The Buzz from I.con Conference: Prospects for Industrial Development in a Global Economy
[ By Sheila Vertino ]
Sessions were packed at I.con, held in the historic Adolphis Hotel in Dallas, Texas, as attendees learned how to increase profits and uncover new opportunities in today's industrial environment.
The world definitely looked flatter at the recent I.con Conference, held in June in Dallas. The effects of the global economy are being felt throughout the distribution chain for goods, right down into NAIOP members' industrial properties.
Short term, the prospects are good for continued growth, but according to economist and keynote speaker Jeff Thredgold, the biggest impact on the U.S. economy will come from the imminent shrinking of the labor force, which will "grow the slowest it has ever grown." This is far more significant than the specter of outsourcing, which Thredgold contends is "not what the media would have you believe. For example, Siemens, a German company, has outsourced 75,000 jobs to the United States."
Small can be nimble, but Big has its advantages, to be sure. Good-natured barbs were traded at this year's installment of David vs. Goliath (Round 4). Shown here are John Seiple, ProLogis and Jeffrey Swope, Champion Partners. Also on the panel, moderated by Jose McNeill, CalPERS, were Michael Curless, Laugh Property Group, and Greg Gregory, IDI.
After years of corporate downsizing (which Thredgold called "capsizing and dumbsizing"), the U.S. economy has emerged as "one of the most flexible and dominant economies in the world." He advised developers to court tenants from "seven critical industries":
Transportation
Financial services
Energy
Entertainment
Technology
Telecommunications
Biomedicine
Suceeding In Tight Times: Realities of Today's Industrial Pro Forma
How tough is it to prosper in today's industrial development market? According to panelist John Stirek, Trammell Crow, "Come on in, the water is cold."
Session moderator Don Chase, KTR Capital Properties, set the stage for the discussion by mapping out four issues coming to bear on industrial pro formas:
An influx of capital in all asset classes.
Rising costs: capital, land, materials, etc.
Increasing sophistication and pressure from smart tenants for flexibility, best buildings, help with financing TIs.
Increase in information available to all of us, from market to macro. This helps to mitigate the risk, especially for new development.
Talk the Talk: A Logistics Glossary
3PL, 4PL: Third Party Logistics, Four Party Logistics.
C-TPAT: Customs Trade Partnership Against Terrorism, which mandates security for all imports.
DC Bypass: End-to-end supply chain design direct from origin (e.g., in China) to retail stores (e.g., in North America), bypassing any stops at distribution centers.
ICTF: Intermodal container transfer facility.
FTZ: Foreign Trade Zone.
Demurrage: Detention of a ship, freight car, or other cargo conveyance during loading or unloading beyond the scheduled time of departure, and the compensation paid for such detention.
TEUs: Standard 20-foot-long cargo container
TL/LTL: Full truck load/Less-than-full truck load
VMI: Vendor managed inventory
The New U.S. Gateways
"Disruption logistics" is now the rule for goods being shipped through the ports of Los Angeles/Long Beach, Calif. Manufacturers looking for alternative gateways, will turn to the following "New Gateway Cities," according to Curtis Spencer, IMS Worldwide, Inc.:
Savannah, Ga.
Houston, Texas
Norfolk, Va.
Charleston, S.C.
Lazaro Cardenas (Mexico) to Kansas City and Houston
Punta Colonet (Mexico) to Yuma-Victorville, Calif.
Container-on-barge to Central Ohio
Hot new rail hubs: Houston, Kansas City, Memphis
Leigh B. Boske, Ph.D., Lyndon B. Johnson School of Public Affairs, University of Texas at Austin, gave I.con attendees an in-depth understanding of how goods are transported by truck, rail and sea, and what changes might affect their warehouse and distribution tenants and facilities in the near future.
Providing insights into what pension funds are looking for, Terri Herubin, New York State Teachers Retirement System, noted, "We need to look at real estate as a long-term play, and not be driven by cap rates. We are 'patient money,' and not big sellers. We try to be nimble, and constantly add value to what we have." They see opportunities in redevelopment and infill, and are also active with smaller users, chopping up existing properties. Herubin pointed out that when a company buys an "existing box," it only takes on leasing risk, not development risk. Sometimes his company will take on a project that has more environmental risk. In some cases, they will go for demolition, when land prices justify it.
Jim Cochran, Dividend Capital Trust, spoke as a take-out source. His company is primarily acquisition oriented, but does some development, operating in 30 markets. Most of their capital comes from pension funds, whose allocations to real estate are now up to eight percent (was $44 billion in 2004; $51 billion this year).
His company sees a good supply of products available, and many owners willing to sell. The large portfolios on the market today command a premium, but, asked Cochran, "How do you measure the premium?"
Joint venture opportunities in Mexican warehouse and distribution were the big buzz at I.con. Attendees heard about plans to attract port traffic to the west coast of Mexico, and ship via rail through Mexico to Laredo, Texas and Kansas City, Missouri. Shown here are panelists Lorenzo Berho, Grupo Vesta, and Amy Powell Erixon, LaSalle Investment Management. Also on the panel, moderated by Jose McNeill, CalPERS, was Luis Gutierrez, G. Accion, A.A. de C.V.
His company is seeing increased activity in smaller properties, 50,000 square feet and below. This might be caused by job creation in small businesses. "We are still not seeing much rent growth, but concessions have flattened," he said.
With regard to cost management, Eugene Reilly of AMB remarked that "we were kind of spoiled during the last decade, when costs were flat. Now we need to build in costs because entitlement will take longer. No contractors will lock in materials or labor costs. However, this constrains supply, and also leads to increased land costs."
Even national powerhouse Trammell Crow is feeling the pinch of the new pro formas. Now doing 50 percent of its industrial deals with Clarion, and also working with Kennedy in Seattle, Trammell Crow's business is centered in the South (44 percent), the East (30 percent) and a small amount (four percent) in the Chicago area, according to panelist John Stirek.
Quotable
-- Charles Klatskin on Maximizing Industrial Profits
"Before buying a distribution center, check to see if you can distribute 24 hours a day."
"Absolute net lease is the way to go. If the tenant pays, they will take care of the property."
"Get a management fee. The big boys do it. Smalls should too. It will be small (two to three percent on a single tenant; 3.5 on multi-tenant), but it adds up."
"In Northern New Jersey, you can't get any up-charge for setting up a Foreign Trade Zone (FTZ) designation. It's really just a marketing tool. And with import taxes going down, FTZ makes less sense."
"The yields used to be nine, and are now 8-1/2 to nine, on a speculative basis, with 200 basis points," he said. "'Dirt to dial tone' takes two years. On build-to-suit projects, we're looking at a 100 basis-point spread. You really need a capital partner so you can buy land and be responsive in your market. There is unprecedented liquidity, even in secondary and tertiary markets."
Echoing a common theme, Stirek pointed out that a major challenge comes from land costs, which he calculates are double this cycle, pushing real costs up 30-40 percent. Much of this is caused by fierce competition with residential developers for land. "These guys are good," he said. As proof of the new realities and tight market, Stirek pointed out that pension funds are now buying un-entitled land for the first time.
Getting the Goods: Transportation Trends
Here's what to expect in a rapidly changing transportation industry, during 2005-2006, according to Leigh B. Boske, Ph.D., Lyndon B. Johnson School of Public Affairs, University of Texas at Austin.
Trucking
Full-truck trips (TL) will continue to grow by six to 10 percent. Less-than-full truck trips (LTL) will increase three to four percent. However, growth will be tempered by record high fuel prices, driver shortages, continued industry consolidation and high barriers to LTL entry. Hours-of-service regulations for trucking companies likely to remain uncertain until September. Look for steep increases in toll-road charges for more than a third of all highways, bridges and tunnels that currently charge a fee. Congress will enact new transport funding bill by the end of June. U.S./Mexico border likely to open to long-haul truckers. Lines are blurring between TL and LTL, between national and regional LTL, between LTL and air freight.
Railroads
Additional capital investments and hiring by railroads, coupled with aggressive yield management and pricing will enhance network efficiency. Railroads are pursuing opportunities for public/private partnerships in infrastructure projects and coordination.... Users will take advantage of advanced booking (futures market) of car capacity to purchase future guaranteed capacity More flexible long-term contracts and haulage agreements Routing protocol agreements will lead to cooperation between railroads Chicago Transportation Coordination Office (CTCO) will speed connections Longer train lengths.
Port Terminals
Extended gate hours Common chassis pools Goods tracked through RFID and OCR devices Reduced free time and increased demurrage charges Continuous loading/unloading (on-dock rail facilities). Alternative trade lanes avoid Los Angeles/Long Beach jams, shifting routes to other West Coast ports, Mexico, Gulf Coast ports, Panama Canal and Suez Canal.
On the Local Level: How Supply Chain Trends Affect You
Phil Trabulsi, Exel Integrated Solutions, pointed out how changes in the global supply chain will affect industrial developers at the local level: Prepare for increased flexibility in building specifications. Increased number of dock doors. Need to consider new technology/data considerations. Increased trailer storage. Flow through building design with flexible reuse potential. Adequate clear height. Security. Fire/life safety considerations.
Demand will also shift to new locations, particularly to Gateway locations Increasing demand in Asian port and population centers like Guangzhou, Shanghai, Yantian, Tokyo, Bangkok, etc. Increasing demand in Americas and European port and population centers like Southern California, Chicago, Dallas, Atlanta, New Jersey/Pennsylvania, Toronto, Mexico City, Sao Paulo, London, etc. Increasing need for intermodal considerations at port and inland locations.
