October 14, 2008

Allen Group secures bridge loan for part of Dallas Logistics Hub

By Steve Brown

Investment banker Holliday Fenoglio Fowler LP said Tuesday that it has arranged a $20 million bridge loan to recapitalize part of the 6,000-acre Dallas Logistics Hub.

Developer Allen Group secured the financing for the 1,031-acre portion of the project from American Bank of Texas.

“Despite a complex transaction and a historic level of disruption in the capital markets, they never wavered in their focus or in their commitment to this deal,” Holliday Fenoglio Fowler’s HFF John Ahmed said in a statement.

The land is located near Union Pacific Railroad’s Southern Dallas Intermodal Terminal and a similar terminal planned by Burlington Northern Santa Fe.

The Dallas Logistics Hub is planned to eventually contain 60 million square feet of industrial office and retail developments.

October 10, 2008

The Allen Group gains approvals from development of Logistics Park Kansas City

The Allen Group, one of the nation’s leading Inland Port development companies, received final approval from the Johnson County Board of Commissioners for a public infrastructure Plan of Finance supporting the new intermodal and logistics park development. This came on the heals of the City of Gardner’s approval of the same Plan of Finance, Annexation and Development Agreements supporting the creation of Logistics Park Kansas City (LPKC).

The Annexation and Development Agreements, in combination with the public infrastructure Plan of Finance, set forth three separate stages of public infrastructure improvements totaling approximately $52 million. The first stage of improvements willinclude $14 million to connect 191st Street to

Interstate 35 allowing the first 200 acres to be developed. Construction for the road improvements on 191st Street will begin in early 2009. The State of Kansas has also made an initial commitment of $3 million to improve the existing Gardner Road and Interstate 35 Interchange. A new interchange is planned by Kansas Department of Transportation (KDOT).

Logistics Park Kansas City is a 600 acre Inland Port logistics park separate from, but adjacent to, the future BNSF Intermodal Facility in Gardner, Kansas. At full build-out, the park will have more than 7.1 million square feet of LEED certified distribution and warehouse facilities, creating over 7,000 new direct and indirect jobs and providing a one billion dollar economic impact for the State of Kansas.

October 1, 2008

Can Warehousing Really, Truly Be Strategic?

You bet. Innovations and value-added DC services are helping shippers leverage their supply chains to compensate for a weak economy, by bail button Warehousing has come a long way from a place to store product. Value-added services combined with some savvy upgrades are making them strategic players in shippers’ quest to do more with less.

During the past decade, “companies may have shifted their manufacturing base, and demand patterns may have changed, but not their warehousing,” points out Bob Spieth, president of OH Logistics. To prosper in tough times changing the way you do things to become more effective in the existing reality vital.

On the technology front, software as a service (SaaS) is a fairly new offering with great potential, especially for cash-tight businesses. With SaaS, users can access the software they need from an application service provider, when they need it, with the same ease as accessing a desktop application, and only pay for what is actually used. This means that users can access software to build highly complex, dynamic models of their supply chain at a small fraction of the cost of buying the application or the heavy duty computing power needed to run it. SaaS also avoids the headaches of installing and implementing an application that may be needed once every few years.

SmartTurn Inc. launched the first SaaS global inventory collaboration platform last June. “It runs over the Internet. You just need a browser,” notes Richard Yim, vice president of products and marketing. Designed for small warehouses and large supply chains, the SmartTurn Inventory Grid offers joint logistics planning, real-time visibility, permission-based inventory visibility, adaptive fulfillment, exceptions management and multiwarehouse inventory planning and distribution.

To determine who can see what information, the information owners set the security and access levels in much the same way Linkedln or Facebook users determine access—levels of permissions. For a price of $500 per month per warehouse, SmartTurn lets clients support an unlimited number of users. Yim says it’s becoming a popular option for 3PLs, who can now get their clients up and running in two to three days, compared to about three weeks for a traditional system.

RFID is becoming increasingly common for highend goods. Although the “let’s tag everything” mindset is employed by only a few major chains, according to Scott Burroughs, director of IBM’s Sensor and Actuator Solution Software Strategy, RFID is entering the business transformation stage where the question is, “how can RFID help businesses gain an advantage from technology?”

Airbus is at the forefront of RFID implementation. “Airbus made a strategic decision to look across multiple areas in the supply chain,” Burroughs says. At an April Webinar, Carlo K. Nizam, the head of value chain visibility and RFID for Airbus, outlined the enterprise-wide rollout plan. Initially, it implemented RFID to track containers and to manage received goods in the warehouse. The company plans, eventually, to integrate RFID into manufacturing and to use that information to automatically generate billing based upon the actual materials used to build each plane. In the pilot project, Airbus found it lowered labor costs and increased accuracy. “The biggest benefit,” Burroughs says, “is that it decreased inventory requirements.”

Harvey says some companies are sitting down with their supply chain partners, including logistics organizations, carriers and warehouses, to develop a system that is effective for all players and then automate it for a fully integrated supply chain. “The goals are to move information faster, ensure information is correct and put a business system atop data flow to allow exception management so you have actionable information,” he says.

In the movement towards a “touchless” inventory information system, shippers, carriers and 3PLs often found that integrating their stand-alone systems rarely yielded a seamless supply chain information system. Bill Harvey, director of logistics for Elemica, says the disparity among systems is causing noticeable delays. The current challenge is to take advantage of the built-up IT infrastructure, optimizing it for enhanced visibility throughout the supply chain.

Supply chain reinvention

Technology is just one part of the solution, though. One of the goals is to minimize the time to get products to the shelf. “The product life cycle—the time between new model introductions in-house or from competitors—has shrunk to a few days or weeks from six months to a year,” notes Steve Sensing, VP Operations, Supply Chain Solutions, Ryder System, Inc. To maximize sales opportunities, “Retailers are demanding products reach their shelves within days,” he says. The luxury of a six week ocean transit is reserved for less time-sensitive goods.

“The objective is to get warehousing closer to the customer,” emphasizes Walter Gruener, partner at Grant Thornton. Doing so has the overall effect of lowering shipping costs and speeding delivery by using more direct routes; having warehousing in similar time zones also helps the manufacturer and the customer work with the warehouse in real time. Carriers know this and are improving their routes into Mexico, and their facilities near the border. And to relieve the acknowledged congestion around major ports, some carriers and developers are expanding facilities near secondary ports like Tacoma or moving into more rural areas. By moving to places like California’s Moreno Valley, about 30 miles from Riverside, companies avoid die moratorium on freight movement during much of the day and gain more affordable and more available real estate.

The Allen Group, a private real estate development company, is buying land in strategic positions for warehousing and industrial parks near major transportation corridors. “Having land in Kansas City or Dallas near intermodal facilities is as sexy as oceanfront property,” Jon Cross, director of marketing, says. The heartand’s ‘inland ports’ as he calls these hubs, can reach 70 to 80 percent of the population within one to two days and the remaining percentages in four to six days. And, he says, labor is more stable in the U.S. interior because unemployment typically is higher than on the coasts.

In Dallas, The Allen Group is building a 6,000-acre project with 60 million square feet of vertical storage. The industrial park is expected to create some 60,000 new and indirect jobs for the regions by the time it’s built out 30 to 35 years from now. It has the benefit of being near Interstates 35,45 and 20, and the Loop 9 rail corridor around Dallas, as well as the Dallas-Fort Worth airport. “It will be the first industrial park in the U.S. to have two intermodal facilities,” Cross says, as Union Pacific and BNSF both have hubs there.

Near-shoring

To deliver shorter transit times, near-shoring is very attractive,” Sensing adds. It puts manufacturing closer to the customer in time zones that are more amenable to normal business hours and in countries that share a common basis in Western philosophy and have more similar cultures.

“Some companies are coming back to the U.S.,” Sensing says, while others are locating nearby. Although the topic of near-shoring arises in nearly any supply chain conversation, there’s broad agreement that this strategy is, so far, the subject of more talk than action. “Such decisions involve contractual relationships and so are held close to the vest and normally aren’t divulged until the decision is made,” notes Robert Gahagen, managing director of operations for Latin America at Menlo Worldwide Logistics. “Things don’t change overnight,” he says.

Third-party resources

In a similar vein, though, Steve Bullard, director of logistics services for Pilot Freight Services, says more companies are performing final assembly in the U.S. from sub-components manufactured overseas. One, an international MRI manufacturer, works with about 34 suppliers and keeps their parts in a warehouse near its U.S. factory. This provides the benefit of inventory reduction without affecting availability, because the shippers maintain ownership of the components until they actually are needed. In that situation, the MRI manufacturer has complete visibility to the entire warehouse, but individual shippers can only access information about their own goods. For this instance, Pilot created a third party mixed-use warehouse that handles about $10 million in inventory annually.

Such shared warehousing is most common among suppliers to a particular company in mature industries with mature product lines, and almost never among competitors. Although suppliers get paid later, it does help them transport more of their inventory by lower-cost carriers, saving more expensive modes for the last miles.

Using carriers’ resources is a good way to optimize the supply chain—that approach is driven by retailers that are converting their own storage space to shelf space, pushing the storage burden, oftentimes, onto the vendors.

Crowley, for example, offers pick and pack services for its apparel customers, as well as quality control, retagging, re-labeling and cargo segregation for shipping. “We’ve been doing this about ten years,” Carlos Rice, general manager, says. “Interest is picking up,” and now constitutes about 50 percent of Crowley’s revenue.

CellMax uses Pilot’s value-added services to help it more effectively distribute cell phone tower equipment in the U.S. It exchanged air shipping on a per order basis with ocean transit and full container loads stored in local warehouses.

Shipwire, an e-commerce order fulfillment company, offers a similar service in the U.S., Canada and UK. “Companies send us inventory and we help move it globally, shipping it from the nearest warehouse to the buyer,” explains Nick Gilmore, VP Marketing. This “store, sell, ship” model, he says, helps small companies compete globally with a level of shipping comparable to that of their largest competitors. That allowed one U.S. wind turbine company, RE Trade, to offer two-day delivery to its UK customers for the price of local ground transport.

Another option is “merge in transit” or “merge and delivery” services. Pilot Freight Services can hold components at Pilot’s facilities until an end customer’s order has completely arrived. Delivering everything to the customer at once minimizes the potential for misplaced components at the receiver’s location and increases efficiency for Pilot by allowing one larger delivery rather than several smaller ones. Taking that a step further, Gruenes says, involves coordinating deliveries so they arrive at the warehouse simultaneously for consolidation, so nothing is actually warehoused. That’s most useful for high end products, and is likely to be a growing trend.

Prospering in tough economic times is possible, but it requires taking a hard look at your own organization, your options, and the willingness to act. Warehouses aren’t just for storage anymore and carriers don’t just transport goods. Value-added services are making them strategic partners with skills that savvy shippers can leverage to their own best advantage.

Contributing Editor Gail Button writes often about logistics and supply chain issues. She is based in Washington State.

October 1, 2008

Commission approves infrastructure financing for intermodal

By Jack Weinstein

Johnson County commissioners approved financing last week for public infrastructure improvements to accommodate the Gardner Intermodal Hub and Logistics park.

Commissioners voted 5 to 1 for the improvements ” dubbed the Public Infrastructure Financing Plan ” needed for the more than $700 million project developed by Burlington Northern Santa Fe Railway and The Allen Group on 1,000 acres at 191st Street between Waverly and Four Corners Roads. Commissioner John Toplikar was the only dissenting vote. Commissioner Ed Peterson was absent when the vote was taken.

A $14 million design contract with Lenexa-based engineering firm Shafer, Kline and Warren, Inc. to remodel 191st from Gardner to Four Corners Roads was authorized by commissioners.

They also approved a measure to assist Gardner with finding funding to improve Waverly Road from 191st to U.S. Highway 56 and the South Waverly Bridge at an estimated cost of $12.2 million. The Public Infrastructure Financing Plan and intention to annex the land was approved by Gardner city council members the week before. The annexation will take place within 45 days of approvals by all participants including the city, county, railroad and developer.

After the meeting Thursday, Commissioner John Toplikar, released a statement explaining his opposition.

“Never before in the history of this county have the people been asked to pay so much for a private development they never asked for, ” Toplikar said.

“For this reason I call for a public vote and referendum on public participation on any county financing plan concerning this development. “

Toplikar added that more than 600 Gardner residents had signed a petition to oppose tax abatements granted to private developments at more than 30 percent. A 50 percent abatement has been proposed for the development.

In June, the Gardner Alliance for Equitable Taxation filed a civil suit against Gardner in Johnson County District Court to force the limitation of tax abatements provided by the city. That case was dismissed Sept. 24.

Another aspect of the Public Infrastructure Financing Plan called for the county to work with Gardner during the upcoming session of the Kansas Legislature to obtain an additional $50 million in state bonds to fund other infrastructure around the development.

During the last session, Gov. Kathleen Sebelius vetoed a financing package that contained the bonds because it was included with legislation to build two coal-fired power plants near Holcomb. Construction of the Intermodal Hub and Logistics Park, which will include more than 7 million square feet of warehouse development, is slated to begin in early 2009 with completion in late 2010.

To accommodate increased truck traffic as a result of the development, the construction of a new interchange at an undetermined location will be paid for by the Kansas Department of Transportation.

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”