advantages.)
What’s different today is the increased emphasis developers are placing on all things logistics. Part of the explanation
lies in cost: While real estate expenses amount to 4 to 5 percent of operating costs for most DCs, transportation costs
are now close to 50 percent, according to experts in the
industry. Another part lies in the transportation challenges
facing shippers, like tight trucking capacity, an aging driver
workforce, regulations that could reduce carrier productivity, and an increasing focus on carbon footprints. All this has
led industrial real estate developers and their transportation
and public sector partners to zero in on transportation and
logistics when they go to market their properties.
That’s mainly good news for those responsible for finding
the best sites for their companies’ DCs—it means that brokers speak the language better than ever. If there is a down-side, it’s that they also understand that a site that can offer
lower transportation costs than nearby
competitors can demand a premium price.
focused on the traditional real estate ‘stuff’ such as square
footage, price per square foot, ceiling heights, etc. They are
not able to assess or quantify the critical logistics decision
inputs, such as proximity to customers/suppliers, labor
costs, supply chain infrastructure, etc.”
WINDS OF CHANGE
All this comes at a time of flux for the
industry. Skyrocketing transportation costs
are forcing many businesses to re-evaluate
their distribution networks, says Tim
Feemster, a senior vice president for industrial real estate giant Grubb & Ellis. In a lot
of cases, these companies are seeking ways to
reduce less-than-truckload and parcel shipping costs, which
tend to rise faster than truckload or intermodal costs, he says.
The result could be a shift toward more regional DCs and
away from large national facilities, he adds.
Other factors could come into play as well, says Feemster,
who joined Grubb & Ellis nearly five years ago after a three-decade career in logistics operations. For example, he
believes that the recent supply chain disruptions—in particular, the blows to automotive and electronics supply
chains caused by the disaster in Japan—may spur some
companies to re-evaluate their business resiliency plans,
including their inventory strategies. That, in turn, could
affect decisions on DC size. “If you change inventory strategy, that affects the size of the box you need,” he says.
Should all this lead to a boom in industrial real estate
activity, the challenge for the industry will be bringing its
people up to speed. Working with clients on logistics network planning projects requires a great deal of specialized
knowledge. “What’s important is that an economic development person understand supply chain cost structures
and how [they] relate to the [site] decision,” Feemster says.
That could mean a steep learning curve for brokers more
accustomed to selling buildings, says Richard H.
Thompson, executive vice president for Jones Lang LaSalle
Americas Inc. (JLL). In an e-mail to DC VELOCITY,
Thompson noted that historically, “when real estate professionals look to market or sell industrial assets, they are
GEARING UP FOR GROWTH
To prepare their brokers for a new era, some developers are
ramping up their training efforts. Grubb & Ellis is a case in
point. Feemster says that when he joined the company, one
of his missions was to train brokers on what really matters
to logistics network planners.
Others are taking the technology route. JLL, for example,
has developed a sophisticated modeling tool to analyze
properties from a logistics point of view.
Called the “Reverse Location Selection” (RLS) model, the
tool essentially flips the traditional site search process on its
head. Rather than starting with a target region and zeroing in on specific properties, the RLS approach starts
with the property itself. That is, it takes a specific location or property and quantifies its
value in logistics and supply chain terms
(as well as in more traditional measures).
That approach offers advantages on a
variety of fronts, JLL says. For one thing, it
saves customers time by doing some of the
upfront work they would otherwise have
to do themselves. For another, it can help
developers evaluate the commercial prospects of their
properties.
For example, JLL recently used the model to develop a
“logistics profile” of a 440-acre site in Pennsylvania’s Lehigh
Valley owned by Los Angeles-based industrial property
developer Majestic Realty. As part of its assessment, JLL
looked at factors like rail and highway access as well as
proximity to major markets.
Ed Konjoyan, a vice president of Majestic Realty, says his
company commissioned the study after seeing how well
logistics-centric marketing worked for the CenterPoint
Intermodal Center. CenterPoint, he says, landed some very
big customers by promoting logistics-related advantages
like reduced drayage costs. Majestic is hoping to emulate
that success with the Lehigh Valley site. The JLL process, he
says, “confirmed scientifically our gut feeling about the
value of this property.”
What does that mean for distribution executives looking
for a new DC location? When companies like Grubb &
Ellis, JLL, Majestic, and CenterPoint parse the logistics
advantages of their properties, it likely can accelerate the
selection process—although due diligence would demand
verifying any claims. And as Thompson points out, there’s
another potential advantage for distribution executives.
When it comes time to shed a company-owned DC, it
could reduce their risk of getting stuck with an oversized
white elephant.
