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.
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.
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.
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.
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.
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.
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.
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.
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
- Size (lbs)
- Age and maintenance history of components
- Underfloor heating
- Storage rooms
- Built-for-Cold or Box-in-Box
- Temperature ranges
- Existing racking
- Lighting type
- Blast cells
- Cold docks
- Fire protection systems
- Battery charging room (# of stations)
- Yard and parking
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.
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.
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.
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.
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.
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.
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.
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
Last week I had the privilege of attending two CoreNet seminars in Dallas. These seminars focused on the financial evaluation of corporate real estate and real estate’s impact on a company’s financial statements. These seminars were excellent and thoughtful reviews of the way real estate professionals should evaluate and think about corporate real estate financially. In this post, I figured I would share some of my thoughts on the topic, including the many lessons learned, and rekindle the news portion of these posts. I hope you enjoy this one and, as always, your feedback is appreciated!
The primary objective of the supply chain real estate professional is to align their real estate portfolio with their company’s objectives. Alignment of real estate and overall business targets can be a complex process involving a wide variety of corporate stakeholders, including corporate finance, operations, and capital markets. This process can often be reduced to balancing efforts to reduce expenses and drive revenue.
How does one execute this balance? By using the universal language of companies…finance. Finance is forward looking and focuses on generating cash from operations, return on investment value, and forecasting metrics.
Discounted Cash Flows
Central to the idea of finance is the concept of the time value of money, which involves a cash flow over periods of time and an appropriate rate of risk to discount them, otherwise known as a discounted cash flow (DCF).
Creating Cash Flows
Cash flows should be estimated on the professional’s best projections (guess). Risk should be accounted for in the discount rate(s), where it can be adjusted over the entire investment or a particular phase of the investment. For example, if a company is considering the purchase of a property and they are believe the risk at the disposition phase of their investment is high, they should adjust the discount rate for that phase so that all cash flows within that phase will be property adjusted for the risk.
For occupiers, a DCF with just real estate cash flows does not show the operational profitability of the real estate. Most supply chain real estate professionals will be familiar with a negative net present value (NPV) for a lease DCF. This is may be acceptable for comparing leases to determine the least negative net present value. However, the lease with the least negative net present value should not be interpreted is the best option for the company. In order to fully examine the real estate opportunity, operational cash flows and tax impacts should be incorporated.
DCFs can have multiple discount rates throughout the time frame of a DCF. For example, you can assign different discount rates for certain phases of a real estate hold such as the purchase, refinance, retrofit, and disposition of the asset.
Establishing the Appropriate Discount Rate(s)
The risk rate, commonly called the discount rate, should be based upon the most appropriate rate of risk for similar investments. For example, a lease with a company is very similar to owning a debt obligation with the company. The company has promised, through a lease, to pay certain amounts over a period of time-just like a bond without the principal payment at the end of the term. Therefore, the appropriate discount rate for such a lease is most likely the company’s cost of borrowing.
Company’s typically should NOT use their weighted average cost of capital (WACC) as their discount rate for real estate DCFs, because it is not indicative of the risk inherent a real estate transaction. A company’s WACC is their market cost of capital (blend of their cost of debt and equity).
Risk can also rise and fall depending on whether the length of the real estate obligation matches the company’s planned period of use. For example, a higher discount rate may be appropriate if a company enters a real estate lease or sublease with a planned period of use less than the lease or sublease term.
Impact on Financial Statements
If real estate cash flows examine the cash impacts of a company’s real estate, real estates impact on financial statements are the overall scorecard. For the supply chain real estate professional, understanding how real estate affects their company’s financial statements is required in order to properly evaluate their real estate portfolio and options.
Financial statements typically exist in three forms; the income statement, the cash flow statement, and the balance sheet. It is important to understand that all three forms are connected but separate statements of a company’s financial well-being.
The income statement, which is also referred to as a profit and loss statement, shows the company’s revenue, expenses, and net profit over a period of time. On the income statement a company will record figures such as its sales, cost of goods sold, gross profit, and earnings per common share.
A cash flow statement shows the impact on cash over a period of time. It has three parts including the cash from operating activities, investing activities, and financing activities.
Finally, the balance sheet details the company’s assets, liabilities and stockholder’s equity. Unlike the income statement and cash flow statement, the balance sheet is a snapshot in time. Typically the balance sheet will be produced at the end of a fiscal year.
There are several basic accounting principals which apply to financial statements. One primary accounting principal is the adherence to certain accounting oversight or guidelines such as FASB, IASB, GAAP, and IFRS. Other basic accounting principals include periodicity, cash or accrued measurement, reporting, materiality, substance versus form, and depreciation. From these principals we are able to understand how financial statements are constructed and reported.
Real Estate Impacts on Financial Statements
The impact of real estate on financial statements is determined by the accounting oversight and guidelines followed by the company. Companies generally will use FASB, IASB, GAAP, or IFRS depending on the location of where their stock is traded or their headquarters is otherwise domiciled. The impacts of the following real estate transactions are, unless otherwise noted, specified by FASB and GAAP.
|Purchase||Operating interest expense; other occupancy expense; real estate depreciation||Acquisition outlays; debt acquisition||Cash; Property Plant and Equipment (PP&E); Mortgage notes payable|
|Sale||Operating mortgage expense; other occupancy expense (real estate taxes and insurance); Depreciation; discontinued operations||Divestiture activity: PP&E elimination; Financing activity: loan payoff||Cash; PP&E; Mortgages payable|
|Sale / Leaseback||Rent; Operating mortgage expense; Other occupancy expense; Depreciation; Discontinued operations||Divestiture activity: PP&E reduction; Financing activity: loan payoff||Cash; PP&E: real estate; Mortgages payable|
|Operating Lease||Rent; Other occupancy expense; Depreciation of tenant improvements (TIs); Depreciation of equipment||Depreciation; Capital expenditures (for TIs)||PP&E|
|Capital (Finance) Lease||Interest expense; Asset depreciation||Depreciation; Acquisition outlays; Financing activity||Total Capital Lease Property; Total Capital Lease Obligation|
The different between an operating and capital (finance) lease is important for accounting purposes. The Statement of Financial Accounting Standards No. 13 (FAS 13) explains the process for determining whether a lease is an operating lease or a capital (finance) lease. A capital (finance) lease is a lease which fits any of the following criteria:
- Automatic Transfer of Ownership
- Bargain Purchase Option
- Term > 75% of the Useful Life of Building
- PV Rent > 90% of Fair Market Value
An operating lease would not fit any of those criteria. The impact of whether an operating or capital (finance) lease can be profound on financial statements, particularly the Balance Sheet. The affect of a capital (finance) lease on financial statements is:
- It is on the Balance Sheet (similar to a purchase with 100% financing)
- Ratios using assets and liabilities are affected (ROA, ROE, DCR)
- Depreciation + interest expenses exceed rent at the beginning
- Generally unfavorable accounting
It is not that a capital (finance) lease is good or bad. The important thing for a supply chain real estate professional is to communicate with their Finance Department when they are considering a lease to make sure the lease is defined as an operating or capital lease and it aligns with the company’s financial objectives.
Lastly, in order to your company’s financial objectives it is important to know if your company is income statement or balance sheet driven. An easy way to determine if a company is balance or income statement driven is to look at how many charts detail income sheet or balance sheet metrics in an annual report.
If your company is income statement driven, it will focus on earnings and expenses in order to understand if the company is profitable. Growth companies often are income statement driven as investors will often care more about how much the company has grown and limited expenses over the prior year than their return on existing assets. Metrics such as Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), EBIT, Earnings per Share (EPS), and Price to Earnings (P/E) are based on the income statement.
Conversely, if your company is balance sheet driven, it will often focus on returns on its assets and liquidity. Balance sheet driven companies are often mature, established companies whose investors care about obtaining a return on existing assets at the end of a financial period. . Metrics such as Return on Assets (ROA), Current Ratio (CR), and Quick Ratio (QR) are based on the balance sheet.
Upcoming Changes in Lease Accounting
On February 25, 2016 FASB issued Topic 842 which stated that all operating leases will be capitalized (on Balance Sheet) starting in fiscal years following December 15, 2018. Practically, companies will need to capitalize the prior two fiscal years in order to provide a coherent accounting history. The current operating and capital (finance) leases will be re-categorized into Type A Finance Leases and Type B Operating Leases. Both will be on the balance sheet, but treated differently.
Under Topic 842, Type A and Type B leases are treated as follows on the Income Statement and Balance Sheet:
- Income Statement: Type A lease has no impact on rent but does have an interest plus amortization expense. Type B lease will have a single lease cost expense in the form of straight line rent.
- Balance Sheet: Type A lease will have an asset depreciation in the form of straight-line amortization and liability determined by the effective interest method. Type B lease will also be on the balance sheet in the form of asset depreciation but the impact will be balanced out by increasing amortization balances to straight-line rent less interest.
Capitalizing both types of leases involves determining the term, which is the non-cancellable period, options are included if reasonably certain, variable lease payments, operating expenses, and discount of the Lessee’s incremental borrowing rate.
While most supply chain real estate professionals will not need to calculate the accounting impact of either type of lease, the important points to know are:
- All leases will be capitalized and on the balance sheet
- Type B lease will have a balancing effect on the balance sheet
- Lease term will have a significant impact on the income statement and balance sheet
Supply Chain Real Estate News
Winco Foods opened a 800,000 square foot distribution center in Denton, Texas last week. The grocery store chain will employ 165 associates and can expand the distribution center by 130,000 square feet.
Amazon pre-leased a 1M square foot distribution center to be built by Goodman North America. Amazon will take occupancy in 2018.
A San Francisco startup is using warehouse space in San Francisco Bay to grow produce. Big wigs from Amazon and Google are betting on its success.
Dollar General announced last week that they acquired 103 acres in Florida, New York for $1.545 million. They plan to build a $91M distribution center which will employ 430 associates.
UPS broke ground last week on a $275M regional operations hub in Salt Lake City. The 840,000 SF facility is said to be one of its largest in its network.
Lighting is a critical component of today’s supply chain real estate. The use of light, whether artificial or natural, affects the costs, labor, compliance and environmental elements of an industrial operation. Therefore, facility decision makers and designers should have a keen awareness of how light is employed in their facilities. This post reviews the importance of light, the most common types of lights, and the use of lights in industrial properties.
Why is Lighting Important
The choice of lighting type and location can have a significant impact on overall operating costs. In non-climate controlled warehouses, lighting is the primary electricity use accounting for 34% of total electricity use and an average of $0.12 per square foot per year in US warehouses.  For example, a 500,000 square foot warehouse at $0.12 per square foot per year in lighting energy costs will equate to $60,000 per year or $600,000 on a 10 year lease. In addition to the electricity costs, acquisition of equipment and maintenance is also a concern.
Light is also an important consideration in maintaining workplace productivity and employee satisfaction. Lighting has been shown to have an impact on the ability for individual workers to perform tasks, with poor lighting having a significant adverse effect on productivity, physical, and mental well-being. 
Lighting is also important to government agencies and regulators. Due to energy efficiency and safety concerns, U.S. federal, state, and local agencies have instituted guidelines and requirements for the use of certain luminaires, or complete lighting units, in non-residential real estate. For example, the California Title 24 California Code of Regulations regulates nonresidential indoor lighting in order to limit the energy used by lighting in a building.  OSHA also has minimum lighting levels for certain tasks, such as driving industrial trucks or forklifts.
Lastly, lighting is important for the overall environmental impact of an operation. It is now common for companies to track their impact on the environment through metrics such as corporate sustainability. The use of energy efficient lighting can be an integral part of efforts to lower a company’s carbon footprint, a key element in sustainability.
Types of Industrial Lighting
Industrial lighting generally falls into four different categories of artificial light sources and natural lights. Within each category are subcategories typically describing the application environment in which the light would be used. The table below describes each category by its energy efficiency in lumens per watt, average lifetime of the bulbs, and its general use. Warehouse lighting above storage areas are typically separated into high and low bay lighting. High bay lighting is used in 20′ to 40′ mounting heights where low bay lighting is used in 15′ to 25′ mounting heights.
|Incandescent||4-17 lm/w||2-20,000 hours|
|High-intensity discharge||50-200 lm/w||1,800-4,500 hours|
|Fluorescent||52-100 lm/w||8,000-20,000 hours|
|LED||10-110 lm/w||50,000-100,000 hours|
Table reference for energy efficiency and lifetime: 
Image source: http://www.energy.ca.gov
Incandescent lighting is the oldest lighting technology of the four categories above and the most inefficient, converting less than 5% of the energy they use into visible light. With the advent of fluorescent lighting sales in the late 1930’s, the use of incandescent lighting has declined.
Image source: http://www.zoro.com
High-intensity discharge or HID lamps are a type of electrical gas-discharge lamp which produces light by producing an electric arc between tungsten electrodes housed within a translucent tube. This tube is filled with gas and metal salts which typically give the lamp a name. Types of HID lamps include mercury-vapor, metal-halide (MH) lamps, ceramic MH lamps, sodium-vapor lamps, and xenon short-arc lamps.
Image source: http://www.zoro.com
A fluorescent lamp or tube is a low pressure mercury-vapor gas-discharge lamp that uses fluorescence to produce visible light. It is much more efficient than incandescent lamps and has largely replaced incandescent lighting in industrial uses. Modern uses of fluorescent lamps in industrial properties include the T8 and more recent T5 fluorescent lamps. T8 and T5 are just codes to indicate that the bulb is tubular, hence the T, and the diameter of the bulb. T5 bulbs are 40% smaller than T8 bulbs, measuring 5/8″ in diameter versus 1″ for T8s. T5 bulbs are more efficient and have better lumens per watt than T8 bulbs, but they are also more expensive.
Image source: http://www.1000bulbs.com
Finally, light emitting diode or LED lighting creates light through electroluminescence via a two-lead semiconductor. LEDs were first produced in 1962 and now are used in a wide variety of applications, including increasing use in industrial properties due to their significant energy efficiency.
Use of Lighting in Industrial Properties
A well-designed lighting system is a critical component of a successful industrial operation. Since specific tasks within an industrial operation are varied, the appropriate lighting requirements for each task must be considered. First, the quantity of illumination must be sufficient for the task or process. Second, there must be enough light to create a safe operational environment. Third, listed or approved lighting equipment should be used. Fourth, a lighting fixture layout should be created which is sustainable and promotes safety. Last, the energy, economic, and operating characteristics of the lighting system should considered.
The quality of light is measured in several different ways. Illuminance is the amount of light falling on a surface and is typically measured in lumens. The amount of lumens is expressed as either lux (lx) or footcandle (fc) measurements, where lux is the lumens per square meter and footcandles lumens per square foot. In addition, the color of light can be measured in terms of temperature (kelvin) and a color rendering index, and described in terms of the color seen by the eye.
Calculating lumens is typically done with a light meter, such as the one below. It is important to note that the measurement of light at a point is dependent on the distance between the lamp and the point where the light level is calculated. In addition, light can be measured in vertical and even horizontal planes.
Generally, the more active the area, the higher the light requirement. For example, lighting in storage areas may not require as much light as shipping and receiving areas. According to the Illuminating Engineering Society of North America’s Lighting Handbook, inactive or infrequent areas of us should have 50 lx or 5 fc while active or frequently areas of use should have 100 lx or 10 fc. In addition, areas where employees commonly read large labels may require 100 lx or 10 fc and for small labels 300 lx or 30 fc.
In summary, lighting is an important part of any industrial operation’s productivity, safety, and efficiency. Light impacts the operating costs, labor, compliance and environmental components of the supply chain and therefore should be a concern of any responsible supply chain manager.
 “Program for Improving Energy Economy and Efficiency in ECE Region.” Ambio 5.4 (1976): 195. Web.
 “How Lighting Affects the Productivity of Your Workers.” How Lighting Affects the Productivity of Your Workers – Blog | MBA@UNC. University of North Carolina at Chapel Hill, 01 June 2015. Web. 08 Feb. 2017. <https://onlinemba.unc.edu/blog/how-lighting-affects-productivity/>.
 “Table of Contents.” Ornithological Monographs 76.1 (2013): n. pag. Title 24 California Code of Regulations. State of California. Web. 9 Feb. 2017. <http://www.energy.ca.gov/2015publications/CEC-400-2015-033/chapters/chapter_05_indoor_lighting.pdf>.
“Warehouse / Industrial Light Fixtures.” Industrial Light Fixtures | Warehouse-Lighting.com. N.p., n.d. Web. 08 Feb. 2017.
“Architectural Lighting Design.” Wikipedia. Wikimedia Foundation, n.d. Web. 08 Feb. 2017.
 Keefe, T.J. (2007). “The Nature of Light”. Archived from the original on 2012-04-23. Retrieved 2007-11-05.
 Nov 1, 2004 ByJoseph R. KnisleyLighting Consultant166 Articles. “Designing Lighting for a Warehouse.” N.p., n.d. Web. 08 Feb. 2017. <http://ecmweb.com/content/designing-lighting-warehouse>.
 “Lighting and Illumination.” Journal of the A.I.E.E. 43.8 (1924): 750-53. June 2004. Web. http://old1.teamster.org/sh/FactSheets/illumination.pdf
In this post I thought I would share my takeaways from a presentation given by Chris Thornberg of Beacon Economics this past Wednesday at the City of Santa Fe Springs City Hall. Many of you in Southern California are no doubt familiar with Chris and I found his themes to be fairly consistent with years previous, with notable exceptions.
The first exception to the last few years is, of course, the election of Donald Trump as President (inaugurated today, in fact). Chris made a point of emphasizing that the election has made economic forecasting even more challenging than it was before, simply because no one knows how many of President Trump’s promises will actually come to fruition.
As for the other points of emphasis, they are as follows:
- Economy is not as bad as the media says it is (no kidding!)
- No chance for recession in next two years barring a significant shock
- Consumers drive the US economy
- GDP growth is a healthy 2%
- GDP does not count “free” activities which happen more due to e-commerce
- Employment, labor, standard of living all good
- Wealth inequality, not income inequality, is a concern
- Be careful believing the results of statistics
- Census Cash uses adjusted gross income from tax returns (not a good metric for real income group analysis!)
- Inflation is not a problem. Expect to see 2-3 interest rate increases in 2017
- Entitlements are the problem no one wants to talk about but we should
- 30 years entitlements could be the US entire budget
- 1 out of ever 6 jobs in the US are created in California
- Housing shortage is the problem, not pricing. Need to encourage governments to promote development-not discourage
In the supply chain real estate world, it is easy to see Chris’ points. The health of the US economy is expressing itself in historically high levels of demand for industrial real estate. Consumers are buying more and more goods online, changing the brick and mortar retail market to a final mile e-commerce one. In certain areas, this demand for supply chain real estate has led to unhealthy levels of supply (much like the California housing market). In some markets, there is less than 1% vacancy creating significant barriers to entry and rapidly rising real estate costs.
As part of my final project for the Global Logistics Specialist program at California State Long Beach (GLS Website), my team and I determined the cubic capacity and utilization for an entire network of fictitious warehouses run by a fictitious retailer. We found that the bay and column spacing within a warehouse can have a significant impact on key performance indicators (KPIs) for warehouse occupiers in ways that are not always obvious. In this post I discuss bays and column spacing in a warehouse and why they are important for supply chain real estate participants to consider when a) designing a new warehouse location and/or b) perhaps re-designing an existing warehouse.
The definition of bays and column spacing are similar but not always identical. I define bay areas as the floor areas in the warehouse not occupied by columns, walls or other permanent impediments. The length and width dimensions attributed to bay areas and column spacing are typically the same, with some notable exceptions. Bay areas can have different names in different areas of the warehouse. For example, a speed bay is an area adjacent to the loading areas ideally measuring at least 60′ from the dock to the first column. Used to move goods in a quick and efficient manner, any storage done within a speed bay is usually short-term.
Typical column spacing is the most common storage area between the columns, usually measured by the distance between the columns lengthwise and by depth away from the loading areas in a one sided or flow-through building. For example, if you were peering through the middle loading door of a building with 52′ x 50′ typical column spacing, 52′ would be the width between each column and 50′ would be the depth to the next column away from you. Atypical bays would include any areas along the non-loading walls.
So why are bays and column spacing important to supply chain practitioners? One reason is that they impact a warehouse’s space utilization. Improper column spacing can lead to wasting significant square footage areas and storage capacities due to less overall storage positions. Depending on a number of factors such as pallet size, minimum aisle width, and material handling equipment, a 52′ column spacing and a 56′ column spacing will likely result in very different levels of square footage utilization and storage capacities. Warehouse occupiers should calculate their optimal column spacing within a warehouse prior to occupancy in a new facility or as part of an audit to determine how well they are utilizing their storage capacity in an existing warehouse. According to Tompkins International, a formula for calculating optimal column spacing is:
[(Depth of Rack * 2) + Flue + Aisle Width] / # of Sections of Rack between Columns
The “Flue” is the space between the row of back to back racking, which is called the longitudinal flue.
Column spacing is also important because it influences the choice of material handling equipment. In order to utilize the available square foot and cubic capacities in a warehouse, certain material handling equipment are required. For example, according to Tompkins a 54′ column spacing allows for a 10′ aisle with typical 48″ racking. Since most counterbalanced forklifts will require a 12-15′ aisle, 54′ column spacing would require narrow aisle material handling equipment in order to maximize the usable square feet and cubic capacity. Therefore, racking decisions may require weighing the potential increased material handling costs with the cost of square foot and storage capacity.
A survey of new warehouses in Southern California show a variety of column spacing dimensions being used, mostly depending on the clear height being offered. For potential e-commerce fulfillment centers, required column spacing is a minimum of 56′-60′ to allow for the large order picking equipment common in the industry and required minimum clearance is 36’+ to allow for multi-level mezzanines/equipment. Two new developments at the Brickyard in Compton and Pacific Industrial/Clarion’s Imperial Distribution Center in Brea have 36′ clearance heights with 56′ x 50′ typical bays.
For new buildings in Southern California with 32′ clear, the typical bay is 52′ wide with varying depths. Western Realco’s new buildings at 4150 N. Palm Street in Fullerton and 3300 E. Birch Street in Brea have 52′ x 60′ typical column spacing. At Pacific Point East @ Douglas Park in Long Beach, Sares Regis has 52′ x 50′ typical column spacing as does Duke’s new warehouse in Lynwood.
Supply chain participants should be aware of how bay areas and column spacing in their warehouses impact their KPIs. If you need help evaluating new or existing warehouses in your supply chain, including evaluating existing column spacing, please feel free to reach out to me.
“SPEED BAY.” SPEED BAY. BOMA International, 2016. Web. 01 Dec. 2016.
Holste, Cliff. “Distribution Center Design: Designing from the Inside Out.” Distribution Center Design: Designing from the Inside Out. Supply Chain Digest, 11 Mar. 2008. Web. 01 Dec. 2016.
Johnson, Wendy. “The Importance of Optimal Column Spacing.” Tompkins International. Tompkins International, 30 July 2015. Web. 01 Dec. 2016.
“How to Optimize Your Existing Warehouse Space | Washington and California,.” Raymond Handling. Raymond Handling Concepts Corporation, 13 Aug. 2014. Web. 01 Dec. 2016.
Fallsway Equipment Company. “Warehouse Operation | Finding Your Aisle Dimensions.” Fallsway Equipment Company. Fallsway Equipment Company, 12 June 2014. Web. 01 Dec. 2016.
Foster, Margarita. “The View From E.CON: E-commerce Real Estate Evolves | NAIOP.” The View From E.CON: E-commerce Real Estate Evolves | NAIOP. NAIOP, 2015. Web. 01 Dec. 2016.
As a supply chain real estate practitioner, I always encourage my clients to engage the services of a qualified fire sprinkler consultant or similarly qualified employee when they evaluate the suitability of a real estate option. While experts should be consulted, actors in the supply chain should take the time to understand the basics regarding today’s fire sprinkler systems and potential pitfalls that could arise from false assumptions. In this post I briefly cover the history of the fire sprinkler system and its evolution to the current ESFR system. I also explain why an ESFR fire sprinkler system may not insure the full use of high rack storage.
According to “The Station House”, a newsletter produced by Tyco (link here), the history of fire suppression sprinkler systems goes back to the 1800’s with the founding of the Providence Steam and Gas Company in 1850, which would later become the Grinnell Company. In an effort to address the mill fires in New England, Providence tested various perforated pipe installations with actuators.
Through the next 100 years, we start to see a resemblance to modern sprinkler systems beginning in 1953, when the National Fire Protection Association issued the NFPA Pamphlet 13, which is the first code to recognize today’s standard sprinkler system. From the 1950’s to the early 1970’s, Ordinary Hazard systems were in standard use under the NFPA code. In the early 1970’s, the NFPA revised their standards to permit hydraulically calculated systems, which would eventually replace Ordinary Hazard systems in most warehouses by the 1980’s. Calculated systems are commonly shown in a volume per minute over an area calculation. Common examples are .33/3000, .45/3000, and .60/2000 calculated systems where the first number is the gallons per minute and the second the square footage.
Beginning in the 1980’s, the first fire sprinkler system was developed to address high rack storage without in-rack sprinkling. The Early Suppression Fast Response sprinkler, or ESFR, was both a concept and a type of sprinkler. The concept was to have a sprinkler capable of extinguishing fires in a high rack storage scenario. This contrasts with prior sprinkler systems, which were designed mostly to control fires until help arrived. In 1988, the first Factory Mutual (insurance company) approved ESFR sprinkler was introduced by Grinnell. Since that time, the ESFR sprinkler system has become the standard in protection for high rack storage.
One key component of the ESFR sprinkler system is the ESFR sprinkler head. Recent changes to the NFPA codes and today’s high rack storage heights require certain types of ESFR sprinkler heads to be used. These sprinkler heads are usually rated by what is called a “K factor”, or the coefficient of discharge. The larger the K factor, the more water it can discharge at a given pressure. K-14, K-17, K-16.8, K-22, K-25, and K28 are some examples of ESFR sprinkler head K factors.
The type of sprinkler heads and water pressure in an ESFR system is important to understanding high pile storage capacity for a given user. I have heard of several horror stories where companies have moved into a high cube warehouse with an ESFR system, only to learn that the sprinkler heads did not allow their desired use of the cube within the warehouse. In these events, typically the tenant will have to foot the bill to change out the heads-not an inexpensive proposition. In addition, changes to the sprinkler head may impact the required pressure-possibly requiring a modification to the pipe system. Again, not inexpensive.
In conclusion, fire sprinkler systems have evolved from little more than a perforated pipe to a highly technical engineered system capable of extinguishing the most combustible materials capable of being stored. Since fire codes and fire systems require professional interpretation and expertise, it is imperative that supply chain companies work with experts to mitigate any risk to their desired storage plans.