The View from I.con: Industrial Market Expands

Fall 2013
I.con attendees filled the room for this and many other panel sessions.

More than 500 of industrial real estate’s leaders gathered at NAIOP’s I.con: The Industrial Conference in Los Angeles on June 5 and 6 to discuss trends, debate ideas, and share news and views of the industry and where it is headed. The industrial sector continues on a strong recovery path, driven by consumption, real trade, and real GDP, according to Gene Reilly, 2013 NAIOP chairman and CEO of the Americas, Prologis, who spoke at I.con’s opening luncheon.

“People ask me, why is the industrial property segment recovering when, for example, office is not,” said Reilly. “The fact is that there are 13 million more people in the country than there were at the start of the downturn, and people need ‘stuff,’ even if they are not working.”

Another big driver, according to Reilly, is housing construction. Total volume peaked at around 2.1 million units in 2006, then declined to between 500,000 and 600,000 units per year and stayed there during the downturn. He said that building more than 2 million single-family and multifamily units a year is not sustainable, but about 1.5 million is. Today, about 1 million housing units are being produced, on the way to a volume of about 1.5 million units.

Gene Reilly speaking at podium

NAIOP Chairman Gene Reilly addressed the I.con opening luncheon session.

group of people waiting for tour boat

I.con attendees gathered at Los Angeles Harbor on the first day of the conference to tour the Ports of Los Angeles and Long Beach, which are located side-by-side in San Pedro Bay but are separate economic entities.

“The expansion of trade and consumption has given us a solid recovery and the economy is in fairly good shape right now, but the real ‘gas’ in the tank for the industrial sector is inventory levels, housing starts, and real job growth. These factors give us a lot of tail wind,” said the chairman.

Are there any dark spots in the recovery that worry Reilly? “We have an anti-business public policy in effect that hurts job formation, and this is at both the federal and state levels,” he warned.

After touring the ports of Los Angeles and Long Beach (see “North America’s Two Busiest Seaports” below), I.con participants heard a keynote presentation on the NAIOP Research Foundation’s newest report — “The Stabilization of the U.S. Manufacturing Sector and Its Impact on Industrial Space” — and attended sessions that explored topics such as e-commerce, “rightshoring,” inland ports, and more. Highlights from I.con — commercial real estate’s eminent national conference for industrial issues — appear throughout this issue.

Key Topics in the Boardroom

What is the biggest concern at the board level for industrial developers and owners right now? That was the question posed by Alan Pontius, managing director, Commercial Property Groups, Marcus & Millichap, at an I.con session titled “Chief Investment Officer Roundtable.”

Here’s what panelists had to say:

Bryan Blasingame Jr., CIO, Industrial Developments International: “One thing we debate at the board level is how to allocate capital. We have eight regional offices and we own land in all of those markets, in addition to land in other markets. We have to evaluate opportunities coming in from every office.”

James Clewlow, CIO, CenterPoint Properties: “A lot of our discussion has to do with customer service and tenant demands. For us, it is all about relationships. We have to be quick and adept at knowing who our customers are.”

Larry Harmsen, CIO, The Americas, Prologis: “In addition to discussing global capital allocation, we frequently ask, ‘how do we find unique opportunities to leverage our unique platform? How do we take advantage of that platform? What fits into that platform nicely?’”

Jeff Phelan, president, DCT Industrial Trust: “When do we stop [developing new projects]? We ask ourselves this again and again. We all know when to start and keep going, but when do we stop and why do we stop? In the REIT world, one of the things that you are scored on is your ability to have the discipline to do that, … to stop. That being said, we are trying to be creative in our transactions. It is tough out there today. If you are in the brokerage community, you know how tough it is: it is tough for real estate owners and developers to make deals, and it is tough everywhere, so you must be creative and stay lean and mean.”

table showing the five trends on e-commerce

When Does a Higher Rent Trump a Lower One?

William Waxman, executive vice president, CBRE, told an I.con panel that while rents are important to his clients, he has been asked to look beyond rents when seeking the best warehouse distribution space for the dollar. Sometimes, he said, a building that rents for $8 per square foot actually can be less expensive than one that rents for $7 per square foot. How can that be?

“I find a materials handling expert to lay out a racking system for the tenant in both the $7 and $8 buildings,” explained Waxman, noting that the expert looks at pallet position as well as other factors. “Can I stuff more ‘things’ into one warehouse because it is laid out differently or better? What causes one building to be more efficient than another could have to do with its length and width, its cubic volume, the location of the doors, or the location of the cross docks,” he added. Finally, what makes a building more efficient will vary according to the end user: “The food user will have different requirements than the light bulb distributor.”

Gridlocked Congress Slows Marketplace Fairness Act

The potential impacts of the Marketplace Fairness Act, which would require online retailers to collect sales tax on goods sold to customers in every state, remain unclear.

“In this gridlocked atmosphere in Washington,” said I.con speaker Curtis Spencer, president, IMS Worldwide, Inc., the Marketplace Fairness Act still faces an uphill battle. However, “over the next four or five years,” Spencer added, “it does have a chance of passage.”

What impact will it have on the real estate industry when it is passed? According to a recently published report by CBRE, “CBRE EA Trends Report,” current laws in most states require retailers to collect tax only if they have a store, office, warehouse, or similar operation located within that state. Customers are expected to individually report sales taxes for goods purchased tax-free on the Internet, but this rarely occurs.

port crane

These modern cranes and materials handling equipment can unload a container every 55 seconds; giant cargo ships that once took five days to unload now can be emptied in less than 48 hours. (And the operator of one of these cranes can earn an annual income of as much as $375,000, according to Jim MacLellan.)

cargo ship with shipping containers

The Maersk Tanjong can carry 8,086 twenty-foot equivalent units (TEUs). Maersk, the largest shipping line in the world, is busy building what will be 20 of the largest cargo ships in the world. At 1,312-feet long (longer than the largest U.S. aircraft carrier), 240-feet high and 193-feet wide, these will be the largest moveable structures ever built. Each ship requires 30,000 tons of steel, and will be able to carry up to 18,000 TEUs. They will be used to handle shipping from the Far East to Europe through the Suez Canal.

cargo ship with shipping containers

Gantry craned cargo ships can load and off-load cargo in Third World ports that do not have their own large cranes.

Andromeda cargo ship

The Andromeda Spirit is a modern cargo ship designed to carry only cars; it has a capacity of about 3,000 automobiles.

The National Retail Federation estimates that state and local governments are missing out on roughly $24 billion per year in these unpaid “use taxes.” Many online vendors limit their physical operations to a few states in order to maximize the number of customers that will not be required to pay sales tax. Should the legislation as proposed become law, it is unlikely to dramatically change the competitive layout of the marketplace, at least from a commercial real estate perspective, according to CBRE.

The reality is that these pending taxation changes are unlikely to change the competitive landscape much, noted the report. Customers have not been saving enough on taxes for the loss of those savings to shift their shopping behavior toward physical stores. Online retailers will maintain the advantage of convenience, as well as the pricing advantage associated with not needing to support physical storefronts.

North America’s Two Busiest Seaports

Everyone in the warehousing and distribution business should visit the ports of Los Angeles and Long Beach at least once, if only to experience the magnitude of these operations.

Attendees at this year’s I.con: The Industrial Conference had the chance to do just that. Jim MacLellan, director of trade for the Port of Los Angeles, and Curtis Spencer, president of IMS Worldwide, Inc., served as tour guides for the half-day adventure. Here are a few of the facts and figures they shared about the ports:

  • The Port of Los Angeles encompasses 7,500 acres of land and water along 43 miles of waterfront. It features 24 passenger and cargo terminals, including automobile, break bulk, container, and dry and liquid bulk warehouse facilities that handle billions of dollars worth of cargo each year.
  • The Port of Long Beach totals 3,200 acres of land and has ten piers, 80 berths, and 66 gantry cranes capable of servicing post-Panamax ships.
  • Each port is operated by the city in which it is located.
  • The two ports compete for business but cooperate regularly in various areas, including security, infrastructure projects, and environmental programs.
  • An 8.5-mile-long breakwater stretches across most of San Pedro Bay and protects the Ports of Los Angeles and Long Beach from direct Pacific Ocean exposure. The initial section of the breakwater was constructed between 1899 and 1911; the remainder was not completed until after World War II.
  • When the number of cargo containers shipped through the two ports is combined, they rank as the world’s sixth-busiest port complex.
  • Both ports are major sources of employment. The Port of Los Angeles employs 994 people at the City of Los Angeles Harbor Department; trade generated by the port supports another 896,000 jobs throughout the region, 1.2 million jobs throughout California, and 3.6 million jobs throughout the U.S. In the city of Long Beach, 30,000 jobs (about one in eight) are related to Port of Long Beach trade, as are 316,000 jobs in the five-county Southern California region (one in 22) and 1.4 million jobs throughout the U.S.
table showing stats for Ports of Los Angeles and Long Beach