Perspectives on Supply Chain

Perspectives on supply chain

2014

The re-emergence of the iron horse The growth of inland ports and their impact on industrial real estate

When it comes to moving goods around the country, trucks handle the Fast forward to March 2014. Proof that truck traffi c is being pushed onto vast majority of that transportation burden. This is true in the U.S., as rail can be found in several statistics, care of the American Association of well as in Asia or Europe, where trucks are the primary go-to shipping Railroads (AAR.org), which tracks numbers from rail carriers that handle method for most companies. The question for corporate shippers today 95 percent of U.S. and Canadian rail traffi c: is “what if trucks are unavailable?” This might sound extreme, but it is a real concern. According to Gordon Klemp, Founder and President of March 2014 carload traffi c was up over 3.5 percent vs. March The National Transportation Institute (NTI), the “mother of all capacity 2013, and the highest since March 2011. shortages” is coming.

Outside of a truck, what other options does a company have to move March 2014 intermodal trafﬁ c was up over 9.9 percent vs. March goods? Air freight? No, too costly for most. Barge? No, not practical 2013, the 52nd consecutive year-over-year monthly within the continental U.S. The only viable alternative to truck is rail, or increase for intermodal. intermodal—a combination of both rail and truck.

Intermodal has been the fastest growing transportation mode for the past North American freight cars in storage are at the lowest point nine years running. Ten years ago, few companies thought of rail (or since the AAR started tracking the statistic in early 2009 (15.5 intermodal) as a practical way of moving their goods. Today, that mindset percent vs. 31.9 percent). is changing. Growth has been substantial: U.S. rail intermodal volume was 3.1 million containers and trailers in 1980 and 12.8 million units in So what has changed? Why the big fuss about rail? Here’s 2013. This represents a CAGR of 9.5 percent over the past 33 years. the rundown: 1 Freight costs are on the rise. No question about it. This creates a need for corporate supply chain professionals to look for cheaper, alternative modes of transportation.

• Railroads are, on average, four times more fuel efﬁ cient than trucks. • Unlike truck trailers, containers can be “double-stacked.” This ‘two in one’ approach lowers costs and also enhances productivity— containers can easily be transferred to and from ships and trucks.

2 Trucking capacity will likely tighten. The trucking industry is being impacted by a variety of issues that will continue to drive costs up and create tighter capacity, including federal regulations such as Hours of Service, limiting the number of hours a driver can be on the road; higher operating costs driven by insurance rates; fuel prices; and increasing driver wages. To compound matters, a driver shortage appears to be on the horizon as many are nearing retirement and the The evolving world of intermodal and the emergence of next-gen is pursuing other careers. A greater reliance on rail intermodal “inland ports” means truck driver shortages are less of a problem. JLL has identifi ed almost 200 intermodal facilities in North America that are controlled by the Class I railroads, including the Burlington Northern 3 Sustainability initiatives are increasing in importance. Santa Fe (BNSF), CSX, Kansas City Southern (KCS), Norfolk Southern Corporations are looking for ways to lower their carbon (NS), Union Pacifi c (UP), Canadian National (CN) and emissions, and part of this is fi nding a way to seek more effi cient Canadian Pacifi c (CP). (“greener” modes of transportation. Trains, on average, are 60 percent “greener” than trucks). Intermodal facility counts, by rail operator (by country) 5 3 4 Risk mitigation is a notable priority. Given recent natural disasters such as the tsunami in Japan and fl ooding in Thailand, U.S. (171) corporate boards are asking about risk management and there is too 4 7 much risk to having all your transportation “eggs in one basket”. Canada (20) 10 12 Mexico (3) Rail and intermodal transportation More and more will likely continue to grow in importance as a way to offset 28 companies who have the operational challenges as 33 never considered rail noted above. The development of inland ports will be the key driver in their supply chain in bringing all of the supply chain 41 1 constituencies together. strategies will look to 50 the new modern “iron This “what is old is new” phenomenon will be due to the horses” of the 21st closely coordinated efforts of the Some of the facilities date from the earliest days of the railroads and century to lower costs, trucking companies themselves, are now located within the urban heart of original railroad cities that shippers, the railroads and today are some of the country’s largest metro areas, including Atlanta, reduce risk and be industrial real estate developers Chicago, Kansas City, Los Angeles and Memphis. The roads and other and their corporate occupier infrastructure systems serving these facilities reached capacity long ago. more environmentally clients as they focus attention and The real estate that was built twenty or more years ago to serve the sustainable. investment capital on inland ports. companies that utilized these facilities has become functionally obsolete It’s all about the ongoing battle to and no longer meets the needs of high thru put operations—much less drive costs out of the supply chain hyper-kinetic e-commerce operations, yet new development is while at the same time delivering goods more quickly. Having a robust playing catch-up. and fl exible infrastructure is crucial. The graphic below highlights the inventory composition of existing Supply chain and real estate professioanls are coming together like warehouse/distribution facilities in excess of 250,000 square feet never before, which will have long lasting impacts upon not only how and that are located within a 5-mile radius of U.S. rail yards, by decade of where goods are transported, but where and how they are distributed. construction. Just as rail intermodal volume began to accelerate from the Age of inventory, by decade In a February 2014 press release, the CSX Railroad stated they 2.4% estimated that 9 million truckloads in the Eastern U.S. are candidates for 1910-1940s conversion to intermodal rail service. To meet this anticipated demand, 4.6% 8.9% they are investing $2.3 billion in intermodal facilities in Florida (Central 1950s 2010+ 5.2% Florida Intermodal Logistics Center) and Canada. The Norfolk Southern 1960s anticipates that its Crescent Corridor line has the potential to remove 9.6% 1.3 million long haul trucks annually. It has or will have spent $2.5 1970s billion in new facilities and capital investment to build out the Corridor infrastructure necessary to meet the new demand they anticipate. 7.7% 1980s 41.3% 2000s

20.2% 1990s

Perspectives on supply chain | 02 1980s on, development of warehouse space has as well. This statistical sampling includes 574 facilities, totaling 292.1 million square feet, and—from a volume standpoint—78.2 percent has a construction date of 1980 to the present. Since half of the inventory delivered with a 2000+ build date, it is safe to assume that future warehouse development will continue to increase as shippers progressively divert cargo from trucks to intermodal modes.

The industrial real estate “renaissance” Real estate developers and supply chain professionals have come together to identify areas that offer the availability of large land masses necessary to aggregate rail and truck trafﬁ c, new modern warehouse and distribution facilities and related infrastructure.

In one example, the CSX and NFS railroads have partnered with the real A sampling of some of the inland port and intermodal developments estate community to put into place programs that pre-certify and identify funded through TIGER grants include: sites that are ideal for rail service. • Rutherford, PA – Rutherford Intermodal Facility Expansion The fi rst fully integrated modern inland port/intermodal facility where • Pritchard, WV – construction of a new intermodal facility the railroad and real estate developer worked together as partners was • Northeast and Midwest US National Gateway Project – connects Alliance Texas, which was started in 1993 and encompasses over 17,000 northwest Ohio to Chambersburg, PA acres. The development features a BNSF intermodal facility, as well as • Crescent Corridor Intermodal Freight Rail Project – supports an airport geared to air cargo customers. The next fully integrated project new development of intermodal facilities in Memphis, TN and would come nine years later in Chicago by the BNSF at the Logistics Birmingham, AL Park Chicago, encompassing a 435 acre intermodal facility along with an • LA/Long Beach, CA – a number of signifi cant grants have been almost 2,000 acre industrial business park. given to improve rail access in and out of the Ports of Los Angeles and Long Beach to intermodal facilities in the greater These developments have successfully brought together all of the Los Angeles area players in the supply chain: Railroads, real estate developers, trucking and transportation companies, 3PL’s and corporate users. Even more These new intermodal facilities have the potential to bring with impressive is the fact that them the development of an estimated 172.3 million square feet together these two parks have of distribution, warehouse and other related logistics facilities The theme for all these precipitated the construction of specifi cally targeted to take advantage of their proximity to the rail projects is the same: over 40 million square feet of and intermodal facilities. At an assumed construction cost of $50 distribution, warehousing and per square foot for buildings alone, this represents an investment To build the country’s manufacturing space. Put into potential of $8.6 billion. Add in the costs for installation of business infrastructure to perspective: This is on par with park infrastructure such as roadways, utilities and extension of rail the size of the entire industrial lines and that number likely swells well beyond $10 billion. accomodate the growing real estate markets of some cities. The chart below identifi es new projects and the associated potential movement of goods via real estate. It is important to note that in most cases the railroads are rail, as well as reduce the From 2000 through Q1 2014, 30 not the ones constructing the real estate facilities associated with intermodal/inland port facilities their intermodal/inland port facilities. Rather, it is a private real estate number of trucks on have either opened or have been development group that has typically partnered with the railroad and our highways. announced with more rumored other supply chain partners to plan and coordinate development to be in process. The pace and strategies for the overall success of the project. breadth of development of inland Railroad New projects since 2000 Potential real estate to be developed ports/intermodal facilities is even more impressive when considering that in square feet 19 of the 30 have occurred since 2008 and were ironically planned and/ or developed during the depths of the Great Recession. BNSF 5 31,500,000 CSX 5 19,964,000 The American Recovery and Reinvestment Act of 2009 has served as KCS 4 12,500,000 a catalyst and, in some cases, accelerated the construction of inland NS 8 44,975,000 port/intermodal developments through the Transportation Investment Generating Economic Recovery (TIGER) portion of the Act. According to UP 7 54,342,550 the Department of Transportation (DOT), “Congress has provided DOT CN 2 9,000,000 with six rounds of competitive grants, totaling just over $4.2 billion for CP 0 0 capital investments in surface transportation infrastructure.” Total 31 172,281,550

Perspectives on supply chain | 03 While the newer developments are spread across the country, there are strong concentrations in the East, Southeast and Midwest. Highlights of South Carolina – Positioned between Charlotte and Atlanta, some of the larger and more interesting projects are described below. the NS-operated South Carolina Inland Port extends the Port of Charleston’s reach 212 miles inland. Operations began in October 2013, and several companies are using the terminal, New/planned inland port/intermodal RE projects including BMW, which is moving its South Carolina export Arizona – The Inland Port Arizona is a 1,637-acre project that will operations into a 413,000-square-foot facility at the 220-acre be served by the UP and is targeting supply chain partners that inland port. BMW is using double-stack trains to transport about need a cost effective alternative to Los Angeles. The developers 70 percent of the 1,100 cars it makes daily at its Greer plant to are still in the planning stages but the assemblage has the the Charleston port. From there, the vehicles are shipped to 130 potential to accommodate over 15.0 million square feet of markets worldwide. real estate. Tennessee – Memphis, a long-time railroad city, has been the Florida – CSX opened its new Winter Haven Intermodal in April recent focus of several railroads and their real estate partners. 2014. An estimated 8.0 million square feet can be developed in the areas adjacent to it. • The CN has recently expanded and enhanced their Memphis intermodal facility with plans for the adjoining Illinois – Two newer facilities in the Chicago area (adjacent 800-acre CN Memphis RidgePort Logistics Center to one another) join the existing and highly successful BNSF capable of accommodating 6.0 million square feet Logistics Park Chicago (LPC) that opened in 2002. of space.

• RidgePort Logistics Center is a 1,500-acre development • The NS opened its Memphis-Rossville intermodal that has the potential to construct almost 15.0 million facility in 2012. Real estate developers control square feet of space. Most interestingly, this park will adjoining land that could translate into the construction feature refrigerated express rail service for produce of 15.0 million square feet. and other perishables grown in Central California and railed to Chicago. Processed foods, grains and other Texas – The Dallas area is home to the nation’s ﬁ rst holistically perishables grown and produced in the Midwest will ﬁ ll planned intermodal/inland port facility, AllianceTexas. With the the back-haul to California. Transport of food via rail advent of the much talked about re-shoring of manufacturing is the newest product to receive interest from those operations to the U.S. and Mexico, we anticipate Dallas and in the supply chain looking to take advantage of the Houston will be vital links in bringing those goods to the rest of economies that rail offers. the U.S. Two new developments in the state include:

• Joliet Intermodal Center (JIT) by the Union Paciﬁ c is • KCS’ CenterPoint Intermodal Center in Houston, a immediately north of BNSF’s LPC and opened in 2011. 689-acre development capable of accommodating 7.5 It has the potential to construct 20.0 million square feet million square feet. of space with over 3.0 million square feet already built since its opening. • UP’s Dalport, a 353-acre development in Dallas with a potential for approximately 5.0 million square feet Kansas – The BNSF Intermodal and Logistics Park KC opened in of development. late 2013 and sits on the operator’s transcontinental line between Chicago and the Ports of Los Angeles and Long Beach. The Edgerton, KS facility opened with annual capacity for 500,000 Intermodal facilities in the U.S. container lifts, which will be tripled upon build-out. The 1.5 million- lift capacity will attract 100 million square feet of new industrial Potential real estate to be developed development within a 350-mile radius of the inland port; 60 million of that will be constructed within the Kansas City area.

North Carolina – The NS has partnered with the City of Charlotte, Charlotte Airport Authority and other municipal authorities to open one of the more innovative facilities from a land use perspective. The Charlotte Regional Intermodal Facility opened December 2013 with the intermodal rail yard portion interspersed with the runways of the Charlotte International Airport. Over 15.0 million square feet of space could be developed in conjunction with the intermodal facility and airport.

Perspectives on supply chain | 04 Current construction Over 14,000 trucks cross the U.S. border from Mexico each day making Total U.S. construction across all markets was 122.8 million square feet rail links between the U.S. and Mexico as well as Canada of growing at the time of this report’s writing. Underway warehouse/distribution interest to the entire constituency of the supply chain.1 facilities located within a 5-mile radius of U.S. rail yards totaled 19.9 million square feet, or 16.2 percent of total U.S. construction. The bulk of Intermodal developments in the key Mexican manufacturing cities this niche segment was focused in the Southwest and the Northeast. of Monterrey and San Luis Potosi as well as key port cities including Lazaro Cardenas are all gaining more attention. Goods and products Age of inventory, by decade 6.1% So Cal loaded on trains in the interior of Mexico enjoy a worry-free crossing of the border and aren’t subject to inspection and duty until they arrive at intermodal facilities in the interior U.S. This international traffi c is benefi ting intermodal and business parks located in Dallas, Kansas City and Chicago. The KCS is running these rail routes and partnering with 21.7% Northeast other railroads as well as transportation companies such as Schneider Logistics. On the Mexico-side, the KCS line has partnership-connections to the Port of Manzanillo, which is the only seaport in Mexico capable of double-stacking containers onto railcars. 5.8% Mid- Atlantic 40.1% Southwest The UP opened a $400 million, 2,200 acre Santa Teresa Intermodal Ramp in Santa Teresa, NM on the El Paso, TX/Juarez, MX border in April 13.1% 2014. Equipped with four gantry cranes, the terminal already handles Southeast Mexican-made auto parts bound for Chicago and will soon benefi t from increased manufacturing activity in Juarez. Mexico’s manufacturing 13.1% resurgence that began in the automobile and aerospace industries is Midwest now spreading into white goods production. It is presently the largest intermodal development along the Mexico/U.S. border, and, back in 2009, there was only 800,000 square feet of warehouse space in the city; now there is 3.0 million square feet leased to tenants like Electrolux.

The rail-near construction numbers yield interesting fi ndings when The Canadian carriers are also leveraging their key ports of Montreal shifting the focus to the market level: Dallas/Fort Worth, Central on the east and Prince Rupert and Vancouver on the west coast to feed Pennsylvania and Northern New Jersey comprised 10.1 million square intermodal facilities in their interior markets such as Calgary and on feet of the 19.8 million square feet presently underway, or 51.0 percent into the U.S. The Canadian National has been especially active in both of U.S. rail-near big-box development activity. All three markets have Canada and the U.S. with projects in Calgary and Memphis to name two. available land for development, are based in notable population centers, Logistics. On the Mexico-side, the KCS line has partnership-connections are home to inland ports with prominent traffi c fl ows and have rail to the Port of Manzanillo, which is the only seaport in Mexico capable of connectivity to other major cities. For the latter, for instance, Dallas/Fort double-stacking containers onto railcars. Worth—which leads all other markets in rail-near construction—offers rail connectivity to Chicago and Southern California. Chicago is home to the nation’s busiest inland port, while Southern California houses its busiest seaports where 40 percent of the nation’s imports enter the country. Both BNSF Logistics Park Chicago intermodal facility in Elwood, IL BNSF and UP are enhancing their on-dock rail capabilities to expedite the fl ow of cargo as it is off-loaded from docked shipping vessels at the Ports of Los Angeles and Long Beach.

Connecting North America According to a February 14, 2014 article, NAFTA’s Economic Impact, posted online on the Council of Foreign Relations and authored by Mohammed Aly Sergie, “In 2011, the latest year for which goods and services trade data are both available, the United States exchanged nearly $1.2 trillion worth of goods and services with Canada and Mexico, the country’s ﬁ rst- and third-largest trading partners, respectively. To put this number in perspective, total U.S. trade with Japan, Korea, and the BRICS nations—Brazil, Russia, India, China, and South Africa—is also about $1.2 trillion.” The same article sites a study by Joseph Parilla and Alan Berube, “Metro North America: Metros as Hubs of Advanced Industries and Integrated Goods Trade,” that appeared in the Brookings Now website.

1 http://www.fas.org/sgp/crs/misc/R41821.pdf and http://transborder.bts.gov/programs/international/transborder/TBDR_BC/TBDR_BC_Index.html Perspectives on supply chain | 05 Conclusion For more information, please contact: The “iron horse” has been around for over 150 years, but rail transportation has evolved greatly in that time, having become a Keith Stauber, SIOR Rich Thompson critical part of the supply chain management equation, which now Managing Director Global Leader includes real estate. Although supply chain management can Industrial Services Supply Chain & Logistics Solutions be quite complex, the increasing interest and focus on rail and +1 773 458 1386 +1 773 458 1385 intermodal, as well as related inland port projects is quite simple [email protected] [email protected] when compared to trucking:

Lower transportation costs Aaron Ahlburn Dain Fedora Only viable alternative to truck Senior Vice President Research Manager More sustainable Americas Director of Research Americas Industrial More reliable/user-friendly +1 424 294 3437 +1 424 294 3444 [email protected] [email protected] Inland ports are the new gateways that connect the United States’ domestic markets. They have and will continue to play an important role and serve as a catalyst for the development of industrial real estate facilities in the future. Industrial markets with intermodal rail facilities have the highest rent growth. This will remain the case in all rail-served markets and real estate developers and owners are advised to take note and urged to form partnerships and collaborate with parties that are likely new to them.

The coming together of the railroads, transportation providers and third-party logistics companies, corporate shippers, as well as the real estate community will ensure the most efﬁ cient and effective movement of the country’s goods.

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About JLL JLL (NYSE: JLL) is a professional services and investment management fi rm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4 billion, JLL has more than 200 corporate offi ces and operates in 75 countries worldwide. On behalf of its clients, the fi rm provides management and real estate outsourcing services for a property portfolio of 3 billion square feet and completed $99 billion in sales, acquisitions and fi nance transactions in 2013. Its investment management business, LaSalle Investment Management, has $48.0 billion of real estate assets under management. JLL is the brand name of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

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