The evolution of the United States’ economy over the past 50 years from manufacturing-based to service-based has resulted in goods that are no longer produced here but, rather, shipped from international locations. The impact of that shift is profound and can be seen in three broad trends: the location of industrial property in close proximity to ports and major population centers; the industrial markets as gateways to major domestic population centers; and technological innovation driving demand for different types of industrial space. Those trends have produced significant opportunities to generate income and value appreciation in the industrial submarkets of port and inter-modal markets in the eastern part of the country.
There is a growing demand for distribution facilities near ports. As manufacturing is outsourced, products returning to the domestic consumer must be accepted at ports of entry. Five major gateways serve the United States: Atlanta, Chicago, Dallas, Los Angeles and northern New Jersey. Those locations have high volumes of cargo arriving by air and sea, and they benefit from the convergence of four or more major federal highways. Consumer-oriented manufacturers and distributors historically have placed their industrial facilities close to those markets with an emphasis on the fastest growing, most affluent economic centers.
The emergence of China as a manufacturing superpower has been the biggest driver of this growth. Initially, China’s impact was felt mainly on the West Coast. But as Los Angeles and Long Beach, Calif., ports became more crowded and plagued with labor issues, shipping moved through the Panama Canal, significantly impacting the ports on the East Coast. In a 2005 Congressional report issued by the U.S. Department of Transportation, the Port Authority of New York and New Jersey reported that it expects its cargo will double by the year 2013 and triple by 2020. Furthermore, we see that inter-modal hubs with developed rail and highway infrastructures such as Harrisburg, Pa., and Chicago are experiencing an increase in goods moving through their regions.
The East Coast port markets with insufficient or obsolete warehouse stock are seeing increased demand for distribution facilities. Tenants relying on those facilities are seeking the most efficient means of delivering their goods in an increasingly demanding and mobile global economy. In distribution facilities, integrating advanced warehousing, unloading, trucking, and rail facilities dictate functionality and efficiency, and are key to attracting tenants.
Warehouse building obsolescence is an increasingly common problem, as larger bulk and cross deck facilities constructed only six or seven years ago are unable to meet current standards. As a result, investment opportunities exist for those operators who understand the needs of tenants and the changing demand for distribution space, along with the ability to recognize smaller second-generation buildings that remain highly functional.
While production has moved offshore, the U.S. population has migrated across the country, resulting in changes to urban and suburban centers. Two factors significantly influence the market evolution for industrial properties: population growth and transportation infrastructure.
Land Constraints
Properties located in major East Coast markets that have limited amounts of land for development and increasing populations are expected to be able to increase rents at a pace exceeding national market rates. In these markets, the barriers to entry are very high and include limited access to land, increased competition with higher and better uses (including residential and retail), and greater zoning restrictions. Some observers believe that land constraints fueled by population growth in coastal states and around ports, along with environmental restrictions, will soon limit expansion of the country’s largest ports. This would place inter-modal connectors, particularly urban freight hubs and high-volume corridor, at a premium.
The expansion of the population base has resulted in increased residential and retail development, which has led to increasing local consumer demand. This positively impacts the demand for industrial space, either in the direct market or adjacent gateway markets. These “infill” locations have a limited supply of space in high-demand environments, resulting in accelerated rental rate growth in these locations. The opportunity to improve older buildings in these areas through physical upgrades and higher and better tenancies opens the door for superior risk-adjusted returns.
A direct and strong correlation exists between population growth and industrial rental rate growth. The national population has been growing at an average rate of nearly 10 percent per decade for the past 40 years, reaching 300 million people in 2006. Even with an anticipated slowdown, it is expected that the United States will add 25 million consumers per decade, a growth rate in excess of 8.5 percent, and potentially surpass 400 million people by 2030. Tenants seek to locate in and adjacent to markets with the highest growth in population and affluence since distribution facilities tend to situate themselves close to the consumer.
Technological Innovation
On the technology front, changes in inventory management and advances in technology have resulted in a contraction in delivery time for shipped goods from an average of four months in 1950 to less than two months in 2006. Building and lot sizes have adjusted to accommodate larger trucks and more frequent inventory turnover, resulting in the obsolescence of older industrial properties and the need for new construction.
The use of radio frequency identification devices (RFID) is rapidly increasing. These tags are the successor to the bar code inventory systems used over the past 20 years. The RFID system’s ability to track goods in the warehouse, on the road, in containers, and ultimately to the consumer provides increased efficiency.
The increased use of the RFIDs, which cut handling costs, will be prevalent in the delivery and supply chains. Goods will move faster through the system, creating higher demand for buildings that are designed to expedite delivery, consolidate multi-product shipments and accommodate a shift between truck load sizes. Smaller cross dock buildings will also be in demand in gateway markets, while air cargo and port cities will have a greater need for larger bulk facilities.
Shipping and goods distribution play vital roles in the overall growth of a local economy. Although U.S. manufacturing and the balance of trade from a domestic perspective may both continue to decline, the distribution economy is growing and its future looks promising. This growth will continue as long as the national population continues to grow and its appetite for foreign goods remains strong.
