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

 

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.

 

 

 

 

Bays and Column Spacing

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.

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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.

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source: The Brickyard South Bay website

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.


References

“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.

Fire Sprinkler Systems and Industrial Real Estate

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.

 

 

Trailer Spots per Acre

I was asked recently how many 53′ truck trailers could be stored on one acre of land and though I would share my answer, based on conversations with my clients and within my company. The first point to make about determining the storage capacity of land or any other two or three dimensional object is that it wholly depends on the configuration. A 30′ x 1452′ acre will have a significantly different storage capacity than a 209′ x 209′ acre. Assuming the acre is functional in shape, meaning closer to a square than a bowling alley, estimates typically range from 34-40 trailers per acre with no truck cab.

The second point to make is that as the land increases in size, the number of trailers that can typically be stored per acre goes up. For example, my team is marketing  an 8 acre land parcel and a space engineering firm created a layout with 394 trailer parking spots for a total of 49 trailers per acre, with 23 trailers spots double stacked.

Real Estate

  • Wal-Mart recently purchased 169 acres of industrial land just south of Denver International Airport in Colorado. Wal-Mart did not disclose what it planned to develop on the site however speculation has centered on a large e-commerce facility similar to the the five existing e-commerce facilities they operate in the U.S.
  • Global refrigerated warehouse capacity grew 600 million cubic meters this year according to the Global Cold Chain Alliance. However, most agree this is not enough to support the ever-increasing worldwide demand for fresh food. Capacity is expected to increase in developing countries as disposable income levels rise.