenges – and the constantly changing deal terms we have had to endure – we are at a point where we have both a senior lender and a mezzanine lender finalizing documents,” he said. “So, despite all the headlines of financial marketplace turmoil, our plans are on track and we continue to look forward to the successful completion of the entire project.”

Mr. Pankey said he expects work on the tower to resume “well before the holidays.”

Cushman & Wakefield

Cushman & Wakefield’s Dallas office is beefing up its investment sales operation with the addition of several professionals.

Stephannie Mower – who was formerly an executive vice president with PM Realty Group – has joined Cushman & Wakefield along with three other brokers.

Ms. Mower will be the executive director of the Dallas capital markets operation.

Barney McAuley, Brandon Beeson and Mart Martindale are also making the move to Cushman.

September 18, 2008

The New Railroad Resurgence

America’s railroads are experiencing an unprecedented expansion, and businesses are taking notice as they make their site selection decisions.

By Lisa A. Bastian

Taking a cue from software language, it might be said that after decades of semi-dormancy, America’s railroads are making quantum leaps to “Rail 2.0,” a stage of development never before experienced by the industry. One result is that a number of businesses are now thinking differently about how important the role of railroads should be in site selection processes.

Major Investment

The majority of projects underway in this “rebirth” of railroads are being implemented by five major American companies identified as “Class 1” by the Association of American Railroads (AAR). Its members include railroads providing service in the United States, Canada, and/or Mexico. To be considered Class 1, AAR says railroads must post annual revenues of at least $319.3 million. Those matching that criteria are CSX Transportation and Norfolk Southern Railway operating east of the Mississippi River and BNSF Railway, Union Pacific Railroad, and Kansas City Southern Railway operating west of the Mississippi.

According to a February 2008 Wall Street Journal article, American railroads have spent $10 billion since 2000 to expand tracks, built freight years, and buy equipment, with $12 billion in spending still to come. In 2005, Union Pacific Railroad spent $1.3 billion on track improvements across its 33,000-mile system. This past January, BNSF President/CEO Matthew Rose said that this year, the railroad “expects to spend more than $1.8 billion to keep our infrastructure strong by refreshing track, signal systems, structures, freight cars, and upgrading technologies.” That same month, Norfolk Southern’s Executive Vice President Debbie Butler said her railroad planned to spend $1.4 billion on capital investments in 2008, an increase of $84 million (6 percent) over 2007’s funding. Then in April, CSX announced $9 million worth of upgrades to key facilities used to ship coal.

Not surprisingly, such large infrastructure investments are tied to growing employment opportunities, too. AAR reports that freight railroads are expected to hire more than 80,000 new workers over the next six years, and that the highest number of openings will be at the major rail hubs of Chicago, Illinois; Kansas City, Missouri; Seattle, Washington; Los Angeles, California; Memphis, Tennessee; St. Louis, Missouri; and Atlanta, Georgia, along with more rural areas such as Alliance, Nebraska; Clovis, New Mexico; Havre, Montana; Gillette, Wyoming; Galesburg, Illinois; and Springfield, Missouri. In contrast, back in 2002, the industry laid off 4,700 workers.

What’s behind all this activity? Simply stated, freight demand is expected to increase a whopping 67 percent by 2020, according to AAR. Much of current and future demand is tied to the increase in America’s appetite for Asian imports, the U.S. economy (even though it has slowed), and rising fuel costs.

Traditional and New Freight Product

Over 40 percent of all American freight moves by rail, according to AAR. For Class 1 railroads, the top commodities hauled in 2006 were coal, with 44 percent of tons moved (21 percent of revenue), followed by chemicals/allied products (8.6 percent), farm products (7.6 percent), non-metallic minerals (7.2 percent), miscellaneous (6.4 percent), and food and related products (5.4 percent).

Coal and export grains are truly the “two major lines of business” for rails today, says John Ficker, vice president of supply chain logistics for First Industrial Realty Trust of Chicago, a provider of industrial real estate supply chain solutions. Another growing area is ethanol, he says, which must be hauled due to its inability to travel through a pipeline. CSX, for example, reported a 46 percent improvement in its 2008 first-quarter results thanks to agricultural products, most notably ethanol and feed ingredients.

However, the most dramatic change is that in addition to traditional commodities, the railroads are moving increased tonnage of finished consumer goods at unparalleled levels. “America continues to outsource its manufacturing, and so these products are pouring in through ports on the East and West Coasts,” says Ficker, adding that it’s not uncommon these days for mile-long trains to pull several hundred double-stacked rail containers of consumer goods. “A large portion of these containers go from the West Coast to Chicago, as well as Atlanta and Dallas, really wherever the people are.”

According to Ficker, competition between truck and rail “is marginal at best” in this new logistics world. “It’s not so much competition as it is collaboration,” he says. “There’s enough freight volume for everyone. Some experts say freight growth will double by 2035. We do have a challenge before us, and the solution is found in how we improve supply chain logistics.” Trains produce one-third fewer emissions than trucks, and are three times more fuel efficient. Those realities — combined with everrising fuel costs — are behind the forging of new rail–truck relationships nationwide. More often than not, the longer portion of cross-country hauls are conducted by train while the shorter piece is a truck’s responsibility.

As a direct result of railroads moving more containerized goods, companies are now building more new “big box” and warehousing facilities at existing and newly built rail yards, or planning to do so in the near future. These super-charged intermodal sites combining rail and truck services are also spurring secondary-level industrial operations in some areas, as well as supportive noncommercial businesses. Effectively, they function as inland ports, freeing up often congested ocean ports and serving as more efficient movers of containers to prime population and/or distribution centers.

Logistic Hubs

Tim Feemster, senior vice president and director of global logistics for the Grubb & Ellis Company, and a 35-year veteran of supply chain and logistics services, lauds companies that understand that besides labor costs, the key drivers to determining where a site is based should be based on both outbound and inbound transportation.

“Transportation costs are two and a half to five times higher than the cost of actually running the typical distribution center,” he says. “Rent is only a very small piece of a center’s cost.” That’s why Feemster advises companies to not only research the benefits of intermodal centers, but also take time to research which one would be best suited to meet their unique distribution or warehousing needs.

There are already some notable logistics hubs in the United States, with some new ones on the horizon:

• Nearly 20 years old, AllianceTexas is the “granddaddy” of logistics hubs. Located in the Dallas–Fort Worth metroplex, this 17,000-acre master-planned, mixed-use community includes industrial, office, and retail space; an inland port; a BNSF intermodal yard; BNSF and Union Pacific rail lines; Fort Worth Alliance Airport, a 100 percent cargo airport; and 6,700 homes. Over 27,000 workers are employed by AllianceTexas’ 170 companies.

• The Dallas Logistics Hub is a 6,000-acre master-planned venue offering up to 60 million square feet for distribution, manufacturing, office, and retail uses. Its first two warehouses, now under construction, are scheduled for completion this summer. The park’s owner, the Allen Group, says the park is expected to create over 60,000 jobs and have a total economic impact of $5.4 billion when completed in about 30 years. The Hub is adjacent to Union Pacific’s Southern Dallas Intermodal Terminal, a potential BNSF intermodal facility, four major highways, and the Lancaster Municipal Airport, a future cargo airport. The park will be a vital inland port accepting products from the Ports of Houston and Los Angeles/Long Beach, in addition to deep-water ports in western Mexico.

• Near downtown St. Louis, Norfolk and Southern provides rail service to Gateway Commerce Center. This 2,300-acre commercial/industrial development site at the intersection of Interstates 255 and 270 connects with four major interstates: I-44, I- 55, I-64, and I-70. Triple Crown Services Company operates a 62-acre intermodal facility on Gateway’s north side. In addition, the park is close to four cargo-handling airports and the nation’s second-largest inland port. Tenants include facilities for Dial Corporation, Procter & Gamble, and Hershey Foods, plus a 1.2 million-squarefoot Unilever logistics/distribution facility. Gateway has created 2,000 jobs, and attracted more than $200 million in new investment and nearly 8 million square feet of new construction.

• The 750-acre BNSF Logistics Park Chicago in Elwood, Illinois, is the centerpiece of a 2,200-acre intermodal distribution center and warehouse development. It offers direct rail, truck, intermodal, and transload services, and provides access to key rail routes to and from all West Coast ports. Tenants include Wal-Mart, Potlatch, DSC Logistics, and Georgia-Pacific.

• In August 2007, Union Pacific broke ground on a $90 million, state-of-the-art intermodal terminal in San Antonio. Once operational later this year, the 300-acre rail port is expected to generate $2.48 billion in cumulative economic impact for the region over 20 years. The terminal will accept and ship household goods and similar items destined for retailers and distribution centers as well as auto parts for the San Antonio’s Toyota plant. It will serve as a prime NAFTA logistics point for goods going to and from Mexico, as well as commodities moving between San Antonio and Houston, and points beyond. The facility is expected to process 100,000 trailers per year at first, and eventually perhaps 250,000.

• Feemster advises businesses using these and other intermodal facilities — notably those firms importing from Asia — to consider inserting “risk diversification” plans into their overall logistics strategies. “They must take into consideration all the risk levels involved in bringing in all their products through West Coast ports,” he says, adding that an increasing number of companies now are altering their supply chain by using California ports as well as coming up through the Panama Canal.

Ficker notes that “people are paying very close attention to the plans of rails.” Revitalized and renewed, U.S. railroads are clearly taking a more prominent role in helping America’s companies thrive in these uncertain economic times, and remain globally competitive in the decades ahead.

September 11, 2008

FTZs Prove Complex for Many Tenants

By Kari Hamanaka

With real estate owners working hard to distinguish their international distribution center site from the next industrial complex, achieving foreign trade zone status is becoming an attractive marketing tool to hire industrial users. However, more real estate owners are finding it pays to go the extra step in assisting users with site activation.

San Diego-based The Allen Group recently completed a 500,000-square-foot, three-building complex in the Midstate 99 Distribution Center in Visalia. The distribution center is within a foreign trade -zone granted to the Merced Counly Board of Supervisors. And while the developer markets the fact that Midstate 99 and its logistics park, the International Trade and Transportation Center in Shafter, are within foreign trade zones, few tenants at either project have activated their sites.

“We do have lots of tenants, and we have exposed them to the benefits [of an FTZ] and had only a few express interest in pursuing it,” said Larry Montgomery, director of development for Central California at The Allen Group. There seems to be the need for an education process to make people aware of the benefits.”

Those benefits include duty and tariff relief for importers and exporters, but simply moving to an industrial park within a foreign trade zone is not enough to gain those incentives. Individual users must go through the process of activating their site, which involves a business background check and review by U.S. Customs. The entire process takes an average of six months to complete.

Although owners of real estate see the value of being within an FTZ, users may be a little slower to adopt that same belief. “It’s a marketing niche for industrial users,” said Jon Cross, director of marketing at The Allen Group. “If you don’t have foreign trade zone status in your [industrial] park, it’s one less entity that you could lose a deal on.”

For the most part, Cross finds that prospective tenants will ask about the FTZ status of a property, but mainly as a precautionary measure should they decide to go ahead with activation in the future.

A 177-acre portion of the Tejon Industrial Complex, at Tejon Ranch, is in an FTZ. The complex is partially in Kern County, an area many have begun to refer to as the “Golden Empire” projected to be the next area to experience a new wave of industrial development after the Inland Empire because it is central to the ports and has cheap land. Therefore, being within a foreign trade zone would only seem to be icing on the cake for importers or exporters locating in that region.

“People have really started to recognize outbound efficiencies obtained by locating in Kern County,” said Barry Hibbard, vice president of commercial and industrial marketing at Lebec-based Tejon Ranch Co., “and also the fact that you have dual port -access bringing products from Long Beach and Oakland. You also have great eastbound access of the [State Route] 58, and most people don’t get that at first until you show them.”

Clayco Ina recently purchased 23.75 acres in the Tejon Industrial -Complex for me development of a build-to-suit warehouse facility for Famous Footwear. The site is located within the FTZ established by a joint venture of Tejon and the Rockefeller Group Development Corp. The two companies also partnered to develop a 606,000- square-foot industrial facility completed in February in the Tejon Industrial Complex.

Clayco’s acquisition is what Hibbard described as a supply chain move to be more responsive to the market. Famous Footwear currently has distribution centers in Wisconsin and Tennessee.

A 350,000-square-foot distribution building will be constructed at Tejon for the shoe company, with additional room for a possible expansion.

While 177 acres of the Tejon Industrial Complex received FTZ status after a two-year-long application process, IKEA Wholesale Inc. is the only subzone at Tejon to date that has activated its site to benefit from being within the FTZ, which is an extension of the FTZ granted to the Los Angeles Board of Harbor Commissioners.

According to Hibbard, FTZ site activation is an untapped market for so many different reasons. However, it is the consensus among industrial developers, brokers and FTZ consulting companies that there is a lack of education and proper marketing to make companies aware of the benefits of a foreign trade zone.

“It is rather technical to quantify the benefits,” Hibbard said. This is not something a real estate broker would be able to do, and ifs not something I would recommend developers do.”

Additionally, the process to activate a site within a foreign trade zone can be an arduous one with various levels of bureaucracy involved.

Douglas Burr of Visalia-based Burr Commercial is the marketing broker on the Midstate 99 Distribution Center in Visalia and said properties in FTZs do not command higher rents than non-FTZ sites.

“It’s just an extra amenity that allows a company to locate somewhere,” he said.

Though Burr said tenants do ask about FTZ status, he thinks it will become more of an issue in die future as more products are produced overseas.

Not Just Another Amenity The question facing real estate owners and consultants is how to get users to see beyond the FTZ as just another amenity alongside higher dock doors or secured parking.

At the Tejon Industrial Complex, Brandi Hanback, managing director of Rockefeller Group Foreign Trade Zone Services, said Rockefeller and Tejon are more involved in making sure companies understand the benefits.

“We’re implementing FTZ packets where we’re delivering the benefit,” Hanback said. “We have an in-house consulting division that works to get land designated and works to help users of real estate activate zones. We take them through the process to go through U.S. Customs; ifs not just us telling them. That’s the difference between a successful zone and one that’s not”

It is not just in California that a little more guidance is in order. The need to educate real estate owners and users is nationwide.

At the national level, less than half of the appraised FTZs are activated, Hanback said. There are 18 designated foreign trade zones in the state, evenly dispersed between Northern and Southern California, with 33 companies having activated subzone status.

Hanback said what is often the case is that real estate owners will seek FTZ status because they presume it will be beneficial, but they lack the expertise to market it correctly to users.

“A lot of times, they think competitively that because someone else may have [FTZ status], they have to have it, but they can’t address how it will be used unless they understand how it will benefit them,” Hanback said.

The lack of understanding is what has allowed for the emergence of third-party companies such as ITC-Diligence Inc., headquartered in Seal Beach. ITC activated itself as a foreign trade zone operator at Global Access, the multimodal facility at the former George Air Force Base in Victorville. The 8,500-acre project is being developed by Stirling Capital Investments in partnership with the city of Victorville.

ITC offers other businesses at Global Access the option of operating under FTC as an activated site. ITC then monitors the companies and provides oversight. As a result, David R. Harlow, of ITC, said business participants are able to see the financial and logistical benefits of activating their FTZ site without having to go through the process alone.

Chris Webb, director of leasing and sales for Stirling, said industrial users do need the additional guidance when it comes to navigating foreign trade zones and activation.

“In my experience, ifs a benefit to reach out [to users],” he said. There is some level of bureaucracy and paperwork to go through, but there are professionals that can walk a corporation through that. It’s not the major focus of many companies coming to an FTZ, so they’re not set up to go through the paperwork.”

Prego Inc. is the only participant of FTC’s program at Global Access. While the program provides the service on a short-term basis, Harlow said Prego is participating on a long-term basis because of a preexisting relationship with ITC. Generally, the company recommends participants activate their site within a year from signing up to use FTC as a foreign trade zone operator.

“We then step out of the picture, but we are in the background to provide them with minor management oversight such as third party audit spot checks with customs and filing their annual reports,” Harlow said. “We’re just no longer the actual activated operator [for them].” ITC also is activated at industrial centers in the City of Industry and Palm Springs, doing most of its work in the Inland Empire and Imperial Valley.

“When we started this [business] five years ago, the one thing we realized in the Victor Valley region is that there’s a significant lack of education on the program,” Harlow said. “It wasn’t that people didn’t want to use the program; they just didn’t know about it”

September 4, 2008

$30M-Plus Auction Yard Fueling More CRE Plans

By Connie Gore

HUTCHINS, TX-With the final details now ironed out, the Allen Group Tuesday will break ground on its first build-to-suit in the 6,000-acre Dallas Logistics Hub in the southern sector. The milestone deal with Adesa Inc. for a 200,000-sf auto auction complex is opening  “This is a very unique use. It doesn’t interact or feed off the intermodal facility or the rail lines. It’s a destination for car dealers,” says Daniel J. McAuliffe, president of Allen Development Texas LLC, “and it creates a tremendous need for hotels in the area.” Likewise, Adesa’s 175-acre tract at 3501 Lancaster-Hutchins Rd., secured by a 20-year lease with options, is expected to be a catalyst for brandnew retail and restaurant development in the corridor.

The San Diego-based Allen Group has peppered Dallas Logistics Hub’s master plan with eight hotels at two entrances to its land. McAuliffe tells GlobeSt.com that the hope is at least one hotel will be under construction at the eastern end when Adesa’s complex comes on line in July 2009 and $8 million of road and utility line infrastructure is finished.

We’re trying to identify what levels of service we want to have and the flags we want to have,” McAuliffe says. “There is a lot of interest from the hoteliers, but nobody has stepped up at this point.” The door is open to sell a site, a build-to-suit or an Allen-owned hotel with a management company to run it for the kick-off play. Meanwhile, city leaders are in talks with retail developers for a number of prime sites, he says.

For now, the focus is getting a showcase auction yard up and running for Adesa, which plans to sell its 50-acre hub at 1224 Big Town Blvd. in Mesquite, roughly 13 miles north of its new location. The same team that negotiated the build-to-suit lease is marketing the Mesquite yard–Bob Hagewood, vice president with Dallas-based Stream Realty Partners LP and Bob Ikel, an independent broker for IC3 Real Estate Consultants, also in Dallas.

Adesa will double in size when it’s time to relocate to the new yard, which will have 2,500 feet of frontage along Lancaster-Hutchins Road. With an all-in development cost topping $30 million, the complex will consist of an 80,000-sf auction arena, 110,000-sf reconditioning center, 10,000 sf for a tech center and car wash and parking for 22,000 vehicles for inventory, customers and employees.

The Carmel, IN-based Adesa, an acronym for Auto Dealers Exchange Services of America, runs 120,000 vehicles per year on a 50-week schedule through its Dallas shop, which opened in 1996. Adesa’s portfolio has 62 locations in the US, Mexico and Canada, with all four major metros in Texas in the mix. “Texas is one of the largest markets in the country and Dallas is the largest market in Texas,” says Warren Byrd, executive vice president of corporate development. “We are committed to growing our business in the industry and Dallas is long overdue for an expansion.”

Adesa Dallas is a regional auction yard for a 500- mile radius, crossing over the borders of Oklahoma, Arkansas and New Mexico. Byrd says Adesa also is expanding its Kansas City, MO yard, a 150-acre corporate-owned location that will be completed in January. In Phoenix, a search is on for a new site.

Byrd says Adesa Dallas will be similar in design to its San Francisco facility, complete with photography and inspection capabilities for institutional consigners and dealers. Architura Corp. of Indianapolis designed the Adesa Dallas complex and Shiel Sexton Co., also from Indianapolis, is the general contractor.

September 1, 2008

Kansas City Industrial Market

By Michael Block

Until recently, Kansas City has not been considered by big box industrial users as a regional distribution hub, in spite of it being home to four rail lines, having become the largest rail server in tonnage moved; three major interstates; the third largest trucking center in the nation; an international airport; and access to barge traffic on the Missouri River.  Rail has a significant advantage in energy efficiency, capacity and cost effectiveness, and Kansas City is starting to see the big box users that for years were locating in other major metropolitan markets.

Story after story in the national press and trade magazines are now discussing Kansas City because the metro area now has approximately 2,000 appropriately zoned acres and four major industrial parks ready to hit the market in the next 6 to 24 months. With a population of more than 2 million and one of the faster growing metro areas in the Midwest, Kansas City is on the move. It has stable growth and approximately 255 million square feet of manufacturing, warehousing, distribution and flex industrial product, including its rather unique underground offerings. Currently, the industrial vacancy rate for the greater Kansas City market measures 7 percent.

The development community has been very conservative during the last few years and speculative development has occurred at a very measured pace. However, at mid-year, distribution centers that were targeting the Kansas City region included 19 large prospects, with six users seeking sites of more than 400,000 square feet and two whose space requirements exceed 1 million square feet.

Several new parks are coming online, with the first being the new Burlington Northern Santa Fe (BNSF) Intermodal Freight Hub in Gardner, Kansas. The Southwest Johnson County hub is to be located on 400 acres and accommodate 7 million square feet of warehouse space. In addition, The Allen Group will develop an additional 1,000 acres, which can accommodate between 8 million and 10 million square feet of distribution space. In addition, other related developments include the Sun Life Insurance Company, which with its fee developer, Kessinger/Hunter, is developing a new 600,000-squarefoot, state-of-the-art warehouse and distribution center in Olathe, Kansas, just 7 miles from the Gardner intermodal project. Scheduled for occu- pancy this month, it is the largest speculative building of its kind to be developed in Kansas. Also planned for development in Gardner is the Midwest Commerce Center, which LS Commercial Real Estate is developing in conjunction with USAA Real Estate. The industrial park’s first building, a 517,000-square-foot spec distribution center, is scheduled to break ground soon. When fully developed, Midwest Commerce Center will contain approximately 2.3 million square feet of bulk warehouse product.

The second major project is the Kansas City Southern (KCS) Intermodal Center, punctuated by KCS’s quest to develop a NAFTA-driven rail corridor from Kansas City to Mexico’s Pacific Coast. Being developed in conjunction with Chicago-based CenterPoint Properties, the rail-served intermodal facility will be situated on 340 acres, with 11,340 feet of rail track. In addition, CenterPoint, which acquired the former Richards Gebaur Air Force Base from the Kansas City Port Authority adjacent to KCS’s property, plans to build 5 million square feet of freight storage space on an additional 970 acres. The developer’s site is currently being upgraded and having infrastructure completed.

The third major project is the KCI Intermodal Business Centre, which is being developed by Trammell Crow Company on land owned by the Kansas City Aviation Department that is located adjacent to the Kansas City International Airport. In a related development, the SkyPort Business Park is underway near the Business Centre; its owners began grading 160 acres and have already sold 47 acres to Pure Fishing, which will construct a new 400,000-square-foot distribution center. With its prime location on airport property, including some parcels with on-ramp access, and Foreign Trade Zone status, the business center will appeal strongly to logistic users that may benefit from a close proximity to an international airport, as well as nearby Interstate 29.

In Riverside, Missouri, in the center of the metro area, Block & Company is developing the Horizons Business Park. Situated on 400 acres at Interstate 635 and Highway 9, the park will feature more than 5.3 million square feet of industrial space when complete. Unlike the other developments, it will be a mixed-use, master-planned business park community, offering an array of services. The park’s central location will help draw labor amid the area’s growing proliferation of industrial development. Some land will be available for sale; however, the majority will be for speculative development for lease.

Other active developments in the Kansas City metro area include the city of Olathe joining forces with Kansas State University to catalyze the development of 92 acres at K-7 and College Boulevard. The project, recently named the Kansas Bioscience Park recently secured its first tenant; Fort Dodge has plans to build a 150,000-square-foot research and development facility within the park. This region is supported by some of the top animal health education programs in the nation, with a collection of universities in Missouri, Nebraska, Kansas and Iowa playing key roles and having some of the top animal health programs in the country. Growth in this industry will be another catalyst for future growth for the warehouse and flex market in the area.

OPUS Northwest, Watkins & Company and Prime Investments are all developing, or have recently completed, new buildings in the Kansas City market. Prime’s building at Interstate 70 and 7th Street in Kansas City, Kansas, has been leased by Line, a supplier to the nearby and highly successful GM Fairfax plant, where the Chevy Malibu is built.

Block & Company is also active at the College Crossing Business Park, where it just completed the development of four buildings, totaling 160,000 square feet. In addition, three more buildings will break ground in the near future and offer an additional 280,000 square feet of distribution space.

During the next several years, analysts expect that the rail line traffic will continue climbing, with the increase in offshore manufacturing and rails efficiency edge over trucking, along with the public frustration toward highway congestion. Industrial developers will select locations close to intermodal hubs to take advantage of the cost of transporting goods. With these factors in place, it appears that trends to larger, centralized warehousing and distribution centers will continue for the foreseeable future and Kansas City is well positioned to capitalize on these trends.

September 1, 2008

Will the Oil Crisis Fuel Near-Sourcing?

By April Terreri

As the escalating oil crisis unfolds, companies with long, complex global supply chains are reevaluating whether their Asia-based networks still make economic sense.

Pete Sinisgalli, president and CEO of Atlanta-based Manhattan Associates, reports that at a recent conference sponsored by AMR Research, supply chain leaders from around the country met to discuss key issues facing the industry. “The No. 1 topic was the increasing transportation costs, whereas in the past number of years the leading topic had been supplier performance.” High on the agenda of management decisions associated with transportation costs are the net value of extended global supply chains. This is prompting reevaluations whether near-sourcing offers a solution to ease the pain and an alternative location for U.S.-bound goods currently coming from China and the Pacific Rim. With about 65 percent of the country’s population residing in the east, near-sourcing from Mexico, Central and South America certainly offers an attractive advantage of not having to ship crosscountry from ports like Los Angeles or Long Beach.

As with any incipient change, some hesitate to conclude that near-sourcing is a long-term trend to reckon with. Denver-based ProLogis, for one, which pays close attention to customers’ changing supply chain needs, remains uncertain. “To date, we haven’t seen any of them make wholesale changes to the location of their facilities as a result of the run up in fuel costs,” notes Mike Peters, first vice president of global services.

Others like Greg Aimi have a different view. Nearsourcing is definitely an escalating and emerging trend, notes Aimi, director of supply chain research at Boston-based AMR Research. “I think it’s still in its infancy, but the cost of oil is causing it to be more acute.” Aimi adds that in the first six months of 2008, AMR Research saw a significant demand for network design studies, beyond what researchers were expecting. “People are concerned about risk mitigation strategies and continued congestion issues at the Port of Los Angeles. So people are very sensitive to the effects of the outsourcing model.”

‘Green’ also figures in the strategy. Companies can reduce their carbon footprint by choosing nearsourcing. “Everything associated with sustainability is very real,” continues Aimi. “We see many of our clients already asking us to include this as part of their planning and decision-making process.”

Regardless of whether this is a sea change or not, supply chain executives are taking a harder look at their manufacturing and transportation costs in an attempt to contain total landed costs. “With oil at $150 a barrel, you have to ask the question if it makes sense for you to manufacture locally in order to cut down that transportation piece,” suggests Neil Doyle, executive vice president of infrastructure and transportation development for Chicago-based CenterPoint Properties. The firm owns, acquires, and develops industrial real estate and related rail and port infrastructures, owning 45 million square feet of distribution space on 8,000 acres in the Chicago market. “You need to determine if this new model overrides the cheaper overseas labor manufacturing coupled with the longer transportation run.”

Near-sourcing reduces some uncertainties and security concerns related to overseas manufacturing and transportation, continues Doyle, pointing to Wal-Mart’s surge of near-sourcing in NAFTA countries. “With fuel costs up, the old model of entering an LA port and then getting products where they need to go is being replaced by entering at the port closest to your consumption base. This means the Southeast ports since the majority of the population is east of the Mississippi.”

CenterPoint developed a number of on-tarmac airfreight facilities, including several at Chicago’s O’Hare Airport. “We rolled that concept into developing intermodal centers across the country with the theory being to locate your DC next to the rail terminal via the inland port model, which is no different from locating your DC next to a maritime port,” says Doyle. “You get more certainty and substantially reduced cost in your supply chain because you eliminate the dray movement from the port to your warehouse.”

Doyle notes DC locations are shifting closer to populated centers than was true in previous years. “The day of the DC located in less-populated areas with cheap or free land is being replaced by the population-center model. What is also coming into play now and revising the supply chain as we know it is the cheap U.S. dollar, which means it might make sense to manufacture goods in the U.S. now more than anytime in the past ten years.”

Manhattan Associates reports seeing more companies reevaluating where they source product. “Manufacturing U.S.-consumed products in China added time and transportation expenses, but saved on factory labor,” says Sinisgalli. “Now that transportation costs are escalating, companies are reexamining questions such as, ‘Do I manufacture jeans in China or am I better off manufacturing them in northern Mexico to reduce my transportation costs?'”

While some companies are still evaluating the changing supply chain landscape, others are beginning to make moves to near-source. But no one can change their supply chain models overnight and it will take some companies time to work through the process. “Most thought-leading companies continuously examine their supply networks to refine where they would like to be in two or three years so that as they make changes today, they are in line with their desired future end-state,” says Sinisgalli.

Economics of proximity

Certain product groups make economic sense to produce in or near the consumption-market country, notes AMR’s Aimi. “Products with a volatile demand that is difficult to predict, such as apparel and consumer electronics, are the ones that should be looked at for near-shoring first.”

For example, a computer company might make components in bulk and ship them to a fulfillment center close to markets, where each computer is configured according to unique customer requests. “A retailer like Best Buy might have 10 different choices of a product on their shelves,” explains Aimi. “They can monitor to see which ones are selling so they can issue a slowdown or speed-up to the manufacturer, based on demand.”

Chainalytics reports it is noticing another pattern among clients. “It is a strategy called postponement – or delaying for as long as possible the forward deployment of products to as close to customers as possible, holding product back further down-stream in the distribution network,” explains Jeff Metersky, vice president of supply chain strategy practice for the Atlanta-based firm. “Since they don’t know for certain what customer demand will be, they will hold back until they receive the final demand signal that allows them to move products to customers.”

Companies are also containing costs by increasing inventory–depending on the nature of the products, reports Metersky. Remember when holding inventory was a bad thing? That strategy is changing to accommodate rising fuel costs. By pushing more inventory into the network, companies can reduce transportation spend by shipping larger shipments or by shipping via more fuel-efficient and costeffective modes.

One of the trade offs companies have wrestled with over the years has been the balance between transportation costs and inventory costs. “JIT inventory management was a beautiful thing when oil was cheap,” explains Sinisgalli at Manhattan Associates. “In some cases, holding larger inventories but making fewer deliveries will be the future strategy.”

Backhauling will be a top priority to avoid running empty miles. Sinisgalli points to industry studies that conclude that over 10 percent of the 150 billion miles U.S. truckers drive annually are driven empty. “So you can look at this from an environmental perspective as well as from a cost perspective for motivation to develop opportunities to do things more efficiently.”

As this trend evolves, companies are thinking about changing their network configuration to include more and smaller warehouses close to drop-off points in an attempt to maintain service levels while reducing transportation costs, adds Sinisgalli. “You will still have the large warehouses around the ports of entry, which will remain the most efficient places to handle goods.”

Metersky at Chainalytics adds that what changes the distribution network is the amount of inventory flowing from ‘the make’ to ‘the buy.’ “The demandpull signals first indicate what is selling where and then they determine where the DC should be located. As sourcing patterns change, so will the driver as to where those DCs are located.”

So where does one begin in changing already established networks? Companies need to conduct a network optimization assessment to simulate demand when to consider moving to a near-sourcing model. The manufacturing location should be close to rail and intermodal access. State taxes, labor costs, and real estate costs should be factored into the assessment. “Companies should understand what their inventory holding costs and transportation costs will be with respect to satisfying customer demand,” notes AMR’s Aimi. “Don’t forget to add in the realities of state and local taxes. Know the labor market and the cost of that labor, as well as real estate costs. These are additional factors you must represent when you model because if you leave them out of the modeling process, they could foil your entire plan.”

Drayage costs are key for deciding where a DC should be located, yet they are often overlooked, notes Bob Liss, vice president of supply chain for The Allen Group in Dallas. For instance, a company with a DC located in a logistics park adjacent to a rail terminal that is importing over 100 containers per week can save millions of dollars a year on inthe- gate shuttle costs–versus over-the-road drayage costs to points outside the logistics park.

Liss adds that drayage costs will only get worse. He reports rising gas prices caused 1,000 truckers to go out of business during the first quarter of the year, with another 2,000 expected to do the same by the end of the second quarter of this year. “With this capacity taken out of the market, trucking rates for drayage are expected to rise between 8 percent to 10 percent by the fourth quarter.”

Another strategy helping companies contain total landed costs is deconsolidation, notes Dave Ganor, vice president of Business Development for Contract Logistics at Pittsburgh-based GENCO Supply Chain Solutions. “We are seeing more requests for deconsolidation centers, not only at the major ports of entry, but at secondary ports as well in the nearsourcing strategy.”

Although Ganor reports GENCO has noticed some near-sourcing movement, he says deconsolidation strategies continue to drive the networks of larger global customers. Goods are received at a transload center where they are reconsolidated into full trailer loads in response to updated demand. “They are shipped via truckload or intermodal, depending on which mode is more cost effective. Deconsolidation strategies are popular because shipping containers inland is an expensive proposition. Then you have to worry about repositioning those empty containers.”

Inland ports

Rail-based freight drove the development of inland ports from about 1995 through 2005, explains Robert Harrison, economist and research scientist at the Center for Transportation Research at the University of Texas at Austin. Rail double-stack transcontinental services, particularly serving West Coast ports, soon carried large volumes of containers destined not just for northeastern markets, but to terminals serving cities like Dallas, Kansas City,

Memphis, and Chicago.

“So the notion was to take commodities to one centralized metropolitan site and deliver product to DCs close to these new terminals,” Harrison explains. “They are multi-modal, value-added centers that come in all shapes and sizes, and are really streamlining the importation process for containerized products originating from primarily Asia.”

Inland ports do more than just duplicate port or gateway functions at inland locations. They concentrate transportation and logistics services, helping transportation planners to promote economic development through logistics integration. Some value-added services include light manufacturing, as in the case of Hillwood’s Alliance Texas in Fort Worth.

“This was one of the early successful and fastgrowing centers with a large BNSF terminal, airport, and interstate access that attracted a variety of DCs and logistics services,” Harrison reports. “They now provide a whole range of services to support DC operations and the efficient movement of goods. When DC efficiency was impacted by labor turnover due to the long commute from Dallas, Hillwood constructed a housing subdivision, together with associated services. It is a planned community rather than a terminal in the traditional sense.” The development now includes high-end homes, an air cargo facility, medical facilities, and shops.

Nokia’s near-souring arrangement at Alliance is a good example of how inland ports can expedite product manufacture. A few years ago, the company had a two-prong approach, with components coming in from both Singapore and Mexico. “They had regular service from Singapore on Lufthansa into Dallas-Fort Worth and they would near-source everything else based on their daily order requirements,” Harrison says. Black & Decker has a similar arrangement, utilizing the border maquiladoras along the U.S.-Mexico border. Imports from Mexico still tend to be trucked, although the Mexican rail system is being strengthened. Kansas City handles both Asian and NAFTA commodities and is a major proponent of the inland port concept to the point where they are negotiating to have a Mexican customs facility to handle inbound NAFTA commodities, reports Harrison.

Whether products are coming from Mexico, Central America, or China, they must move efficiently from the border into the heartland. “The price of fuel is driving the long hauls away from truckers to stacktrains, which will terminate at a few inland intermodal terminals,” explains Liss at The Allen Group. Companies with DCs at logistics parks adjacent to intermodal terminals in key distribution cities like Chicago, Dallas, and Kansas City can save on the cost of moving containers.

The Dallas Logistics Hub, developed by The Allen Group, is preparing for opportunities existing in that market. Its location, on 6,000 acres, will benefit from the proximity of two Class 1 railroads, four major interstates, and Lancaster Airport, which will become an air-cargo facility. Its plans include mixed-use development and will have 60 million square feet of distribution, manufacturing, office, and retail space.

“When the Panama Canal is widened, the Port of Houston traffic can truck right up to Dallas,” says Liss. “And three miles west of the hub’s western boundary is I-35, which is the NAFTA corridor going down to Laredo. So it is ideally located for Mexican imports.”

Bringing international containers to Dallas where they can transload into domestic containers will help balance the network while achieving better total landed costs, explains Liss. “You are closer to the eastern markets and you have carriers looking for backhauls, so the economics are there. You have to be loading in both directions, so you can create domestic capacity with import loads and then turn the boxes around with export cargo.” He notes that the cotton industry is one major segment looking for export boxes. Anticipating increased export volumes, Liss recently met with container leasing companies to negotiate a supply of guaranteed containers into Dallas.

The railroads are investing in updated infrastructure to handle increasing volumes in their high-density lanes. “Railroads are improving their tracks to be service-competitive with trucks,” says Liss. “BNSF and UP are double-mainlining high-density intermodal corridors. This will increase their capacity and improve service.” He adds that Norfolk Southern is investing millions into the Meridian Speedway to connect into Dallas from Meridian, Mississippi and KCS has invested over a billion dollars in its rail lines in the U.S. and Mexico.

Down the road

An area to watch, notes Harrison, is the rise in U.S. exports. “We will begin to think about inland ports as part of the supply chain that works in both directions. With the falling dollar and the growth of exports requiring containerized boxes, there will have to be a bit of fine-tuning of the supply chain.”

In conclusion, it is accurate to say that the global supply chain is flexing at the moment, although slowly. “The cost of fuel is definitely affecting the supply chain,” says AMR’s Aimi. “We now have to contend with higher fuel costs after the overzealous approach to moving to China. This is causing volatility in the network so we have to reassess our move to China.”

Europeans have faced high fuel prices for years and have continually adapted their supply chain networks, inventory levels, and transportation functions to improve operating performance, reminds Sinisgalli at Manhattan Associates. “So there are parallels between what Europeans have already adopted and what the U.S. will likely evolve to. As the microeconomic landscape shifts rather radically, we will see companies that adapt to rising fuel prices with better-optimized supply networks achieve a competitive advantage