After researching an article on tenant creditworthiness, I decided to switch gears over the weekend and focus on the COVID-19 implications for CRE, specifically the Force Majeure provision of most leases. Fortunately before getting too far, an attorney named Howard F. Klien beat me to it. I am linking to Howard’s great article on Force Majeure here: https://creradio.com/can-a-tenant-stop-paying-rent-because-of-the-coronavirus/
One of my goals this year is to write a blog post once a week. Look forward to sharing my perspective in 2020.
Today I was thinking about first principles and what first principles exist in my business as an industrial real estate resource and representative. A first principle 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 principle 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 principle for my business.
I am happy to announce another edition of the Los Angeles Insider. To download the latest Insider, please click here. Now, here is the latest in Supply Chain Real Estate News…
Food and beverage firms have proposed over 90 cold storage projects totaling more than $1.6 billion. Second quarter will be the strongest in terms of construction starts with 44 projects breaking ground.
Alcoa is moving its headquarters back to Pittsburgh from New York City. The move will only involve 10 employees who will join an existing workforce of 205.
According to New York-based research firm Reis, Inc., demand for ecommerce and international trade has led to an additional 54.7 million square feet of new warehouse/distribution space in 2017.
Blackstone’s non-traded REIT, Blackstone Real Estate Income Trust, acquired a six million square-foot industrial portfolio from High Street Realty for $402 million. The properties are located in Atlanta, Chicago, Houston, Harrisburg, Dallas, and Orlando.
GM ceased its Venezuela operations as its manufacturing plant with 2,700 workers was seized by the Venezuelan government liked to a court case there.
Amazon is searching for 1,300 warehouse across Europe to fulfill its one-hour Prime Now delivery service. Amazon first introduced one-hour delivery in Europe in 2015.
Best Buy leased a 479,310 square foot distribution facility in the Los Angeles area city of Compton. Their lease follows UPS’ lease of a 521,816 square foot facility next door in September 2016.
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.
One of the most important facility requirements for any logistics operation is the amount of dock high positions an industrial building provides. Often overlooked, dock high positions can have a significant impact on whether an operation is able to meet its key performance indicator objectives and contribute to the overall success of a company.
Determining the minimum number of dock positions needed for a facility involves an understanding of the internal and external factors which affect the amount of dock high positions required. The internal factors can include the amount of trucks serviced by the docks over a period of time (average and peak), the time to load and unload each trailer per dock, staging and cross-docking requirements, work hours over a period of time, employee breaks, drop trailer requirements, trash / bailing requirements, shifts, and shipping preferences. External factors can include time of truck arrivals and departures, the reliability of carriers, whether carriers will back haul drop trailers, types of trailers used by carriers, and truck driver capabilities. A comprehensive understanding of these and any other internal and external factors will result in more precise understandings of an operation’s dock high requirements.
In general, the minimum number of dock high positions are calculated based upon a formula involving their use, the amount of time they can be used, and a safety factor. Below are three examples of manual calculations using some of the internal and external factors above.
- Number of Truck Positions Needed = ((Number of Trucks per Year x Hours it takes to Load / Unload a Truck) / Work Hours per Year) x Safety Factor 
- 7,000 trucks per year
- 2.5 hours for loading / unloading
- 2080 work hours per year
- Safety factor of 25%
- (7,000 trucks per year x 2.5 hours for loading / unloading) / 2080 work hours per year) = 8.4 x 1.25 safety factor = 10.5 docks or 11 dock high positions needed at a minimum
- Number of Truck Positions Needed = Number of Trucks per Hour x Turnaround Time per Hour 
- 20 trucks per day
- 8 hour work day
- 150 minute turnaround time
- (20 trucks per day / 8 hour work day) = 2.5 trucks per hour x (150 minute turnaround time / 60 minutes per hour = 2.5 turnaround time) = 6.25 dock positions needed or 7 positions needed
- If all trucks arrive in AM, then work day would be shortened to 4 hours and the dock requirements would be 12.5 or 13 positions needed
- ((Peak trucks per day) x (Average dock time per truck) x (Safety factor of 1.5 to 2)) / Number of hours in work day 
- 20 trucks per day
- 2.5 hours per truck
- 8 hour work day
- ((20 trucks per day) x (2.5 hours per truck) x (1.5 safety factor)) / 8 hour work day = 9.375 docks required or 10 docks needed
These three calculations show that depending on the formula used, roughly the same inputs will yield slightly to drastically different minimum dock requirements. Where formulas 1 and 3 resulted in 11 and 10 positions required, formula 2 resulted in only 7. Not surprisingly, formula 2 did not employ a safety factor. Safety factors are used to account for unforeseen variability such as disruptions in deliveries or labor.
Companies may also employ manual simulations of dock requirements. These simulations include the detailed logging of docks used by the various types of vehicles that deliver or ship to a facility. These simulations can show how to improve dock assignments or delivery schedules for better dock utilization and determining of minimum docks required.
The use of technology in determining the minimum number of dock positions required may make the use of the manual calculations above obsolete. Warehouse management systems or WMS may include dock requirements based upon much more detailed inputs and trends. However, the manual calculations formulas above help to show the importance of understanding the external and internal factors involved with determining the minimum number of dock positions for a given operation.
Chinese car maker BAIC has disclosed plans to build an assembly plant in Mexico after opening a dealership in Mexico last month. Among Chinese car makers in general, there is growing interest in Mexico as a potentially strong export market. Last year Chinese car makers exported over 330,000 vehicles to Mexico.
Amazon has announced that it will build its 10th fulfillment center in California, agreeing to locate an 855,000 square foot facility near Sacramento International Airport. The fulfillment center will bring a reported 1,000 warehouse jobs to the area.
PortFresh Logistics is constructing a 100,000 square foot cold storage facility at the Port of Savannah. The facility, which will primarily serve the importers of South American produce, will create 40 jobs upon its opening with an expectation of 75 full-time jobs by 2021.
Newegg, a web-only retailer of technology products, has opened what it calls a Hybrid Centre in Ontario, Canada. The 81,000 square foot facility will include a showroom where customers can view some of its latest offerings. Newegg also has a Hybrid Centre next to its Los Angeles headquarters.
UPS has applied for Miami-Dade County incentives to build a $65 million sorting facility in the northwest part of the County. In the deal UPS would reportedly receive $877,180 in county funds in exchange for creating 25 jobs and retaining 2,005 existing jobs.
Wal-Mart opened its new $100 million grocery distribution center in Mebane, North Carolina. The center will employ more than 550 and distribute food to more than 55 Wal-Mart stores in North Carolina and Virginia.
Prologis, the global leader in logistics real estate, reported record second quarter 2016 results. Rents on lease renewals jumped 17.8% while rents overal rose 7.9 percent. These led to second quarter net earnings per share of $0.52 compared to $0.27 in the second quarter of 2017.
Many of China’s logistics property companies have disclosed plans to go public amidst the e-commerce boom there. Groups such as China Logistics Property and GLP have already gone public and otheres, such as e-Shang Warehouse Services, plan to list soon.
Gap said they will add more than 100 jobs and invest $3.1 million in uprades and technology to increase its e-commerce capabilities in its Gallatin, Tennessee facility.
Retailers are adding more distribution centers closer to major population centers in an effort to provide more efficient customer service. Customers increasing demand to receive orders faster and cheaper has pushed many of the so-called inland ports to grow much faster than average US industrial markets.
General Mills announced the layoff of 1400 jobs, including 550 in United States as part of a rework of its supply chain. General Mills plans on selling a plant in southern New Jersey and sell another in northern Ohio.
 Mulcahy, David E. Warehouse Distribution and Operations Handbook. New York: McGraw-Hill, 1994. 4.18-.20. Print.
 4Front Engineered Solutions, Inc. “Dock Planning Standards.” (n.d.): 10. Web. 31 July 2016.
 Gross & Associates. “Calculating Dock Door Requirements.” (n.d.): n. pag. Web. 31 July 2016.
 Mulcahy, David E. Warehouse Distribution and Operations Handbook. New York: McGraw-Hill, 1994. 4.18-.20. Print.
In this week’s edition is a widely cited Forbes interview with the new CIO of Target, Mike McNamara. I thought an interesting part of the interview discussed omnichannel, which for a long time was significant buzz-word within retail. McNamara’s position is that it is a “tired” word and thinking about two separate channels no longer makes sense-it is really one digital channel. Given the recent news about Wal-Mart and others, it does seem that the brick and mortar + e-commerce retailers of last year are quickly becoming the digital platforms of tomorrow.
A robotic arm with a suction cup, two-finger gripper, and 3D camera won a warehouse bot competition put on by Amazon. Bots competed to see which could pick up and put down items on a shelf. (BBC)
The new Target CIO has cited supply chain innovation as one of his two top priorities. Mike McNamara, formerly the CIO of Tesco, whose first priority is “digital”, said Target’s supply chain is a network which makes all of the inventory available to customers anytime and shipping decisions based on economic or shorter lead times. (Forbes)
According to the appropriately named research firm Research and Markets, the global material handling market is projected to rise from $115.342 billion in 2015 to $148.542 billion in 2021. The Asia Pacific region was cited as the fastest growing market in the near future. (Yahoo Finance)
PREMIER Design + Build’s EVP Brian Paul gave an interview with GlobeSt.com discussing the redevelopment of industrial properties. Paul cited the importance of designing redevelopment to maximize efficiency. (GlobeSt)
REI opened a new fulfillment center in Goodyear, Arizona. This is the third fulfillment center for REI, the others being in Washington and Pennsylvania, and will service 60 of its stores. (The Republic)
Prologis completed 16 build-to-suit development projects in the 1H of 2016. These projects encompassed over 6.8 million square foot and were located in both the US and abroad. (Yahoo Finance)
XPO exercised an option to purchase the 552,330 square foot building they occupied in Phoenix for $30.4 million ($55.04 PSF). XPO had been leasing the property from Lincoln Property Company since 2013. (Phoenix Business Journal)
Amazon India has announced the addition of six more fulfillment centers in India. Amazon previously had 10 fulfillment center in India. (India Times)
GE and Microsoft have joined to bring GE’s Predix platform-as-a-service offering to the Microsoft Azure cloud. Predix is an operating system and platform for building applications connecting industrial assets, infrastructure, and operations. (Computerworld)
Business Insider created a video showing Under Armour’s new manufacturing facility. The video details some of Under Armour’s R&D and manufacturing within the facility. (Business Insider)
Emerging trends in manufacturing and logistics are transforming how companies think about the real estate component of their supply chains. Trends such as additive manufacturing, fulfillment, big data, and final mile are introducing an entirely new set of facility requirements.
This week I have linked several articles below which may shed light on the nature industrial operations and buildings of the (near) future. If you have any thoughts on this subject and want to discuss, you can email me at email@example.com. All the best in the upcoming week!
Supply Chain and Real Estate Week in Review
Flat truck yards may not be high on the occupiers wish list for their new industrial space, but its inclusion may save them time and money over their occupancy. Flat truck yards are actually truck yards without the typical gradual slope towards the building’s loading docks. Instead, the truck yards are sloped away from the building.
Why does this matter? It has to do with rain and what happens to the precipitation after it hits the truck yard. In the traditional truck yard, since the slope is towards the building any precipitation run off will also run towards the building and drains installed to prevent pooling. These drains will be connected to sump pumps, which are tasked with pumping the precipitation quickly out of the yard areas.
In addition to the wear and tear on sump pumps in wet areas, in areas where rain in infrequent (such as Southern California) the solenoid in the sump pumps often dries out. This causes the sump pump to fail, leaving the occupier with a flooded yard, bill to repair the sump pump, and costly disruption to their operations.
Enter the flat yard, which eliminates the need for the drainage / sump pump system in the yard by grading away from the building. I recently had the opportunity to speak with Neil Mishurda at Pacific Industrial about their inclusion of flat truck yards in the construction of their new developments. Neil says that since Pacific and their partners are long-term owners, they believe the additional $1 PSF on the building cost to install a flat yard is worth the investment. I would suspect their tenants feel the same.