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Report: Fuel Costs, New Infrastructure Reshaping US Industrial Supply Chain

Inland Ports in the U.S., Canada and Mexico Likely Stand to Benefit from $6 Billion Panama Canal Expansion and Corporate Efforts to Trim Distribution Costs
April 29, 2009
Up-and-coming distribution hubs like Memphis, Kansas City, Columbus, OH, and San Antonio will capitalize on rising transportation costs that are prompting many U.S. companies to seek out shorter routes to market for their goods, according to a study by Cushman & Wakefield Inc.

Investment in ports, rail terminals and highways by this new breed of well-located inland U.S. ports is opening up new routes for the more-efficient movement of goods and redesigning the nation’s supply chain, according to "New Age of Trade," a white paper by Cushman & Wakefield prepared on behalf of the NAIOP Research Foundation. Smaller, fast-growing ports in Mexico and Canada are giving shippers even more alternatives, the study found.

To keep costs down, shippers are increasingly keeping products aboard slower but more cost-efficient rail and sea transport for as long as possible, while working to minimize air and truck freight, the report says. Shippers that once used rail only for longer trips are now making shorter hauls between a series of interlocking transit hubs.

Rising fuel prices are the main reason behind the latest reconfiguration of the nation's supply chain. Oil prices, which were $50 a barrel in January 2007, nearly tripled to $145 per barrel by last July before dropping back to 2007 levels in the face of the global financial crisis and plummeting demand. However, some experts expect energy costs will likely increase once the recession eases.

"A mega-distribution center strategy that depends on a few very large distribution centers to serve the entire country may be less cost-effective than a more integrated hub-and-spoke model that relies on smaller facilities located closer to consumers," according to the report. Some shipper are coming to believe that small or partial loads going directly to retailers or other businesses, known as less-than-truckload (LTL), guzzle more fuel and are less efficient than full truckloads to multiple smaller distribution centers.

Meanwhile, the report points to the $5.25 billion widening of the Panama Canal and the emergence of the Caribbean as a major trans-shipment region for a possible boost of trade traffic into East Coast ports and industrial markets -- while possibly continuing to deflate growth in West Coast ports such as Long Beach, Los Angeles, Seattle/Tacoma and Vancouver in coming years as the West becomes less competitive in moving goods from Asia vast distances over land to the eastern U.S. and Canada.

Betting on the future of the new inland ports are firms like Spartan Logistics, a third-party logistics broker that acquired 50,000 square feet of warehousing space from American Warehousing & Logistics in Columbus earlier this year.

"Adding that location, as well as the increased rail capacity, will really give us an edge in the Columbus warehousing market, especially with the Heartland Corridor nearing completion," Spartan Logistics CFO Steve Harmon said last week, referring to the $195 million joint project between the government and Norfolk Southern to improve the intermodal link between Hampton Roads, VA and the Midwest.

West Coast Battles for Market Share

Los Angeles and Long Beach continue to handle about two-thirds of the cargo arriving from Asia. But congestion and higher rail costs are already driving market share from West Coast ports to the eastern and Gulf region ports, and south of the border to the Mexican ports of Lazaro Cardenas, Manzanillo, Veracruz and Altamira, the C&W report asserts.

But don't count out the huge Pacific hubs just yet. A Port of Long Beach spokesman counters that the port isn’t congested, but acknowledges that the facility is taking steps to maintain and grow its share of intermodal rail cargo as the recession forces customers to re-examine transportation costs.

The port commission voted April 20 to postpone a planned cargo infrastructure fee on shippers and explore federal stimulus dollars for improvements. The commission also approved a package of incentives -- including 10% cut in the port’s wharfage fee for intermodal containers -- to persuade terminal operators to maintain or hike the amount of "discretionary" cross-country cargo that could potentially be shipped through any of several ports to inland destinations.

"It’s safe to say we’re concerned about preserving and growing market share, but congestion has not been an issue for years -- certainly since long before volumes started going down," port spokesman Lee Peterson told CoStar.

Tenants will continue to be attracted to the major inland rail logistic centers like Chicago, Dallas and Atlanta -- and increasingly in coming years, to secondary hubs like Kansas City, Portland, Memphis, and San Antonio. Here's a quick look at activity in three leading or merging inland port regions:

Kansas City

While Chicago’s dominance as the top inland hub will remain unchallenged, Kansas City, located at the nexus of the transcontinental and NAFTA trade corridors, is emerging as a major player. CoStar data shows that direct industrial vacancy in the market was 6.7% in the first quarter, up slightly from 6.4% for the same period a year ago but significantly lower than the 9.4% national vacancy rate. (For more CoStar coverage of industrial market trends, see "Warehouse Vacancy Up Sharply as Industrial Demand Plummets," April 15)

Demand will be put to the test in coming quarters by at least three major intermodal projects under development in the area. In the largest, Chicago-based CenterPoint Properties is developing the 1,340-acre CenterPoint Intermodal Center on former Richards-Gebaur Air Force Base property near Belton, MO. The $300-million logistics park, earmarked for more than 5 million square feet of warehouse and industrial facilities, will target Mexican freight.

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Other planned projects include developments at the Kansas City International Airport, and Burlington Northern Santa Fe’s 997-acre logistics hub and intermodal center in Gardner, KS, where The Allen Group hopes to develop about 7 million square feet of speculative warehousing and distribution facilities. The project was slated to begin this year but has been delayed by the rough economy.

Dallas/Fort Worth

The industrial vacancy rate here edged up to 10.7% in the first quarter, 200 basis points higher than first-quarter 2008, on negative absorption of nearly 1 million square feet as developers delivered nearly 4.9 million square feet of new supply in the first three months of 2009, according to CoStar information.

However, Cushman & Wakefield describes DFW as "especially well-positioned" among inland distribution hubs to support growing intermodal volume. The region already has the 360-acre Union Pacific intermodal terminal 12 miles from downtown Dallas, and The Allen Group’s 6,000-acre Dallas Logistics Hub is billed as the largest new logistics park under development in North America, with the potential for 60 million square feet of distribution, manufacturing and retail.

The master-planned Logistics Hub, near four major highways, dual rail lines, intermodal facilities and a future air-cargo airport, will receive goods from the ports of Los Angeles, Long Beach, Houston, and new deep-water ports in western Mexico.

Dallas also hosts the 12,000-acre Alliance Global Logistics Hub, one of the world’s largest inland ports and home to more than 200 companies, and BNSF’s Alliance Intermodal Facility. Fort Worth Alliance Airport is the fifth-fastest growing airport in the world and the first dedicated industrial airport.

Virginia, West VA, Ohio

The three-year Heartland Corridor project will improve rail and truck terminals and shave 200 miles and up to a day's transit time off the route between the deepwater port of Hampton Roads/Norfolk, VA, and Columbus, OH. The result will be a larger, more efficient flow of goods to Chicago and other major Midwestern markets due to the expansion of tunnels through the West Virginia mountains to accommodate the double stacking of intermodal cargo containers.

In Columbus, Norfolk Southern last year opened the $68.5 million, 175-acre Rickenbacker Intermodal Terminal, the first of three new rail terminals to be added to the Heartland Corridor. The 175-acre terminal, part of the 1,300-acre Rickenbacker Global Logistics Park, one of the nation's largest integrated logistics complexes.

Widened Canal Improves Access to the East

The completion of the expansion project for the 92-year-old canal in 2015 will double its tonnage capacity and bring more and bigger ships to Gulf and East Coast ports, and setting the stage for the emergence of the Caribbean basin as a major transloading center for Asian goods entering the east coasts of North and South America and their inland hubs. However, most Gulf ports -- with the exception of Houston -- don’t currently have the infrastructure in place to handle major intermodal traffic. Most of the largest intermodal infrastructure projects are on the East Coast, including the more-than $450 million APM Terminal in Portsmouth, VA.

A number of other ports, including Baltimore, Philadelphia, Charleston, SC; Savannah, GA; Jacksonville, FL and Miami, are dredging and building crane and infrastructure capacity in anticipation of 2015 that will benefit the supply chains in New York, New Jersey and Virginia. Dallas and Atlanta are also well positioned to take advantage of boosted trade traffic in nearby Houston and Savannah, GA.
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