Significant News in Logistics & Industrial Real Estate

Week of October 13, 2019

Welcome to Significant News in Logistics & Industrial Real Estate, a weekly and monthly newsletter where I highlight and comment on the most important stories in industry, the economy, and industrial real estate.

REAL ESTATE
Key Themes

  • Demand for industrial space picks up after a slow start to 2019
  • Industrial users are not only demanding variable footprints but also a variety of clear height, land, and power requirements
  • A future with autonomous vehicles should be considered when designing today’s commercial real estate

The U.S. industrial real estate market continues to thrive supported by e-commerce and warehouse/distribution demand. After a slow start to 2019, demand picked up in the Third Quarter of 2019 with 48.7M square feet absorbed according to Cushman & Wakefield’s latest report. Year-to-date absorption registered 148.8M square feet and is on pace to break 200M square feet for the sixth straight year. 


For the first time in nine years, construction supply is on track to exceed demand by around 70M square feet in 2019. However, much of the 337.6M square feet in the pipeline is either build-to-suits (72.5M square feet) or pre-leased (72.3M square feet) with the remaining 109.3M square feet going towards speculative construction. The amount of speculative new construction should provide additional avenues for tenant growth in tight markets and is not expected to adversely impact rent growth or market values.


With the slow down in demand, asking rents rose 3.2% year over year in 3Q 2019 down from 7.2% in 3Q 2018. Rents are projected to rise modestly has the economy likely grows slowly or contracts slightly. I would anticipate the strongest rent growth in the primary markets but also in some secondary markets like Salt Lake City, which is one of the hottest markets in the U.S. right now. #industrial real estate

Amazon continues to open massive fulfillment centers across the country such as a 1 million plus square foot facility in Channahon, Illinois, about 11 miles southwest of Joliet. Sure, e-commerce is driving smaller buildings in some infill markets but big box distribution centers are not going away. What is changing is the efficiency within the big box. Amazon is rumored to be their fourth or fifth version of a multi-level fulfillment prototype which combines racked storage with sortation in a vertical delivery system. If distribution does skew more into smaller footprints, it is likely to be due to continued developments in how product is stored and moved in the box and not just getting close to the customer. #Amazon #e-commerce #Chicago

To say that FedEx has been in the news lately is an understatement. Two real estate deals involving FedEx were notable this week. First, FedEx filed a $212M building permit with Memphis, Tennessee to improve and expand its presence at the Express World Hub at the Memphis International Airport. The total investment of the expansion is expected to be more than $1B is scheduled for completion in 2025. The State of Tennessee provided more than $20M in tax brakes for the new hub. 


Second, a 252 door terminal FedEx leases in West Jefferson, Ohio was sold by Griffin Capital Essential Asset REIT for $30.3M or $120K per door to Sealy & Company. No word on what FedEx is paying but if one assuming an 8% return that would equate to a monthly rent per door of $800. #FedEX #Memphis #Terminal

Autonomous vehicles are predicted to change real estate and logistics in many ways and developers are starting to design properties accordingly. In the industrial real estate world, autonomous vehicles would likely impact site selection, employee parking, truck court design, and overall ingress/egress pathways onto sites. I wrote about this topic back in 2017 when the technology was just starting to clear pathways to full autonomy in the form of driver assist technology, otherwise known as Level 1 autonomy. Now we are seeing Level 3 autonomy in vehicles, meaning the vehicles handle driving tasks but still may need intervention. Level 4 and Level 5 are what we think of as the driverless stages, where in certain environments the vehicle is driverless (Level 4) and in all environments the vehicle is driverless (Level 5). Most do not believe these latter levels are achievable in the near future, with most predictions falling in the middle part of the next decade.


Since the average useful life of an industrial property is 40 years, even if we are 10 years away from Level 4 or 5 autonomous vehicles they will likely impact industrial buildings being designed and built today. Randy Thompson with Cushman & Wakefield’s Build-to-Suit group, recently wrote an article for Area Development where he discussed “Future-Proofing” buildings to account for autonomous vehicles. We will likely see future industrial property design include smaller to no employee parking lots, expanded and separate drop-off areas, and smaller truck court areas as autonomous trucks become more common. In addition, since an autonomous vehicle does not need to rest, secondary and tertiary markets may become more attractive for distribution into even infill areas. #AV #technology

INDUSTRY
Key Themes

  • The logistics industry is investing heavily into technology to improve supply chains and support customers
  • Various economic and industry indicators point to a balancing trucking industry in 2020 and steady growth in the warehousing sector
  • Companies continue to enter and exit the last mile delivery space as Amazon and FedEx expand their last mile services

Logistics companies continue to invest heavily in technology to enhance a variety of functions and needs in their organizations. One area getting a lot of investment is technology to help increase visibility in the supply chain. Offering customers the ability to understand where their freight is located in real-time should increase as the Internet of Things (IoT) populate throughout the supply chain. Companies such as Flexport, who recently purchased container tracking company Crux, have made significant investments in “bolt-on” technologies to enhance their current and future tracking capabilities. 


In addition to serving external customers, companies such as Merck KGaA have partnered and acquired technology to allow them to better predict inventory requirements throughout their own supply chains. The large pharma company has partnered with TraceLink, Inc. to use analytics and machine learning to predict and prevent drug shortages. Merck not only wants to save lives by eliminating drug shortages in their supply chain, but also a lot of money. According to the research and analysis firm Gartner, pharmaceutical companies carry an average of 156 days of inventory compared to 78 for consumer product retailers and 57 days for IT equipment sellers. By better predicting inventory requirements, Merck could reduce its inventory requirements and expedited shipping charges allowing them to save potentially hundreds of millions of dollars. 


Another area where companies are investing heavily is automation within their supply chain. While vehicles get a lot of the press, automation of other functions may be equally or more important to the improvement of a company’s supply chain or those of their customers. For example, Amazon recently purchased digital customs broker INLT to help their third-party sellers import goods through U.S. Customs without an outside customs broker. Other companies, such as Shopify, have acquired technology firms to help automate and improve functions such as material handling, storage, and other warehouse functions. 
In addition to acquisitions, logistics companies are also partnering with technology firms to offer better service to their customers. The LTL carrier Estes Express has recently partnered with nearby Warehowz to give customers access to their available warehouse space on-demand. Flexe, a competitor of Warehowz, has developed a customer base of direct-to-consumer companies who can take advantage of the flexibility and cost savings of unused warehouse space. 


Information security is another area where logistics companies have invested and collaborated for the good of the industry. The Blockchain in Transport Alliance (BiTA) is a consortium of technology and transportation firms formed to create blockchain standards for the freight industry. The consortium has 500 members with over $1T in revenue annually. Their newest member, Prologis, is perhaps an acknowledgement of the important role large real estate owners can play in the security of information and the overall security of the supply chain.


Lastly, there are concerns that the investment and development of supply chain technologies is creating an abundance of ‘unhelpful’ solutions. The pace of technological growth is seen by some to exceed the logistics sector’s ability to consume. Furthermore, many technologies have been designed with only part of the supply chain in mind and therefore can create barriers to future integration efforts. #technology #Flexport #Crux #Amazon #INLT #IoT #Estes #Warehowz #BiTA #Prologis #blockchain

Various economic and industry indicators point to a somewhat improving picture for logistics in the U.S. The trucking industry is expected to rebound in 2020 with truckload rates potentially seeing growth in early 2020. The trucking market appears to be headed towards a equilibrium between freight and capacity next year, but certain challenges remain. J.B. Hunt, for example, missed on profit expectations last quarter due in part to increases in its costs for recruiting and retaining drivers.


Meanwhile, warehousing continues to steadily grow as e-commerce companies continue to gobble up space. According to the CSCMP Logistics Manager Index, the pace of growth is expected to be less than years prior and warehouse capacity is expected to increase for the first time since June. With the growth in warehousing, material handling orders have increased as well. The Conveyor Equipment Manufacturers Association (CEMA) reported its August 2019 booked orders increased 58.1% compared to August 2018 and were up 27.2% over July 2019. #trucking #J.B. Hunt #CSCMP #material handling

Last mile delivery is a dynamic part of the supply chain as companies are continually announcing reductions or expansions in the service area. Last week, Inpax Final Mile Delivery announced it was laying off at least 718 workers and Letter Ride over 900 workers after losing contracts with Amazon, reportedly due to Amazon’s review of their safety practices.  Following Schneider’s announcement that they were shuttering their final mile delivery business last month, FedEx announced this week that it is expanding its FedEx Freight Direct service, which delivers bulky items into residences and businesses, to cover 80% of the population. #last mile #Inpax #Letter Ride #Amazon #FedEx

ECONOMY
Key Themes

  • A handshake agreement has halted some of the trade war between the U.S. and China
  • Economic indicators were mixed with the Federal Beige Book indicating slow growth in the U.S. while retail sales saw a slight dip in August

There was a bit of good news this week regarding the trade negotiations between the U.S. and China. The so-called Phase I handshake agreement postponed certain tariffs on goods from China in exchange for promises to purchase large amounts of agricultural goods from the U.S. However, trade experts warn that the agreement is just a temporary pause to allow for further negotiations to take place and many of the promises made seem unrealistic or uncertain. For example, China promised to purchase $50B of U.S. agricultural goods-which is double the most they have purchased from the U.S. previously. Also, many more important issues remain unsolved such as intellectual property rights, national security concerns, and tariffs not discussed under the Phase I agreement. #trade 

Economic indicators were mixed this week with some positive indicators from consumers and negative markers for retail sales. The Federal Beige Book, which summarizes the areas which the Federal Reserve considers when making decisions, reported slower growth in regions throughout the U.S.  In particular, the Midwest and Great Plains are growing slower than the South and West regions. Some manufacturers are starting to layoff workers due to weak orders while others are cutting hours in order to retain their workforce and avoid potential re-hiring and retraining costs in the future. The big question is will the weakness in business confidence seep into the consumer sector, which is still seen as an engine of growth. Average hourly earnings are up 3.2% YOY, household savings rates are triple what they were in 2005, and consumers have less debt overall. However, retail sales fell 0.3% in August, the first monthly decline since February, which is potentially an indication that the consumer confidence is softening. #growth #consumer confidence #retail sales

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.

OLYMPUS DIGITAL CAMERA

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.

racking-plan-building-b
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.

Calculating Dock Position Requirements

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.

  1. 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 [1]
    1. Inputs
      1. 7,000 trucks per year
      2. 2.5 hours for loading / unloading
      3. 2080 work hours per year
      4. Safety factor of 25%
    2. Calculation
      1. (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
  2. Number of Truck Positions Needed = Number of Trucks per Hour x Turnaround Time per Hour [2]
    1. Inputs
      1. 20 trucks per day
      2. 8 hour work day
      3. 150 minute turnaround time
    2. Calculation
      1. (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
      2. 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
  3. ((Peak trucks per day) x (Average dock time per truck) x (Safety factor of 1.5 to 2)) / Number of hours in work day [3]
    1. Inputs
      1. 20 trucks per day
      2. 2.5 hours per truck
      3. 8 hour work day
    2. Calculation
      1. ((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.[4]

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.

 

Real Estate

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.

 

 

 

[1] Mulcahy, David E. Warehouse Distribution and Operations Handbook. New York: McGraw-Hill, 1994. 4.18-.20. Print.
[2] 4Front Engineered Solutions, Inc. “Dock Planning Standards.” (n.d.): 10. Web. 31 July 2016.
[3] Gross & Associates. “Calculating Dock Door Requirements.” (n.d.): n. pag. Web. 31 July 2016.
[4] Mulcahy, David E. Warehouse Distribution and Operations Handbook. New York: McGraw-Hill, 1994. 4.18-.20. Print.