The new dynamics of site selection
It's no longer all about the rent. When shippers evaluate DC sites nowadays, their top concern is transportation.
The CenterPoint Intermodal Center in Joliet, Ill., faces fierce competition for distribution center business, but it has an edge that's proving tough to beat. And it's not shy about promoting it. Visit the center's website and you'll find a calculator that shows customers what they could save in drayage costs by locating a DC at the 2,500-acre industrial development, which boasts on-site access to Burlington Northern Santa Fe's Logistics Parkâ€“Chicago. A drayage calculator might not sound like a killer marketing tool. Yet that's precisely the kind of sales tool CenterPoint used to attract high-profile tenants like Wal-Mart and Georgia Pacific.
To understand why drayage costs would carry so much weight with customers, you have to know a little bit about the new dynamics of DC site selection. The days when companies chose DC sites largely on the basis of cost per square foot are long gone. Today, transportation costs will likely be the principal driver when a company goes to pick a site within its target region. Small wonder developers like CenterPoint are anxious to promote their properties' transportation advantages.
That's not to say that industrial developers haven't played the logistics card in the past. Leasing companies and developers have long touted access to markets and transportation infrastructure in their marketing pitches. Many industrial developments, like the Rickenbacker Global Logistics Park, part of the Rickenbacker Inland Port in Columbus, Ohio, focus specifically on their potential logistics advantages in their marketing. (The Rickenbacker Inland Port even publishes an online newsletter called "Logistically Speaking" that highlights the development's advantages.)
What's different today is the increased emphasis developers are placing on all things logistics. Part of the explanation lies in cost: While real estate expenses amount to 4 to 5 percent of operating costs for most DCs, transportation costs are now close to 50 percent, according to experts in the industry. Another part lies in the transportation challenges facing shippers, like tight trucking capacity, an aging driver workforce, regulations that could reduce carrier productivity, and an increasing focus on carbon footprints. All this has led industrial real estate developers and their transportation and public sector partners to zero in on transportation and logistics when they go to market their properties.
That's mainly good news for those responsible for finding the best sites for their companies' DCs—it means that brokers speak the language better than ever. If there is a downside, it's that they also understand that a site that can offer lower transportation costs than nearby competitors can demand a premium price.
Winds of change
All this comes at a time of flux for the industry. Skyrocketing transportation costs are forcing many businesses to re-evaluate their distribution networks, says Tim Feemster, a senior vice president for industrial real estate giant Grubb & Ellis. In a lot of cases, these companies are seeking ways to reduce less-than-truckload and parcel shipping costs, which tend to rise faster than truckload or intermodal costs, he says. The result could be a shift toward more regional DCs and away from large national facilities, he adds.
Other factors could potentially come into play as well, says Feemster, who joined Grubb & Ellis nearly five years ago after a three-decade career in logistics operations. For example, he believes that the recent supply chain disruptions—in particular, the blows to automotive and electronic supply chains caused by the disaster in Japan—may spur some companies to re-evaluate their business resiliency plans, including their inventory strategies. That, in turn, could affect decisions on DC size. "If you change inventory strategy, that affects the size of the box you need," he says.
Should all this lead to a boom in industrial real estate activity, the challenge for the industry will be bringing its people up to speed. Working with clients on logistics network planning projects requires a great deal of specialized knowledge. "What's important is that an economic development person understand supply chain cost structures and how [they] relate to the [site] decision," Feemster says.
That could prove to be a big adjustment for brokers more accustomed to selling buildings, says Richard H. Thompson, executive vice president for Jones Lang LaSalle Americas Inc. (JLL). In an e-mail to DC Velocity, Thompson noted that historically, "when real estate professionals look to market or sell industrial assets, they are focused on the traditional real estate 'stuff' such as square footage, price per square foot, ceiling heights, etc. They are not able to assess or quantify the critical logistics decision inputs, such as proximity to customers/suppliers, labor costs, supply chain infrastructure, etc."
Gearing up for growth
To prepare their brokers for a new era, some developers are ramping up their training efforts. Grubb & Ellis is a case in point. Feemster says that when he joined the company, one of his missions was to train brokers on what really matters to logistics network planners.
Others are taking the technology route. JLL, for example, has developed a sophisticated modeling tool to analyze properties from a logistics point of view.
Called the "Reverse Location Selection" (RLS) model, the tool essentially flips the traditional site search process on its head. Rather than starting with a target region and zeroing in on specific properties, the RLS approach starts with the property itself. That is, it takes a specific location or property and quantifies its value in logistics and supply chain terms (as well as in more traditional measures).
That approach offers advantages on a variety of fronts, JLL says. For one thing, it saves customers time by doing some of the upfront work they would otherwise have to do themselves. For another, it can help developers evaluate the commercial prospects of their properties.
For example, JLL recently used the model to develop a "logistics profile" of a 440-acre site in Pennsylvania's Lehigh Valley owned by Los Angeles-based industrial property developer Majestic Realty. As part of its assessment, JLL looked at factors like rail and highway access as well as proximity to major markets.
Ed Konjoyan, a vice president of Majestic Realty, says his company commissioned the study after seeing how well logistics-centric marketing worked for the CenterPoint Intermodal Center. CenterPoint, he says, landed some very big customers by promoting logistics-related advantages like reduced drayage costs. Majestic is hoping to emulate that success with the Lehigh Valley site. The JLL process, he says, "confirmed scientifically our gut feeling about the value of this property."
What does that mean for distribution executives looking for a new DC location? When companies like Grubb & Ellis, JLL, Majestic, and CenterPoint parse the logistics advantages of their properties, it likely can accelerate the selection process—although due diligence would demand verifying any claims. And as Thompson points out, there's another potential advantage for distribution executives. When it comes time to shed a company-owned DC, it could reduce their risk of getting stuck with an oversized white elephant.
About the Author
Peter Bradley is an award-winning career journalist with more than three decades of experience in both newspapers and national business magazines. His credentials include seven years as the transportation and supply chain editor at Purchasing Magazine and six years as the chief editor of Logistics Management.
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