Site Selection for Land-Intensive Occupiers in Infill Areas

Key Concepts

  • Industrial properties with 30% or less improvement square feet compared to land square feet (“low coverage”) are increasingly scarce in metropolitan areas of the United States
  • Land-intensive industrial uses, which typically use low coverage industrial properties, can be challenging to entitle and therefore understanding zoning is critical to a project’s success
  • Successful site selection for land-intensive industrial occupiers typically involves a proactive approach to finding and securing suitable properties
  • The ability to compare the relevant internal and external data with a robust property search and indentification process exponentially increases the effectiveness of the site search

Availability of Low Coverage Properties

Finding available infill properties for land-intensive industrial occupiers is typically much more challenging than office, warehouse or manufacturing uses. Throughout most primary, secondary, and even tiertiary US industrial markets, low coverage properties are increasingly an endangered product type. With no more than 30% of their land area covered by improvements, low coverage properties have been developed into “higher and better” uses, subject to strict zoning regulations, and even turned into other property types.

Due to these challenges, site selection for land-intensive industrial occupiers must be designed differently to increase the odds of success. A successful site selection strategy for such occupiers incorporates the relevant internal and external sources of information with a proactive approach to investigate, target, and secure properties which align with company objectives.

The Proactive Site Selection Process

The site selection process involves multiple steps which ultimately lead to a desired site at the best cost/benefit ratio possible. Generally these steps are assembling project stakeholders, defining requirements, researching the market, analyzing potential options, negotiating, and acquisition. All these steps are important but I won’t be discussing all of them here. If you are interested, there are plenty of site selection articles in industry publications which discuss the site selection process in detail.

In any site selection search that has limited property availability in a desired area, such as the infill low coverage sites considered here, companies cannot follow the same playbook as a search for suburban office building or a dry warehouse and expect great results. Instead, I think there are two key areas where land-intensive companies should focus their resources.

First, firms should use internal and external data with GIS mapping platforms, such as Esri, to identify the areas in which they would consider a new location. GIS mapping technology can easily show customer locations, competitor locations, available properties, average real estate costs, zoning, labor, drive times, and more. A much better conversation can take place when stakeholders can see all the relevant information required to make location decisions.

Furthermore, it is especially effective to use GIS mapping when searching for properties that are difficult to find. Rather than just focusing on the location of currently available properties, via GIS mapping the stakeholders can determine:

A) the areas they would consider a location (“Areas of Consideration”)

B) zoning overlays within the Areas of Consideration which will allow their use (“Entitled Areas of Consideration”)

C) all properties within the Entitled Areas of Consideration which meet their minimum physical requirements (“Set of All Amenable Properties within the Entitled Areas of Consideration”)

D) all available properties, if any, within the Set of All Amenable Properties within the Entitled Areas of Consideration

E) then layer in additional data as needed.

The second key area I would recommend firms focus is actively marketing their requirement to owners of property within the Set of All Amenable Properties within the Entitled Areas of Consideration (Item C above), investor/developers, and brokers. This practice increases the odds of finding one or more suitable sites and can also create negotiating leverage with the owners of any sites currently on the market. The marketing can be done without divulging the company name, if helpful only indicating the basic requirements and creditworthiness to further entice landlords or sellers.

Marketing the requirement to owners is the inverse of what is typically done by an owner marketing its property. Similar to an effective property marketing program, a marketing program for an occupier can be structured in the same manner with marketing materials and scheduled follow ups being made to prospective landlords or sellers.

Another benefit of actively pursuing the key areas above is the trust it can build within the organization. Many site selection leaders experience the doubt expressed by others when available properties are difficult to find. By virtually exploring all the possible properties via GIS mapping and proactively marketing to those property owners, these leaders are able to show other stakeholders that no opportunities are being left “uncovered” and the organization is doing all it can to find a suitable site. This can engender trust in the site selection process internally and help prevent the dreaded “I see available properties everywhere. Why can you find one?” response many of us have heard.

First Principles

Today I was thinking about first principals and what first principals exist in my business as an industrial real estate resource and representative. A first principal is basically a concept which cannot be divided further. In other words, it is a foundational concept and leads to other concepts which are based upon something that cannot be further deduced.

I think one first principal for my business is the notion of service to individuals not organizations. When I represent XYZ Company, I am really representing and furthering the interests of the individual stakeholders at XYZ Company. This way of thinking helps me focus on building a personal relationship with the client where I understand their particular ideas, needs, and wants-not just the company’s objectives.

While it is great to have a reference board of the companies I represent, I really should have one that has just names of the people I work with at those companies. To me, they are a first principal for my business.

INterchange 2019

I attended the Cushman & Wakefield industrial conference known as INterchange 2019 last week. As a recap, here are some of the interesting points I heard there:

Occupiers

  • Availability of qualified labor is a primary concern in site selection.
  • Tenants and landlords are investing heavily in developing or adding amenities which can help companies attract labor
  • Industrial firms may value certifications such as WELL which indiciate a higher standard of amenities and health for employees
  • Staffing companies which are compensated based on their ability to retain employees as opposed to finding them are gaining in popularity

Capital Markets

  • Opportunities for rent growth in smaller spaces, 50,000 square feet or less
  • Larger buildings (500K+) are less attractive investments since many investors do not want to allocate high levels of capital to a single investment
  • Yield pain in primary markets continues to lead to investor interest in secondary and tiertiary markets
  • Secondary and tiertiary markets often have lower yields than many new investors expect
  • Value add opportunities are seeing the greatest buyer pool
  • Core opportunities typically will see 5-6 offers
  • 3-7 year lease term is most desirable for investors
  • 10+ lease terms are discounted +/-25 basis points since investors
  • Investors want to be able to forcast their exit or increase in future value
  • With land prices approaching market building values, covered land plays are increasingly desirable

3PLs

  • Procurement is increasingly driving the bid process for 3PL customers
  • More 3PLs may look at strategic campuses of multiple buildings
  • Expect more merger and acquisition activity in the 3PL space
  • Shipping companies are aggressively expanding into the 3PL space

Los Angeles Basin Drayage Rates 2016-2019

New drayage rates released by Tina Arambulo and Eric Kenas @ Cushman & Wakefield indicate that differences between drayage rates by area are narrowing in infill areas of Greater Los Angeles while widening in East Inland Empire markets. Therefore, Greater Los Angeles importers may be less sensitive to location differences in infill areas while increasingly biased towards locations west of Fontana based on drayage rates alone.

The chart below shows the widening or narrowing of percentage differences between markets from 2016 to 2019. The negative percentage indicates a narrowing of drayage rate differences for the compared locations while the positive percentage indicates a widening of drayage rate differences for the compared locations.

Drayage Rate Delta

 

Strategic Use of Transaction Documents in Commercial Real Estate (Part 1)

The selection, construction, and use of transaction documents is an important part of negotiating any commercial real estate transaction. Transaction documents define the parties to the transaction, the business terms to be agreed upon, and the time frame in which the parties can agree. They create the playing field for the negotiation to take place.
 
A transaction document is best viewed as a tool to implement a negotiation strategy. Choosing the type and structure of a transaction document, and the frequency of a response should be depend upon the negotiation strategy designed to achieve the objective. It is therefore important that the objective and negotiation strategy are created prior to entering into a negotiation with another party.
 
In this post, the first of a three-post series on the strategic use of transaction documents in commercial real estate, I review the definition and creation of a negotiation strategy. In the second post I will review the strategic use of the Request for Proposal or RFP. In the third and final post, I will review the strategic use of proposal documents and the documents used to respond to a proposal. 

What is Strategy?

Since the definition and use of the word “strategy” varies significantly in business, I think it is important to define what is meant by strategy and its use in negotiations. Strategy is simply the overall plan to achieve the objective. As a former football player, an easy way for me to think about strategy is as a game plan where certain plays would be called, adjustments made, and players used in certain situations.

A strategy will typically answer why certain actions are taken to reach a goal. In this way, strategy are not actions or tactics. Tactics are the steps taken to fulfill the strategy and will typically answer the question of how certain actions are taken to reach a goal. Bill Belichick, head coach of the NFL’s New England Patriots, is famous for defensive schemes which neutralize an opposing team’s two best players on offense. His possible strategy is to take away an opposing team’s two best players on offense because it forces the opposing offense to call unfavorable or unfamiliar plays.  Coach Belichick uses tactics in the form of defensive formations, calls, and players to execute this strategy.

In the context of a negotiation, strategy becomes the system in which a party will negotiate with one or more other parties in order to reach its desired outcome. Such a strategy will contain tactics which encourage the other party or parties to accept your desired terms. 

The Objective

Defining an objective cannot be done properly without research and critical thinking. A reasonable objective takes into account a) the overall goals and strategy of the organization, b) the market value of the parties to each other and c) the market in general. An organization’s goals for a negotiation should start in alignment with its overall goals and strategy, then consider the impact of the market value of the parties to each other and the market in general.

If the comparative value of the parties to each other is greater than the general marketplace, then a reasonable objective for each will reflect the additional value created by the other party. A Fortune 100 tenant may create additional value for a publicly held landlord who reports on the creditworthiness of its tenants to investors, for example. Conversely, an existing and valued landlord may create additional value for a tenant wishing to avoid negotiating a new lease and overall uncertainty.

Objectives should also be realistic in the marketplace, considering the market “best case” and “worst case” scenarios based on historical and pending transactions, potentially adjusted by market trends. Such scenarios should not only consider price, but also terms if available.

Developing a Negotiation Strategy

One way to create a negotiation strategy is to outline the likely steps it will take to reach the objective. In the example below, starting with the Objective in mind, there are seven steps potentially required to achieve the Objective. The amount and description of the steps should be reasonable, even though they are subject to change as the negotiation proceeds.

First Steps

Once an initial outline of the steps has been created we can start to describe the tactics we anticipate using during the negotiation. The tactics can consist of any action which can help lead to the objective. Tactics can be used again and again during negotiations. The key to success is understanding which tactics to use and when.  As the diagram below shows, tactics indicated by the letter “T” are repeated throughout the negotiations.

Second

In order to develop the negotiation strategy further, the outline with the tactics can be expanded to include if-then scenarios. If-then scenarios plan for possible actions depending on how the other party responds during negotiations. The outline with the tactics developed updated for if-then scenarios might look like the following:

Third

Once the tactics and if-then scenarios are populated, the negotiation strategy can be summarized as explaining why the planned steps and tactics will be used during the negotiation. When the negotiation begins, those planned steps and tactics function as guides to be assessed and modified depending on how the negotiation proceeds. 

While the steps to develop a negotiation strategy take some time, I believe the benefits of planning far exceed the costs. A negotiator is in the strongest negotiating position possible their objective is reasonable and achievable, the steps to achieve the objective are defined, they are prepared for the other party’s actions, and they have sound tactics to help them reach their goals. They are not victims of the market, employing “lazy” ideas such as splitting the difference, and searching for less strategic ways to get a deal done. Instead, they put the odds of negotiating success strongly in their favor.

In my next post I will discuss utilizing the Request for Proposal in a negotiating strategy as a tactic to achieve the ultimate objective. Until then, I look forward to your comments or questions.

 

Blend and Extend in a Landlord’s Market

via Blend and Extend in a Landlord’s Market

Layout of Supply Chain Real Estate

Why Building Layout Matters

At its very basic level, the industrial building is two dimensional, meaning that it consists of a width and a length, or widths and lengths if irregularly shaped. While three dimensional topics such as clearance heights and sprinkler systems often determine an industrial building’s utility, it’s layout can be equally important.  The dimensions of a building can determine if a distribution operation is moving goods profitably, a manufacturing operation produces product efficiently, and a warehouse operation stores product effectively. For these reasons, supply chain real estate practitioners should be aware of how their company or client’s operation translates into an ideal building layout for any new real estate search or re-design of current facilities.

Much like clearance heights and sprinkler systems, the optimal building layout is not uniform for all users. For example, a less-than-truckload (LTL) distribution company may prefer a thin, rectangular facility with a significant amount of dock high positions on one or multiple sides. This shape will allow the LTL to effectively move and sort as many goods in and out of the warehouse to the largest amount of trucks possible. It will also reduce the distance between moves inside the warehouse, which greatly improves pick times and related key performance indicators. Conversely, a manufacturing company may prefer a thicker, almost square-shaped facility with inbound and outbound loading on only the narrowest side. This shape will allow the manufacturer to plan long production runs, starting from the inbound areas and weaving around to the eventual outbound side or storage areas.

Outside of greenfield developments, where the building shape and amenities can literally be designed around material handling requirements, the responsible parties of a firm looking for a new industrial property would select a facility that either exists or will exist based upon an already entitled design. For the most part, architects have designed speculative industrial buildings to a) maximize site coverage and b) appeal to the widest possible audience of users. For these reasons, most modern industrial buildings will have a rectangular shape with loading on one or both wider sides.

For the warehouse/distribution user, buildings which have greater than average depths (400’+) and one-sided loading will often be at an operational disadvantage compared those with shallower depths. This is especially the case for operations with higher inventory turns using forklift or manual order picking. It may not be the case for operations with higher inventory turns using automated picking systems. However, at this time the vast majority of operations use forklift or manual order picking due to the high expense of automated picking systems. Therefore, for the vast majority of warehousing and distributing operations buildings with average to below average distances from loading areas will be preferred.

 

 

 

The Basics of Cold Storage Real Estate

Cold or refrigerated storage is a specialized industrial real estate product type which plays an important role in the global cold chain and greater worldwide supply chain. As the name would imply, cold storage is simply the storage of goods at temperatures less than ambient. Cushman & Wakefield’s Los Angeles based team of Mike Foley, Ryan Bos, and I specialize in the sale and lease of cold storage facilities throughout North America and are active participants in Cushman & Wakefield’s Food & Beverage group. In this post I cover the basics of cold storage from an our “broker” perspective. I review the cold storage features most commonly of interest to cold storage users and property owners when they evaluate cold storage facilities. If you would like to learn more detail about any of the features below, please reach out to us. I also have usually included a link to a relevant website with more information in each section.

Location

Cold storage facilities are located in areas where refrigerated storage is in demand. A recent report from a competitor of C&W mentioned that cold storage facilities tend to be located near food production and population centers. I would add ocean and air ports of entry are also an important location consideration as many goods requiring refrigeration are imported and exported on a global basis. Common products stored in cold storage facilities include food-related products, pharmaceuticals, and even some consumer goods like camera film and lipstick. The vast majority of cold storage is designed and constructed for agricultural and processed food products.

According to the USDA, U.S. total refrigeration storage capacity is 3.6B cubic feet in 950 warehouses as of October 1, 2017. This capacity is highly concentrated in top five states with the most refrigeration capacity. Together they account for almost 40% of all U.S. cubic capacity. California has the most refrigeration storage capacity with 396M cu. ft. or 11% of U.S. capacity, while Washington (217M or 8%), Florida (259M or 7%), Texas (231M or 6%), and Wisconsin (228M or 6%) round out the top five.

The largest cold storage provider in the U.S., Americold, has 14 locations in California alone encompassing almost 70M cubic feet and 1.9M square feet of refrigerated space. 9 of Americold’s 14 California locations are in Southern California while the remaining 5 are located in the Salinas and Central Valleys, some of the largest agricultural areas in the world. Americold’s California portfolio exemplifies the typical cold storage location criteria; close to the large population center and ports of Southern California and the large agricultural growing areas of Northern California.

Types

Cold storage facilities are not homogeneous. Despite the varying features and layouts, there are generally two main types of cold storage facilities; the purpose-built cold storage facility and the dry conversion facility, also known as box-in-box. A purpose-built cold storage facility is usually a build-to-suit for a user and specifically designed to meet the user’s cold storage needs. There may be ambient areas of a purpose-built facility, but the cold storage amenities will be incorporated into its construction.

Conversely the dry conversion facility was originally an ambient warehouse which was converted, by way of the addition of cold storage features, into a cold storage facility. Dry conversion facilities are often less than 50% cooler/freezer and typically are a better option for companies with significant ambient requirements and smaller cold storage requirements.

Refrigeration Systems

IMG_0356

The heart of the cold storage facility is the refrigeration system. The refrigeration system is usually labeled by refrigerant it uses. There are typically two different categories of refrigerants used by most cold storage refrigeration systems; anhydrous ammonia and Freon, a trademarked catch-all name for a number of halocarbon products including older R-22 and newer R134a, R-507, R-404A, R-407C and R-410A. Each system has relative cost, efficiency, safety, and environmental qualities and it is important for cold storage participants understand how each refrigerant suits its requirements.

Ammonia and Freon systems have distinct differences in terms of cost and efficiencies. Compared to Freon, ammonia refrigerant is typically cheaper running about 2.5 times less than R22 and 7 times less than R134. Operation costs in ammonia systems are 20-30% lower than R22, compressors are usually more efficient and high heat transfer coefficients (R values) in equipment is usually better with ammonia versus Freon. However, efficiency savings may depend on temperature ranges. With low food freezing temperatures between -30 and -45 degrees F,  Freon may be more efficient than ammonia due to less expensive compressors and lower compression energy.

Despite the cost and efficiency savings of ammonia in most systems, some cold storage users and property owners avoid ammonia systems due to its reputation as being dangerous. Although ammonia is categorized as a non-flammable gas by the DOT and explosions are extremely rare, when there have been ammonia explosions they can be catastrophic when the ammonia gas has been allowed to build up to substantial levels. Such levels are unlikely in operating cold storage plants because leaks of ammonia are self-alerting. The presence of the gas is very noticeable due to is pungent odor.

Cold storage users concerned with their environmental impact may take a closer look at the type of refrigerant being used in their cold storage facilities. Some Freon gases such as R22 are ozone depleting and, under the U.S. Clean Air Act, are being phased out. Newer Freon gases, such as R134a, are not ozone depleting but do have global warming potential. Ammonia is not ozone depleting and has no global warming potential.

The design of any refrigeration system, including those used within cold storage facilities, is to move heat from a low-temperature reservoir to a high-temperature reservoir to achieve a temperature below the surrounding ambient temperature. In cold storage facilities, refrigeration systems typically consist of compressors, piping, condensers and receivers, expansion and control valves, evaporators, monitoring systems, and temperature controllers. A good video overview of an ammonia cold storage refrigeration system can be seen by clicking here and a Freon (410a) by clicking here.

If the heart of a cold storage facility is the refrigeration system, the element which makes it tick is the compressor. The compressor’s function in the refrigeration system is to take cool, low-pressure refrigerant and compress it into a vapor at much higher temperatures. Here is a good site to understand how compressors function within a refrigeration system.   Compressors can be generally categorized into reciprocating, scroll, screw rotary and centrifugal types and have either hermetic (closed and sealed), semi-hermetic (can be opened for repairs), or open types.

As with any system that moves fluids and vapor, piping is an important component of the refrigeration system. Low quality and poorly designed piping can lead to significant issues throughout the refrigeration system of a cold storage facility. Most pipes are made of steel, especially where ammonia is used as a refrigerant. Ammonia based systems cannot use components made of brass, copper, zinc, galvanized steel, or cast iron as the ammonia will degrade those materials. In either an ammonia or Freon system, pipes are rated for temperature and are often insulated throughout the refrigeration process.

Following the compressor, the next stage in a refrigeration system is the condenser and receiver. As stated previously, the compressor takes the refrigerant in a cool, low-pressure state and compresses it into a vapor at much higher temperatures. From the compressor, the refrigerant vapor is piped to a condenser, which is basically a series of tubes and fins often accompanied by fans to drive air through them. The job of the condenser is to remove heat from the refrigerant as it liquefies.

There are four types of condensers that can be used in a cold storage facility including air cooled, liquid cooled, evaporate, and static. If the refrigeration system has an expansion value, it will often have a receiver following the condenser. The receiver’s functions are to 1) separate any refrigerant vapors from its liquid form; 2) receive and pipe the liquid refrigerant towards the expansion valve, and 3) store any liquid refrigerant during a shut down.

The expansion valve, or thermostatic expansion valve (TXVs) to be precise, functions as a gatekeeper for the next stage of the refrigeration system, the evaporator. As the liquid refrigerant is piped towards the evaporator, an expansion valve allows refrigerant to expand, lowering its temperature and allowing it to absorb heat inside the cold room via the evaporator. The expansion valve throttles refrigerant automatically based on the requirements of the evaporator.

The evaporator is the final stage of the refrigeration system and the component used to reduce temperatures in cold storage facilities. Working in the opposite way of the condenser, the evaporator takes the low pressure and temperature liquid refrigerant from the expansion valve and allows it to absorb heat from the air flowing around it. Because the liquid refrigerant is at a much lower temperature than the surrounding air and has a low boiling point, the refrigerant attracts and absorbs an increasing amount of heat through the evaporator as air moves around it. Through this system the refrigerant removes heat from the cold room and, as its name would suggest, returns its evaporated form to the compressor to start the entire refrigeration process over again.

In cold storage facilities, refrigeration systems often work in tandem with several other systems which ensure the desired temperature is met and the physical elements of the facilities are protected from extreme temperatures.  In facilities with room temperatures consistently below freezing, underfloor heating is typically required to prevent heaving. Heaving takes place when the soil beneath the facility floor freezes, form ice, and expand pushing the floor, columns, walls, and even the roof upwards.

There are several types of underfloor heating used in below freezing cold storage facilities. An electric heat system uses trace place in metal conduit buried in the sub slab and monitored by a control system. A pumped fluid system typically moves glycol or other warm fluid through a system of pipes. Then there are the forced ventilation and natural ventilation systems, where air is used to heat the sub slab area. With any system, the objective is to raise the temperature thereby avoiding any damage due to ground freeze and heaving.

Cold Rooms

Staff worker control in freezing room or warehouse

Within the cold storage facility, the cold room is the main storage area being refrigerated. Cold storage rooms can be built in multiple types of configurations and with many different types of features. Common to all cold storage rooms is their purpose to contain and maintain temperature. To do this, cold storage rooms are typically constructed with materials that are insulated.

Cold room walls, for example, are typically insulated metal panels or IMP; essentially consisting of a metal exterior and an expanded polystyrene (EPS) core. Considerations for cold storage walls include its R-Value, fire rating and ease of installation. In addition to its walls, cold storage rooms have ceilings or roofs that are also insulated, either with IMP or with single-ply TPO or PVC with layers of insulation such as polystyrene. Lastly, door design is important in order to contain and maintain desired temperatures efficiently. For those rooms with low traffic or long term storage of goods, a low speed highly insulated door may be preferred. Rooms with a high traffic or short term storage of goods may prefer higher speed or rapidly opening doors, which can often rise and close in very short periods of time to restrict airflow.

Racking is often a significant consideration in the cold storage facility because a cubic foot of refrigerated space is expensive to build and maintain. Racking can be a costly component of the facility, not just for the initial installation but also because it can be challenging to replace. Re-racking a cold storage facility can trigger all sorts of requirements, from OSHA to replacing an entire sprinkler system. Furthermore, racking ultimately controls one of the most important metrics in cold storage, the pallet count. Since cold chain companies often charge by or track their product using the pallet, the number of pallets a cold storage facility can hold is generally an indication of how much money or product they can spend or hold. Ratios such as pallet per square foot and pallet per cubic foot can indicate how efficient a cold storage facility might be compared to its square foot and cubic size.

Most of the time, cold storage facilities employ selective pallet racking, where the pallets can be easily accessed at all times. Other types of pallet racking include drive-in, push back, gravity flow, and movable types which can be condensed to preserve space. Whatever the type of racking, its ability to store product densely is critical as long as it meets the needs of the operation.

Selecting racking in a cold storage facility is not only about storage capacity, but the materials and construction of the rack should also be considered. Racking typically is built in two forms, roll formed and structural bolt together. Where roll form is the typical standard in ambient temperatures, in cold storage structural bolt-together can be better because it is less susceptible to failure in freezing environments. Another consideration is the chances of a forklift hitting racking in a cold environment is higher than in an ambient environment. Reaction times are slower for forklift drivers in colder environments, which can lead to greater accidental impacts with racking and other areas of the cold storage facility. Smart operators will use heavier duty racking and protective devices, such as bollards, to prevent damage to sensitive areas.

Other Areas

Adjacent to cold storage rooms are sometimes found blast cells or freezers. These are rooms or areas dedicated to freeze products quickly for storage and/or transport. There are generally three types of blast freezers; continuous, variable retention time (VRT), and blast cells. Continuous are usually located in production facilities at the final stage, such as frozen pizza. Tunnel and spiral are two types of continuous freezers. Variable retention time (VRT) freezers are typically hybrid systems including batch blast freezers and continuous freezer systems. VRTs are typically located near production lines. Finally, blast cells are the most common type of blast freezer found in the cold storage facility. Their function is to freeze many pallets of boxed product at one time using a high volume of cold air.

Between the cold storage rooms and the exterior loading areas is the cold dock. Cold docks are an important component of most cold storage facilities because they allow for product to be staged in a temperature controlled environment prior to loading or storage. It is typically not necessary to refrigerate cold dock areas to freezing temperatures, even for frozen product, since they are designed to slow down the thawing process and not for storage.

Another room commonly found in cold storage facilities is the battery charging room. Battery charging rooms are typically separate, well-ventilated areas designed to prevent the build-up of hydrogen gas and keep heat away from the cold storage areas. Hydrogen gas is a by-product of the battery charging process and it is explosive if concentrated. An air mixture of 4% or more hydrogen has a high risk of explosion. In addition to ventilation, battery charging rooms will typically have acid resistant floors and ample electrical distribution. Battery life suffers in colder environments and the typical battery can lose up to 35% of its charging capacity in cold versus ambient environments. Because multiple charges per day reduces battery life, a greater number of charging stations are often required to fully charge batteries before they are used.

Loading areas in the cold storage facility are typically found off a cold dock and have some specialized features when compared to ambient loading areas. Dock doors will typically be insulated and sealed to prevent the loss of cold air. Although mechanical and hydraulic “pit” levelers are not uncommon, in order to prevent additional loss of temperature and prevent pests there are also vertical-storing dock levelers. As with ambient space, dock lights and door controls are common features in cold storage facilities as typically are no skylights to help illuminate the dock areas. Outside the dock doors, dock seals and/or shelters help keep the cold air in and the elements out of the storage areas. They also can protect employees loading and unloading. Reefer electrical plugs and trailer restraints also are common amenities, allowing refrigerated containers to run and be safely loaded and unloaded at the dock. Grade level doors are also common and can be used for the loading and unloading of equipment and other large items.

Yards are an increasingly important part of the cold storage facility. More operators are requiring off-dock trailer storage and increased areas for trailer staging in yard areas. For safety and insurance purposes, they want separate employee parking and truck yard areas. In order to keep yard maintenance costs to a minimum, operators also look for concrete dolly pads or yards as opposed to asphalt.

Rail service is another feature which can add to the functionality of the cold storage facility. Many large and intermediate agricultural companies use rail to bulk ship goods, many times from the growing areas to more populated areas. Rail served cold storage facilities will typically have a rail dock consisting of a refrigerated area and insulated doors leading to the rail spur outside. However, even if a cold storage facility has rail related infrastructure, including the rail spur and rail docks or doors, users should always investigate whether the rail is active upstream from their spur and includes any required switch infrastructure. Lastly, many companies want to investigate the possibility of using rail at their facilities, typically to replace truckload or intermodal shipments. However, railroad lines typically required a certain volume to service specific facilities so such companies should also check with the railroad who owns the spur and upstream lines to make sure they will service their facility.

Fire Protection

As with ambient storage facilities, fire protection systems are an important part of the design and safety of cold storage facilities. Unlike ambient storage facilities, wet sprinkler systems are impractical for cold storage facilities. Freezing temperatures can cause wet sprinkler pipes to burst-causing a significant damage as a result. Instead, non-wet sprinkler systems or, for example, double-interlock pre-action sprinkler systems are often utilized. In such systems the fire protection system requires a detection signal from a heat detection cable, which in turn opens a sprinkler valve to allow air to escape the sprinkler pipe. The escaping air pressure then triggers a deluge valve which allows water to enter into the sprinkler pipe. One example of a non-wet system is Tyco’s Quell System.

A common misconception is that fire dangers are somehow mitigated in cold storage facilities due to the low temperatures. On the contrary, cold storage facilities often contain flammable construction materials and present a more difficult environment to extinguish a fire. Notorious fires such as the Worcester Cold Storage Fire are deadly examples of the challenge and tragedy sometimes presented by fires in cold storage environments.

Lighting

As with fire protection systems, lighting in the storage areas of cold storage facilities play an important role in how the space can be utilized. They also have an impact on the energy costs incurred by the cold storage facility. With the advent of LED technology, users of cold storage facilities have increasingly been replacing fluorescent lights in order to save money on energy costs, replacement bulbs, reducing heat generation, and achieving a lower carbon footprint. The ballast of a fluorescent light can be a major heat source in a cold room, releasing up to 10% of its input power as heat. This heat must be compensated by the evaporator system in the cold room, increasing its energy consumption and the corresponding energy costs. The new LED lighting for cold storage facilities often has motion sensors and are zoned, allowing operators to save more money by keeping the lights off where no activity is present. Light brightness is an important element for all but he fully automated cold storage facility, as any natural light source such as a skylight can be a source of heat and temperature loss.

Evaluating Cold Storage Facilities

 

Lastly, for the cold storage user and property owner the evaluation of an available cold storage facility typically involves several vendors, contractors, and specialists. As a broker who sells and leases cold storage facilities, part of my service is conducting a general evaluation of the cold storage features before my customer spends resources involving other vendors or specialists. In addition to any questions generic to ambient or cold storage, we will provide a general evaluation of the cold storage facility being offered including the following features, and will assist any further investigations by cold storage vendors. Most owners will have information related to these features readily available upon request.

  • Square foot and cubic feet storage capacity
  • Pallet count capacity (by storage room)
  • Power supply, metering, and distribution
  • Prior history of utility bills
  • Refrigeration system
    • Operating status
    • Type
    • Size (lbs)
    • Age and maintenance history of components
  • Underfloor heating
  • Storage rooms
    • #
    • Sizes
    • Built-for-Cold or Box-in-Box
    • Temperature ranges
    • Existing racking
    • Lighting type
    • Construction
  • Blast cells
  • Cold docks
  • Fire protection systems
  • Battery charging room (# of stations)
  • Loading
  • Yard and parking
  • Rail

In conclusion, cold storage facilities are a unique product type within supply chain real estate. They are often complex, highly engineered systems designed to remove heat and retain cold at precise temperatures. For the cold storage operator and property owner, it is important they have a team of specialists who understand how to properly evaluate cold storage facilities for the features discussed in this post. If my team and I can assist you with any cold storage related topic, please do not hesitate to reach out to us. Thank you.

 

 

 

 

Is Warehouse Demand Shrinking?

On June 22nd the Journal of Commerce (JOC) published an article titled “Long-awaited US inventory drawdown spotted” where they state in the first sentence, “Lower US inventories would be a boon from coastal ports to heartland highways”. The notable exception to such a boon, as they cite in the next paragraph of the article, is in warehousing demand. If US inventories are reduced we would expect warehouse demand to be reduced as well. However, economic indicators do not support such a drawdown at this time.

The factors JOC cite as indicators of an inventory drawdown include strong truck and steady intermodal traffic in May 2017, steady consumer spending and manufacturing output, increasing inventory costs, and comparatively low transportation costs. While the May inventory to sales ratios have not been released, we can look at each of the indicators cited by the JOC and whether they support an indication of an inventory drawdown.

According to the American Trucking Association, truck tonnage did indeed increase from April to May by 6.5%. However, this follows three straight declines of 2.6% in each of the previous three months. Despite the increase in truck tonnage in May, it remains to be seen if traffic will continue to increase in the future. The ATA Chief Economist, Bob Costello, said “Despite the robust jump in May, I still expect moderate growth going forward as key sectors of the economy continue to improve slowly”.

US Intermodal Traffic has increased in the last three months to nearly 270,000 Intermodal Units according to the Association of American Railroads. Despite some volatility in traffic over the past year, most monthly readings fall between 250,000 and 270,000 intermodal units. However, volume is clearly down from 2014 and 2015, perhaps from increased competition from the trucking industry and cost cutting actions by the rail carriers.

RTI Dash (1)

Consumer spending, if measured by the Personal Consumption Expenditures (PCE), has been rising steadily over time for decades. While there was a flattening in the rate of increased consumer spending at the end of 2016, the rate has increased since the beginning of 2017.

fredgraph (1)

Manufacturing production, as measured by real output, has climbed since January 2014 and, following the 3rd Quarter of 2016, has increased by around 1.1%. However, manufacturing production’s role in reducing inventory levels in unclear.  For example, raw material inventories may increase concurrently or by even larger amounts with an increase of manufacturing levels. In fact, indexes such as the Institute of Supply Management’s PMI® in May 2017 suggest inventories are growing, not shrinking, in the midst of higher manufacturing.

fredgraph (2)

An inventory carrying cost increase would provide an incentive for supply chain participants to reduce inventories across their network. However, according to CSCMP’s 2017 State of Logistics Report total inventory carrying costs have declined by 3.2% year over year despite a storage cost increase of 1.8%. The financial cost of carrying inventories fell 7.7% year over year. The aforementioned JOC article cites the same. Again, this data would not suggest that an inventory drawback is imminent based upon inventory carrying costs alone.

Transportation costs, as measured by the Producer Price Index for the Transportation Industry, have been relatively stable since 2014. Year over year costs were up 2% in May but down 4.6% since May 2014. As the ratio of inventory carrying costs to transportation cost rises, supply chain manager would likely draw down their inventory levels. Since inventory carrying costs have been falling and transportation levels stable, the aforementioned ratio is shrinking instead.

fredgraph (3)

Finally, the inventory to sales ratio has slowly risen since the Great Recession started in 2010. The gradual rise from 2010-2014 rapidly increased in 2015 then has leveled off. There are likely many reasons for the build up in inventory levels since 2015 but the most fundamental is how inexpensive inventory is to hold. Supply chain participants have much less downside by holding inventory than they have risk of stock-outs and other low inventory related issues.

fredgraph

While inventories may very well be reduced in the near future, based on the economic indicators cited here there are no compelling reasons to believe the reduction is happening now.

Supply Chain Real Estate News and Analysis

Amazon has agreed to purchase Whole Foods for $13.7B, giving them an immediate presence in brick and mortar retail, among other benefits. One other benefit, as cited by C&W’s Ben Conwell, is Whole Foods’ relationship with Instacart. This would allow Amazon to understand Instacart’s online grocery delivery business, who is a competitor to Amazon Fresh. However, the transaction is not finished and Walmart may put in a higher bid.

Warehouse startup ShipBob raised $17.5M in a funding round, allowing them to open distribution centers in more cities. Fulfillment startups such as ShipBob are entering the market to compete with existing parcel carriers, such as UPS and Fedex, to provide next day and two day deliveries for ecommerce companies. They will likely increase the demand for infill properties with immediate access to freeways but may face issues of creditworthiness with landlords.

Taiwanese Foxxconn Technology Group is looking at seven states in the US Midwest to invest $10B or more to manufacture flat-panel screens and related equipment. According to Foxxconn, the investment would create 30,000 to 50,000 jobs. In addition, large manufacturing operations usually bring with them demand from suppliers, who want to be as close to the manufacturing operations as possible. This would create demand for warehouses in close proximity to the eventual plant location.

 

 

 

 

The Future of Industrial Real Estate

Advancements in technology are disrupting the function and design of industrial real estate. Since these advancements are believed to be exponential, perhaps to an extent, the industrial real estate of tomorrow promises to be very different than today. Technologies such as autonomous vehicles, 3D printing, robotics, and the internet of things (IoT) exist and will disrupt industrial real estate and supply chain. However, with exponential advancements in technology disruption the future of industrial real estate is very likely to be disrupted by new technological silos which do not exist today.

The most disruptive existing technology to impact industrial real estate in the next five to fifteen years will be autonomous trucks, beginning with autonomous platooning and ending with fully automated tractor-trailers. Site selection will change with autonomous trucks. So will the design of industrial facilities.

Perhaps the most disruptive quality of autonomous trucks will be their interaction with other technologies such as robotics and 3D printing. Autonomous trucks can be sent on milk runs to deliver packages using drones and robots to a multiple customers at the same time. They may also encourage automation in the distribution center by connecting to an internet of things (IoT) within the warehouse, which will coordinate the unloading and loading of the trailers and material handling in the warehouse by robotics. Autonomous trucks may also team with 3D printing to manufacture parts while on the road to the destination.

While the impact of existing technologies on the supply chain and industrial real estate is not fully known, the most impact will most likely come from how these technologies can interact and work together.

Supply Chain Real Estate News

Pennant Moldings, Inc. will invest $8.6M to establish a 60,000 SF operations center in Lebanon, TN…

HarbisonWalker International is constructing a $30M monolithic refractory facility in South Point, Ohio…

Amazon plans a to open a 855,000 SF fulfillment center in Troutdale, Oregon…

German grocery store chain Aldi announced a 900 store, $5B expansion in the U.S.

DHL is expanding their locations in India due to an expected boom in e-commerce there…

Apparel retailer Bebe sold its distribution center to prevent a bankruptcy filing..

A Chinese tire manufacturer named Wanli Tire Group is planning on investing $1B in a new South Carolina manufacturing plant…

Industrial real estate development at a 10 year high…

Mueller Industries will build a new 55,000 square foot U.S. headquarters in Memphis…

Report states that driverless trucks will eliminate millions of jobs…

Amazon’s robots mean more human workers in Houston, not less…

China’s CIC is close to a $13.49B deal to purchase European warehouse owner Logicor…

Lease accountancy changes may require more work than companies have previously thought…

Cushman & Wakefield brokers $76.1M sale in Pennsylvania…

Robinson Weeks Properties builds a new 1M SF speculative distribution center in Atlanta…

Tennessee Tool and Fixture, ironically based in Canada, will locate its first US operations in Manchester, Tennessee…

UPS will build a 980,000 square foot $180M packaging hub in Phoenix…

Another meal delivery service fails as Sprig Inc. closes its doors…