October 2012

The future of real estate is driven by transportation

As seen in RE Journals

By Adam Roth

The Journal of Commerce held the Inland Port Logistics Conference in Chicago a few weeks ago.  Consistent at various logistics conferences over the last 12 to 15 months is that a few “alarming” transportation statistics were shared and discussed.  At one point during the conference, I was sitting next to a truckload broker.  He asked why a “real estate guy” like me would be taking notes on a trucking panel.  My answer: “The concerns and monumental issues trucking is trying to tackle are going to define and directly impact my industry.”  His response: “ … but you’re in real estate.”  Below are some of the key items I walked away with and how they will be transforming commercial real estate.

“As the economy changes, as competition becomes more global, it’s no longer product vs. product, company vs. company but supply chain vs. supply chain.” – Fortune Magazine, February 1995.  This was part of the keynote address delivered by Michael Murphy, chief development officer at CenterPoint Properties.  This statement is truer today than in 1995 and the supply chain will be a leading factor in corporate strategy.  The transportation sector, particularly trucking, is under severe pressures that will be increasing as the economy and freight come back.  Historically, transportation is eight to 10 times the cost of rent; due to transportation constraints, this multiple is going to be amplified to 12 to 15 times the cost of rent within the next two years.

Truck driver shortages have become a chronic problem and driver turnover recently toped 100 percent – yes, 100 percent, this is not a typo. Also impacting the industry are fuel costs as well as two recent regulatory changes:  Compliance Safety & Accountability (CSA) 2010 and new Hours of Service rules that are set to begin July 2013.  Over the past year, I have seen presentations from the president of Schneider Trucking (the country’s largest privately held trucking firm) and a high ranking person from JB Hunt (one of the largest publicly traded trucking firms). Their “unofficial” predictions/projections on driver capacity are a reduction of 8 to 10 percent of the current driver pool. This may sound like business as usual, however, per the 2012 State of Logistics Report that was presented in Washington, D.C. in June, “If U.S. truckload capacity is reduced by 5 percent due to new regulations and driver shortage, it could equate to a 29 percent increase in total intermodal volume.” Interestingly, per the same report, trucking companies are partnering with rail for intermodal service to avoid problems caused by the driver shortage. In fact, many carriers are investing in new intermodal chassis and trailers rather than full rigs.

Meanwhile, in an economically tight time, the railroad industry spent approximately $12 billion in 2011 alone in infrastructure.  The railroads have very good visibility across multiple commodities/industries and in the slowdown, they have spent to prepare for the increased volume.  They are already seeing the benefits as intermodal volume has recovered 84 percent of its 2006 volume. Also benefitting the industry is its fuel efficiency.  Approximately 98 percent of supply chains are based on low-cost fuel and trucking capacity, both of these factors are changing toward the negative and when truck capacity becomes tight, more will be forced to turn to rail. Making the transition easier is the reduced emissions and one more thing: typically it costs less when converting from over-the-road to rail. Integrating with a rail component will be a driving factor as corporations evolve and look ahead in their overall network strategy.

Site selection is already driven by transportation spend, however, network analysis will become more fluid and ongoing.  One panel included a major 3PL, a site selection consultant and a household name retailer – all are now engaging in network analysis every two years.  The ongoing network analysis and potential location shuffling will bode well for 3PLs, an industry that since 2002 has doubled their revenues and will remain one of the most active sectors.

From a pure real estate perspective, it’s critical to understand what transportation advantages a building or location offers.  In particular, my team has found it effective to have an understanding of the lift volume and specific function of the various intermodal operations.  Equally important is the ability to correlate the transportation advantages directly to the real estate costs.  Rate itself can only be pushed so far, whereas if a project can impact the corporate transportation spend, the actual net rent will be much less of a factor in the decision process.

Reinforcing the gravitation to rail is the final statement from the 2012 State of Logistics Report: “ … and I will end with our favorite refrain, capacity issues are on the horizon.  I urge everyone to begin making contingency plans for the day you cannot get a truck.  The railroads are standing by with a great offer and have the capacity to take up the slack.”

Adam D. Roth, CCIM, SIOR is an executive vice president at NAI Hiffman and specializes in industrial real estate including land assemblage and development, building sales and tenant representation. Additionally, as a director of NAI Global Logistics, Roth’s focus is providing real estate and supply chain solutions to distribution and warehouse companies throughout the world on matters including corporate relocation, site search analysis, build-to-suit alternatives, acquisition, disposition and leasing services.

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