IDI

NJ and Pa. - Should You?

Recently completed by IDI, this 427,500-square-foot building is located in a prime central New Jersey location - off turnpike Exit 8A.

If you could use only a couple of words to explain why Atlanta-based IDI opened its eighth regional development office in Philadelphia last summer, the first would be timing. The Eastern Pennsylvania and New Jersey region was not new to IDI. Just as the company had projects in that region managed from its Atlanta development office before locating an office in Fort Lauderdale, the company already had some properties in play in the Northeast before locating the office in Philadelphia. These projects included build-to-suit, and other dedicated projects, with business partners who shared IDI's market-driven approach to commercial development and its view of the Northeast as a global logistics hub.

While more than 750 million square feet of industrial property lie in Northern and Central New Jersey alone, making this industrial market the third-largest in the United States, the broader area -- including Eastern Pennsylvania -- boasts 1.3 billion square feet. The most active submarket in the area is that of Middlesex County, around Exit 8A on the New Jersey Turnpike, located roughly halfway between New York and Philadelphia. With more than 3.5 million square feet of space currently under construction, the Exit 8A submarket has for many years consistently outpaced surrounding areas in industrial development volume. Other submarkets in the region, however, such as Allentown and Harrisburg, Pennsylvania and Northern New Jersey, also have experienced significant inventory increases every year since 1998.

Major Logistics Hub

This 412,178-square-foot, front-loading building is off Exit 8A on the New Jersey Turnpike in South Brunswick.

The Eastern Pennsylvania/New Jersey area is located in a geographically optimum location to serve as a major hub in the domestic path of goods for both inbound and outbound logistics. On the inbound side, the area serves as a gateway to the local consumer market for international goods shipped through Northeastern ports or transported via truck from Canada. And because major arterial roadways from both the South and West converge within this area, it also serves as a unique location for the staging of inbound domestic goods to a population that represents 30 percent of the total U.S. consumer spending capacity.

On the outbound side, the area is an origination point for the preparation of goods that are imported through the ports of New York and New Jersey, and which ultimately are destined for other parts of the U.S. Accordingly, there has been a recent wave of development activity near the Northeastern ports. This is driven by the anticipation that Asian trade will represent an increasingly larger share of freight traffic on the East Coast.

Already, Asian countries, particularly China, are experiencing double-digit increases in shipments to the U.S. that aren't likely to slow. And because West Coast container traffic is reaching its maximum threshold, more distributors are choosing U.S. East Coast ports over the closer-but-congested ports of Long Beach and Los Angeles when shipping goods from Asia.

In addition, companies currently are altering their supply-chain strategies to eliminate certain risk factors associated with bringing goods into the U.S. via West Coast port facilities. These factors include labor unrest, such as the work stoppages seen in 2002 that worsened already-bad congestion at those ports.

Retailers are among the first business sectors to jump aboard this national trend for taking advantage of the land and water opportunities that exist either by heading farther south and trekking through the Panama Canal, or by directing westbound goods through the Suez Canal, then sailing northward to the Eastern U.S. shores. Awaiting them are ports such as those of New York and New Jersey, which are experiencing an ever-increasing flow of products from European and Asian shippers. Add to this trend growing populations along the Eastern Seaboard and the resultant economic development, and you have a recipe for significant change. It's not necessarily areduction in traffic to the West Coast, which handles through Long Beach and Los Angeles alone one-third of all U.S. container traffic. It's mostly an increase in traffic to the East, particularly as the cost of trucking goods westward across the country increases, at least temporarily, along with the price of oil.

This growth in activity along the East Coast, however, is not without time considerations or some growing pains for all the players involved.

To start, it takes cargo as long as an extra week to reach an East Coast port versus those at Long Beach or Los Angeles. And, many ports along the East Coast years ago incurred the enormous expense of additional dredging of channels and berths to accommodate an anticipated increase in volume and larger ships. On land, installation of new terminals, cranes and dock yards has been under way for quite some time. In some cases, truck traffic already builds to the point of congestion, depending on the regulation of gate hours at any particular location.

Still, the trade-offs can be worth the investments. The dependability of cargo arriving, (1) at a less-expensive port; (2) on a more efficient ship; and (3) as expected - even if a few days later than before - creates big advantages for having logistics operations on the East Coast.

That creates considerable opportunities for developers such as IDI in markets like New Jersey and Eastern Pennsylvania, particularly given the growth in the number of retail operations in the Eastern U.S. and the retailers' need for warehouse and distribution space closer to an ever-growing consumer and labor base.

Population Plays Major Role

IDI's second word for explaining why it opened an office in Philadelphia is access. During a roundtable discussion at the Steven L. Newman Real Estate Institute, Robert Paaswell, director of the federally-funded University Transportation Research Center, described a new, broader focus of that old real estate motto, "location, location, location," and how population changes and accessibility affect a region's economic growth.

Paaswell pointed out that in addition to submarkets and states of the Northeast U.S. competing against one another in a regional competition for commerce, the Northeast region itself competes against other industrial territories in the U.S., such as the Inland Empire area of Southern California. But, he said, the Northeast's newer and bigger role is, specifically, within a global marketplace. This market, Paaswell stated, competes with Europe, multiple regions of Asia and other international commerce centers with ever-increasing importance, thanks to its large population, its proximity to financial centers and its growing capabilities and expanded infrastructure to support port, rail, highway and air-freight transport.

In other words, with some 45 percent of the U.S. population within a day's drive, the Northeast market's commercial activity mirrors on an international scale the same factors of successful logistics strategies as the world's most successful businesses. Namely, these are having access to ever-increasing populations of global proportions and having the greatest number of viable logistics options for reaching them. The industries that are represented by concentrations of big-name companies in the Northeast - financial services, insurance, software and other information technology industries, pharmaceuticals, biotechnology and biomedicine, telecommunications, transportation and warehousing and manufacturing - all rely on these factors.

In terms of providing maximum logistics options, the Northeast region has much potential but is not without its challenges. In the next 25 years, for instance, the state of New Jersey is expected to grow by 1.2 million new residents and 750,000 new jobs. That's good news for economic growth, but potential trouble for the state's Transportation Trust Fund, which has faced insolvency issues in the past. While it ponders ways to replenish those coffers, the state has acted quickly to develop a comprehensive plan for allocating some $4.7 billion in federal transportation funds approved for fiscal years 2005-2009 through the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) legislation approved last summer. By including important freight-rail programs such as the Liberty Corridor project among the proposed infrastructure improvements, the state is ensuring future efficiency in freight movement throughout the region and, in turn, economic benefits for businesses and residents alike. (The Port of New York and New Jersey Authority's and the New Jersey Economic Development Authority's Portfields Initiative is designed to provide incentives for new industrial development, for the port in Elizabeth. Currently the Portfields Initiative has industrial sites under consideration in Kearny, Newark, Elizabeth, Linden, Carteret and Perth Amboy.)

Pennsylvania, on the other hand, expects a much flatter projection relative to population growth (approximately 700,000 residents throughout a much larger state) over the same time period and therefore may suffer labor shortages if past economic development trends continue into the future. The state, however, is expected to receive about $8.2 billion in SAFETEA-LU funding and therefore is poised to improve a number of transportation systems that are nearing capacity.

Industrial developers, such as IDI, which also stand to benefit from continued growth, have an important role in bringing to fruition certain proposed real estate solutions that responsibly affect the growth in these important markets and others.

As noted in the Winter 2005 issue of Development, it's flexibility in responding to different supply-chain needs that benefits today's industrial tenants most. Port proximity is becoming increasingly important in the Northeast, and developers such as IDI are responding to that need, providing off-the-ship staging and light-assembly locations that help streamline distributors' transportation needs further inland.

But flexibility has its limitations, and transportation - the common denominator for success in any of these logistics markets - is one such limitation. The hallmark of any industrialized society, efficient transportation is the challenge that lies ahead for us all as industrialization outside U.S. borders makes significant gains on industrialization within our borders. Nowhere is the potential for imbalance more obvious than at our ports.

In the Northeast, it's especially critical for transportation to run most efficiently. But while progress lies in the hands of those largely outside the commercial real estate industry, IDI considers itself to be positioned in the right place at the right time to help companies align their distribution models in the best way possible.

Frank J. Petkunas is IDI vice president/regional development officer.