Intermodal Hubs and the Industrial Real Estate Boom
By: Robert Chapman, CEO and Matt Mullarkey, senior vice president, strategic projects, CenterPoint Properties
CenterPoint Properties’ four buildings at Cedar Crossing Industrial Park in Baytown, Texas, near the Port of Houston, total 1.2 million square feet and are fully occupied by Exel Logistics, which processes and packages plastic resin there. The buildings are adjacent to an interstate and two state highways and have direct access to two rail lines as well as a barge terminal.
As state-of-the-art intermodal hubs emerge throughout North America, industrial developers are racing to build new facilities nearby.
INTERMODAL transportation is far from a new concept. It has been almost 60 years since the first freight containers made their way from Newark to Houston on a refitted oil tanker, revolutionizing what businesses to this day strive to perfect: a way of efficiently moving products from point A to point B.
Intermodal’s debut heralded a new era in supply chain management, one defined by standardization, closely integrated transportation modes, and dramatically reduced operational costs. As a result, intermodal facilities — specialized industrial parks equipped with infrastructure for moving cargo between different transportation modes like ships, trains and trucks — started to become nationwide fixtures. Despite much economic and regulatory change in the decades since, intermodal has proven its staying power.
Over the past 15 years, modern forces have triggered an intermodal resurgence, leaving a wave of industrial real estate demand in its wake. Retail and logistics organizations today face mounting pressure from buyers and trade partners to stabilize their supply chains, trim costs and cater to evolving consumer habits. As state-of-the-art intermodal and freight hubs emerge throughout North America, organizations are racing to develop facilities as close to these logistics nodes as possible.
The numbers behind intermodal’s recent boom speak for themselves. According to the Intermodal Association of North America, there are more than 1,100 intermodal facilities in the U.S. today, from container yards and rail terminals to ramps. The national intermodal network handled nearly 20,000 containers and trailers of dry van freight per day between the first quarters of 2013 and 2014, a year-over-year increase of almost 500 units per day, according to Mark Solomon, executive editor of DC Velocity. Intermodal loadings have grown consistently since 2000, with the exception of a minor slip during the Great Recession.
CenterPoint Intermodal Center-Joliet/Elwood is the largest master-planned inland port in North America. Set on more than 6,400 acres just 40 miles southwest of Chicago, it is strategically positioned at the epicenter of the region’s transportation infrastructure, adjacent to the I-55/I-80 interchange and anchored by the BNSF Logistics Park Chicago and Union Pacific Joliet Intermodal Terminal.
This upward trajectory can be attributed to a perfect storm of industry trends. In the last few years, the sharp decline of domestic trucking, new regulations and a shift in consumer behavior have compelled organizations to transform their transportation strategies.
First, the U.S. talent pool for truck drivers is in the midst of a record-breaking dry spell. Around 25,000 trucking jobs are unfilled, according to the American Trucking Associations (ATA). In the second quarter of 2014, trucking labor turnover rose 11 percentage points, reaching its highest level in almost two years. The Hours of Service Final Rule, enforceable by the Federal Motor Carrier Safety Administration as of 2013, only compounds the labor supply problem. The amended regulation limits long-haul truckers’ 34-hour restarts, includes tighter rules for rest breaks and imposes new fines for noncompliance.
Trucking’s downward spiral hasn’t been the only driver of intermodal’s rise. The birth of e-commerce — and the consumer buying habits it induced — has forced retailers to rethink their supply chain structures.
By 2018, U.S. online sales are expected to surpass $400 billion and account for 11 percent of all retail transactions, according to Forrester Research Inc. As consumers acclimate to the immediacy of online shopping, their expectations for speedy delivery and returns increase. Same- and next-day delivery options have become the norm rather than a niche, pushing retailers to build more agile supply chains and more efficient fulfillment infrastructure.
Many retailers are aiming to expand their product offerings to stay competitive, often by curating third-party marketplaces. Under these arrangements, outside merchants pay a fee in order to sell their products within an existing brand’s e-commerce website (such as Best Buy’s or Sears’). This added layer of complexity magnifies retailers’ need for more robust supply chains.
An Unstoppable Growth Spurt
Transportation organizations took note of these developments and have been responding accordingly. In 2014 alone, a trio of the largest North American railroads — Union Pacific (UP), Burlington Northern Santa Fe (BNSF) and Norfolk Southern (NS) — invested in new or expanded intermodal service, offering additional routes through which goods can be moved from rails to trucks and vice versa. Currently, there are almost 200 rail operator-owned intermodal facilities across the continent. It’s becoming increasingly apparent that wherever these hubs emerge, industrial real estate demand follows.
This 320,000-square-foot building, one of four at CenterPoint Intermodal Center-Savannah, is occupied by Coastal Logistics Group Inc. The center is less than two miles from Savannah International Airport, minutes from I-95 and the eastern terminus of I-16, and has direct access to Norfolk Southern rail service and Norfolk Southern’s Dillard Intermodal Yard. At buildout, the center will feature 15 facilities on 22.36 acres.
According to JLL, almost 150 million square feet of industrial space has been under construction within five miles of a U.S. intermodal facility since 2000. Around 30 percent of this activity began in the last five years.
International logistics firms, and the household brands they serve, are seriously investing in intermodal-proximate warehouse, production and distribution space. By strategically locating near intermodal hubs, businesses avoid many of the economic and regulatory forces working against them. Intermodal access helps retailers diversify their transportation options, protecting them from the trucking industry’s labor volatility and highway congestion. It also allows organizations to make good on their sustainability commitments: Intermodal rail accounts for less than 3 percent of transportation-based greenhouse gas emissions in the U.S.
Perhaps the biggest case to be made for developing intermodal-proximate industrial properties involves the short- and long-term cost savings. The geographic immediacy of cost-effective transportation networks easily justifies the upfront relocation or development expenses associated. With the prices of air shipping and trucking up in their own stratosphere compared to rail, no business can afford a supply chain built around a single transportation method. Drayage is another contributor to intermodal’s cost savings appeal; drayage operator costs are returning to (and even climbing above) their recession-era levels. Positioning distribution facilities within a few miles of transportation networks, however, can save cargo owners hundreds of thousands of dollars in drayage fees annually.
The recent uptick in the demand for strategically located industrial properties supporting the logistics industry isn’t the result of spontaneous combustion, but rather a number of carefully orchestrated partnerships. Constructing an intermodal terminal or inland port that attracts tenants depends on close collaboration among transportation firms, public sector agencies and real estate developers.
Rail operators throughout North America are on aggressive tracks to expand their intermodal services, amplifying the need for additional investment in infrastructure. In 2014, CSX Transportation opened two new intermodal terminals, in Florida and Montreal. In 2015, BNSF and UP will execute on $6 billion and $4 billion capital plans, respectively, with a healthy portion of those funds funneled into ongoing intermodal assets. NS continues to build out its Crescent Corridor, a $2.5 billion rail project spanning 11 states from Louisiana to New York. To date, NS has begun adding new signals, building new track and rail terminals, and straightening curves to bolster intermodal efficiency across the Eastern U.S. By 2020, the project is expected to save 170 million gallons of fuel annually and take more than 1 million trucks off highways each year.
Federal, state and local governments also play a critical role in facilitating intermodal developments. Congress has contributed more than $4 billion to road, rail, transit and port initiatives through the U.S. Department of Transportation’s TIGER (Transportation Investment Generating Economic Recovery) Discretionary Grant program. In addition to providing funding, public sector groups often contribute available land to intermodal projects. The federal government, one of the largest real estate owners in the country, has ramped up its efforts to sell excess, underused or blighted property to capable developers.
Rounding out this complex equation are real estate developers, many of which must adjust to the new requirements of intermodal-proximate properties. Industrial build-to-suits are in remarkably high demand; facilities need to be optimized to take advantage of nearby transportation. This often translates into larger spaces, higher clear heights and more strategic dock placement. E-commerce fulfillment centers, in particular, require a full slate of niche accommodations ranging from heavy-duty flooring to unusually tall building heights capable of housing specialized conveyer systems and extra mezzanine levels.
Successful examples of these public-private partnerships can be seen across the country, where intermodal centers are more than logistics nodes — they’re economic engines.
Where the Action Is
Historically, regions with preexisting transportation infrastructure and proximity to major population centers have been ideal targets for modern intermodal facilities. Markets including Chicago, Dallas/Fort Worth, California’s Inland Empire and Kansas City (all of which are long-standing rail hubs), as well as Northern New Jersey; Savannah, Georgia; and Suffolk, Virginia (homes to a few of the country’s largest seaports), were some of the first frontiers for intermodal hubs. As a result, these metro areas have become hotbeds for industrial real estate activity.
According to JLL, the Inland Empire recorded more than 21 million square feet of industrial net absorption and 17 million square feet of industrial property under construction in 2014 alone. Los Angeles, Dallas/Fort Worth and Chicago each averaged more than 13 million square feet of industrial net absorption during the year. Big names in retail are flocking to build and occupy this premium space. Brands like The Home Depot and Wal-Mart operate large distribution facilities out of the CenterPoint Intermodal Center-Joliet/Elwood, Illinois, which provides access to BNSF and UP intermodal terminals. Ace Hardware enjoys logistics advantages at its retail service centers in Suffolk, Virginia, and Wilmer, Texas, less than a mile from UP’s Dallas Intermodal Terminal. Kansas City’s growing intermodal resources are attracting an influx of retail distribution tenants, including Zumiez and Sears.
Going forward, it is almost inevitable that fluctuating global trade patterns and space constraints will spread the intermodal wealth to new markets. Transportation and industrial real estate investments are already rising in Southeastern port cities like Charleston, Miami and New Orleans, in anticipation of the Panama Canal expansion. Eventual space limitations in traditional intermodal regions may shift the focus to new secondary markets. Indianapolis, Phoenix, Orlando and Portland, Oregon, to name a few, are already projected to have strong intermodal and industrial potential.
No Signs of Slowing Down
The intermodal wave is unlikely to crash any time soon. By 2025, the ATA expects domestic freight tonnage to grow more than 23 percent. International trade is poised for a similar jump: Imports and exports will account for 19 percent of domestic freight tonnage and 31 percent of value by 2040. All signs point to a continuing push for efficient transportation options and logistically advantaged real estate.
It’s impossible to know exactly where the next intermodal nexus will emerge, or what future waves of this transportation phenomenon will bring. However, the cost and productivity advantages intermodal transportation offers the logistics, manufacturing and retail sectors have already proven their staying power. Going forward, the viability of this trend truly depends on the public and private sectors’ ability to cooperate with each other, ensuring that there will be enough supply to meet this massive demand.
Intermodal Terms and Definitions
Drayage: The transportation of goods over a short distance, usually via ground freight.
Dry van freight: General cargo that does not require refrigeration, typically transported on standard 53-foot trailers.
Inland ports: Specialized industrial parks, often located near railroad routes, developed to facilitate intermodal transportation. Many inland ports include on-site cargo transfer facilities, trade zone processing services and other logistics amenities.
Intermodal facility: An industrial campus that supports the transfer of containerized freight from one mode of transportation to another.
Logistics facility: A distribution center, warehouse, storage or freight-forwarding facility involved in the movement of cargo.
Ramps: Also known as intermodal terminals, these are the structures used to move containerized cargo on or off a railroad car.