DC Velocity - July 2011

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insurance. Due to historically low interest rates on commercial loans, interest charges totaled only $4 billion. The value of all U.S. business inventories in 2010 was pegged at $2.064 trillion.

WEAK GROWTH SEEN FOR 2011

As for what lies ahead, Wilson said the “ underlying pieces are not falling into place to support anything more than weak growth” for the rest of 2011. Many retailers already have sufficient inventory on hand, and Wilson doesn’t expect any dramatic restocking activity leading into peak season. The freight market will continue to be “fraught with challenges for shippers and carriers alike” as a slowing economy will likely result in fewer shipments, she said.

Wilson predicted that a shortage in both truck capacity and available drivers could lead to “very significant rate hikes” for shippers by late 2011 unless “freight volumes continue to soften.” She said shippers would need to cultivate stronger relationships with truckers to meet their freight needs in the face of tightening capacity.

The trucking industry faces daunting challenges, according to the report. Trucking costs rose 9. 3 percent in 2010 while volumes grew by only 5. 7 percent, levels that come nowhere near recovering the significant traffic losses of recent years. Most of the industry’s revenue gains came from “pass-throughs” to shippers of diesel fuel-surcharges. However, carriers have recaptured only about 70 percent of their increased expenditures on diesel, the report said. Capacity remained ample through most of 2010, making it difficult for carriers to raise their rates and make them stick, the report said. Meanwhile, carriers confront a multitude of cost challenges, ranging from recruiting new drivers, upgrading engines to meet tougher emission standards, and complying with new government safety mandates.

“Any rate increases in 2010 were just going to recover costs,” Wilson said.

The situation is unlikely to change anytime soon, said Dick Kane, CEO of trucker and 3PL Kane Is Able Inc. “We face tremendous pressure on margins,” he told the Atlanta gathering. Kane said part of the problem is that logistics buying is increasingly being handled by non-practitioners who may be focused solely on price and do not understand the value delivered by companies like his. “Today, logistics is being purchased by purchasing managers, not logisticians,” he said.

The nation’s industrial property market continues its long, slow climb out of a very deep ditch.

Due in large part to growing demand for “big box” distribution center space of more than 500,000 square feet, vacancy rates for warehouses and DCs have dropped to 10 percent, a level that historically stimulates demand, real estate and logistics services giant Jones Lang LaSalle (JLL) said in its “Spring Industrial Outlook” report, released June 20.

Furthermore, the improvement is being felt in markets like Phoenix and Miami, both of which took a beating when the industrial real estate market plunged with the rest of the economy in 2008 and part of 2009, the report said.

Craig Meyer, JLL’s international director, said in an interview that the decline in the overall vacancy rate has been as gradual as it has been consistent. At the trough of the recession, average vacancy rates were in the 12- to 13-percent range, he said.

About 68 percent of the markets tracked by JLL are showing positive net absorption, indicating demand is sopping up supply that has remained static since new construction ground to a halt during the financial crisis and subsequent recession, Meyer said.

California’s Inland Empire, located east of the Los Angeles basin, continues to be a star performer, with vacancy rates falling by 80 basis points, the report said. Meyer said there are three to four active projects in the region involving DCs of 500,000 square feet or more.

For the first time in three years, developers are beginning to mull the idea of so-called spec development, where facilities are built before any firm commitment is made. Meyer said “we will see a return to spec development in 2012,” though he stressed the recovery will not be vigorous.

In fact, Meyer used caution in describing overall market conditions, saying rents remain depressed, new construction activity is still muted, and businesses continue to be conservative about financial commitments to warehouse and DC space. “This is not a wholesale and widespread development recovery. It’s more like the corpse coming back to life,” he said.

Meyer said that while low asking rents undoubtedly attracted leasing interest, the lower vacancy rates and pickup in activity has been driven more by a brighter overall economic picture. As for the outlook for rents, Meyer said the current situation “is as good as it ever is going to get” for tenants and lessees.

Chicago experienced the strongest surge in demand with 7. 7 million square feet absorbed in the first quarter alone, the report said. Most of that demand was driven by third-party logistics providers, according to the report.