Real Share Conference Ontario: Outlook? Real Bad

I wish I went to this conference, the writing has been on the wall and I have been talking about these topics forever, but it is nice to have some reaffirmation every once in awhile. I feel kinda bad for the Ontario Economic Development Director, her job is to not throw the Inland Empire under the bus, which is kind of hard at times like these. Enjoy!

ONTARIO, CA-If you’re looking for the bottom of the economic downturn, you may find it here in the Inland Empire--it’s just that the “when” is another matter. Experts voiced some bleak near-term outlooks Wednesday at the third annual RealShare Inland Empire conference at the Ontario Convention Center, where more than 250 owners, investors, developers, brokers, lenders, service providers and others connected with the commercial real estate industry came to share their views and network.

“There’s no nice way to spin it,” keynote speaker Richard Green, director of the USC Lusk Center for Real Estate, said of the local economy. “The jobs picture in San Bernardino-Riverside County right now is not particularly good. People want to know when are things going to bottom. Will we have a 'V' or 'U' in terms of the recovery?”

Green was one of a host of speakers and panelists who tackled issues ranging from how the changes in the economy, the credit markets and commercial real estate have affected the Inland Empire to what industry leaders see for the immediate and long-term future. His remarks, and those of some others, stood in contrast to the upbeat news that emanated from the Inland Empire for years before the nation's subprime excesses, soaring energy costs and general economic malaise clamped down on every part of the country, even high-flying regions lining the Inland Empire.

The Inland Empire chalked up some of the nation's biggest growth numbers before the downturn. Powered by one of the country's biggest home-building booms, the Inland economy provided a fertile ground for developers to launch scores of retail, office, industrial and multifamily projects.

Now that the economy has slowed and the capital markets are in turmoil, industry leaders and other professionals in the commercial real estate industry are facing a host of questions regarding the near and long-term future of this two-county region east of Los Angeles. Chief among the questions is “When do we hit bottom?” both nationally and in the Inland Empire.
There has never been, until now, a decline in the median home prices nationally since the Great Depression, Green pointed out. The median income is falling and “financial institutions are in an environment of fear,” he added.

In the Inland Empire, existing home sales rose from a year ago, but a lot of that was foreclosure sales, he noted. The good news is “prices have come down so fast and rents have gone up enough that house prices in this region are sensible.”

Green also said educational attainment in the area is lacking. “The Inland Empire lags Southern California, it lags the state of California, it lags the United States as a whole,” he added. According to Green, the percentage of high school students taking college prep classes in Los Angeles County is 37%, slightly above California’s 35.3%, while in Riverside the number is 31.8% and in San Bernardino it’s is 25.5%.

That’s a bad sign for the Inland Empire because educational attainment is a good measure of future incomes, Green said. “This is a good projection of how incomes grow,” he said.
Following Green, a Town Hall Meeting tackled the question, "How Will the Inland Empire Fare in 2009?" The topics covered ranged from the impact of high fuel prices, the credit crisis, the housing slump, flat job growth--and how real estate professionals find and capitalize on opportunities in a confused market.

Job losses for 2008, diminished tenant demand and a generally rugged economy, “have pushed class A office vacancy to its highest level in more than two decades,” said panelist Doug McCauley, regional manager for Marcus & Millichap. He added that Marcus & Millichap anticipates vacancy to reach 15.2% by the end of the year.

Panelist Kim Snyder, senior vice president of the southwest region for AMB Property Corp., says the pinch at the pump is impacting industrial. “Fuel costs are definitely having a major impact on the industrial business in the Inland Empire,” Snyder said.

Panelist Mary Jane Olhasso, economic development director for Ontario, defended the region. “We also have a lot of industrial manufacturing, engineering related to the manufacturing process…medical manufacturing,” she said, noting that “The office sector along the I-10 corridor, that’s the future in our opinion” and that the general development plan from Vineyard to the Interstate 15 Freeway is “just phenomenal.”

She acknowledged the area is “in this bubble of negativity that’s not shared by everyone,” but that the long-term outlook for the Inland Empire is positive, she said, noting that “he who has the work force wins. And guess what? We have the work force. At the end of the day this is where people are going to live in the next two decades.”

Snyder also added his confidence in the long-term outlook for the Inland Empire: “Not only is it a good value, but it’s the best real estate product in the business.”

A new session at this year's RealShare event was a corporate perspectives panel, which included commercial real estate end users and those who represent them talking about the market from their standpoint, why they are in the market, where they are expanding as well as why and where they think the economy is headed.

Another new panel this year addressed how to improve return on investment and save money by going green. Aside from the panels above, RealShare Inland Empire's panels throughout the day included sessions on the capital markets and how investors are getting deals done in today's climate, how the cities and municipalities of the Inland Empire are catering to the diverse needs of its end-users, what it takes and costs to finance deals.

G. Ryan Smith, a senior vice president with Newport Beach-based Buchanan Street Partners, said that “It used to be if you had a heartbeat, you could get a loan. It’s a different world than it used to be.”

Harold Rose, managing director for Greystone, summed things up: “We’re back to the basics,” Rose said.

What your warehouses says about you:

From Modern Materials Handling

A 15-minute walk-through of a facility can tell more about operations than an hour in the conference room.
By John M. Hill, principal, TranSystems ESYNC -- Modern Materials Handling, 8/20/2008

Having visited hundreds of warehouses around the globe, it occurs to me that the routine I follow and the initial observations I make may well be traceable to my childhood. My mother was charming, always a smile on her face. But, she was also fastidious about the way her house and children looked. Our rooms would have passed an inspection by the toughest drill sergeant. Not only do I still scrub behind my ears, it seems like I apply my mother’s standards on an initial warehouse walk-through. Here’s some items from the checklist I have used for more than 30 years. Within minutes, it tells me more about the quality of operations and management than an hour in a conference room.


PEOPLE

• What’s the mood?


• Are members of the team open and pleasant, closed, suspicious and sullen or somewhere in between?


• Does their personal appearance seem to count?


• Does the tour host know team members by name and greet them accordingly? Does he or she engage their support during the tour?


• Do workers receive regular feedback on targets and actual results? A number of companies are now using large electronic displays or scoreboards to keep the team in the game and reinforce winning performance.

A CLEAN, WELL-LIGHTED PLACE

• How’s the housekeeping?


• Are work and common areas clean or cluttered with dunnage, paper, labels, banding material, shrink or stretch wrap? Are workers stepping around the clutter or stopping to remove it?


• How about the restrooms?


• Are storage and pick locations well marked with easily readable location labels in logical sequence?


• What about warehouse lighting? Is the facility dark and cave-like? If lighted, what about glare and uniformity? Excessive brightness or poor light distribution can lead to eyestrain and impact productivity. The use of properly spaced luminaries and lighter colored facility walls can help.


• What about the temperature? Too cold (unless it’s a refrigerated facility)? Too hot? Could better dock seals and ventilation help?

CONGESTION

• Do aisles and dock areas resemble an Los Angeles freeway at rush hour? A “yes” here suggests a number of issues including storage and pick area sizing and layout, possible improper matching of aisle widths to equipment types and traffic patterns, and activity scheduling.


• A related consideration is inventory slotting and activity scheduling. Time and time again I see pickers delayed while waiting for others to complete fast mover picks in the same area. Spread the fast movers across a wider pick front.

GOLDEN ZONE

• Is most of the picking executed from locations that are positioned at or near picker waist height? If not, fatigue and back problems are likely to impact productivity and workers comp costs. Profiling activity by SKU (or product) can help with deployment of fact movers in the “golden zone.”

THE DIRTY FINGER TEST

• While walking through the storage or picking areas closest to the shipping docks, drag a finger across the tops of the stored pallets, cases or items and check that finger every 10 or 15 feet. The quicker it becomes dirty, the greater the problem with improper storage of slow-moving materials. Fast movers, not slow movers, should be located nearest to shipping to reduce travel times and speed trailer turnaround time.

DOCKS

• Does the warehouse use proper dock plates and levelers, trailer wheel chocks and restraints like the ICC bar that engages the rear impact guard on the back of trailers to prevent movement away from the dock?


• When lift trucks tip over or fall from docks or when workers are hit by a lift truck or falling load, injuries can be serious and sometimes fatal.


• What about dock seals? Are they properly fitted and do they provide sufficient protection from the elements to ensure a comfortable environment for the workforce? The busiest and most dangerous part of the warehouse is not the place to skimp!
  

Going back to Cali, yeah, I think so

Well, I just got back from my seven day cruise to Alaska. Many thanks to Michael Soto for taking over in my absence.

One of the stops along the way was in Prince Rupert. Most of the people on the ship felt that stopping here was unnecessary as there was not much to do in Prince Rupert B.C.

I was not one of those people; Prince Rupert is a major container port and a prime competitor to Los Angeles / Long Beach.

Prince Rupert is an island, and the containers were loaded directly to rail cars to be shipped to Chicago. As such, there wasn't any distribution centers around the port that I could see, the only interstitial space was fishing/ boating related.

Phase I of the project is completed and can handle 500,000 TEU's a year. Phase II is under-construction and can handle 3 million TEU's a year, around a third of what comes through the port of Los Angeles.

Philadelphia Fed Forecast

It is actually an aggregate forecast from a bunch of sources, but the not everyone can be wrong, right?

Forecasters Project Another Round of Cuts to the Outlook for Short-Term Growth

Growth in U.S. real output over the next few quarters looks slower now than it did just three months ago, according to 47 forecasters surveyed by the Federal Reserve Bank of Philadelphia.

This is the sixth survey, beginning with the survey of the second quarter of 2007, in which the outlook for growth appears weaker. In the current quarter, real GDP is expected to grow at an annual rate of 1.2 percent, down from the previous estimate of 1.7 percent.

The largest downward revision (1.1 percentage points at an annual rate) is for the fourth quarter, when real GDP is projected to grow at an annual rate of 0.7 percent, down from the previous projection of 1.8 percent.

The forecasters also reduced their estimates by 0.7 percentage point for growth in the first quarter of 2009 and by 0.4 percentage point for growth in the second quarter of 2009.

Year over year, growth is expected to average 1.7 percent in 2008 and 1.5 percent in 2009.

Previously, the forecasters expected growth of 1.5 percent this year and 2.2 percent in 2009.

Increased Chance of a Downturn

The risk for a quarter of negative growth in real GDP has risen. The forecasters see a 47 percent chance of negative growth in the fourth quarter of 2008, up from 30 percent in the last survey.

Not So Fast

This was from this month's issue of Area Development Magazine:

The New Railroad Resurgence

America’s railroads are experiencing an unprecedented expansion, and businesses are taking notice as they make their site selection decisions.

By Lisa A. Bastian (Aug/Sep 08)

Taking a cue from software language, it might be said that after decades of semi-dormancy, America’s railroads are making quantum leaps to “Rail 2.0,” a stage of development never before experienced by the industry. One result is that a number of businesses are now thinking differently about how important the role of railroads should be in site selection processes.

Major Investment
The majority of projects underway in this “rebirth” of railroads are being implemented by five major American companies identified as “Class 1” by the Association of American Railroads (AAR). Its members include railroads providing service in the United States, Canada, and/or Mexico. To be considered Class 1, AAR says railroads must post annual revenues of at least $319.3 million. Those matching that criteria are CSX Transportation and Norfolk Southern Railway operating east of the Mississippi River and BNSF Railway, Union Pacific Railroad, and Kansas City Southern Railway operating west of the Mississippi.

According to a February 2008 Wall Street Journal article, American railroads have spent $10 billion since 2000 to expand tracks, built freight years, and buy equipment, with $12 billion in spending still to come. In 2005, Union Pacific Railroad spent $1.3 billion on track improvements across its 33,000-mile system. This past January, BNSF President/CEO Matthew Rose said that this year, the railroad “expects to spend more than $1.8 billion to keep our infrastructure strong by refreshing track, signal systems, structures, freight cars, and upgrading technologies.” That same month, Norfolk Southern’s Executive Vice President Debbie Butler said her railroad planned to spend $1.4 billion on capital investments in 2008, an increase of $84 million (6 percent) over 2007’s funding. Then in April, CSX announced $9 million worth of upgrades to key facilities used to ship coal.

Not surprisingly, such large infrastructure investments are tied to growing employment opportunities, too. AAR reports that freight railroads are expected to hire more than 80,000 new workers over the next six years, and that the highest number of openings will be at the major rail hubs of Chicago, Illinois; Kansas City, Missouri; Seattle, Washington; Los Angeles, California; Memphis, Tennessee; St. Louis, Missouri; and Atlanta, Georgia, along with more rural areas such as Alliance, Nebraska; Clovis, New Mexico; Havre, Montana; Gillette, Wyoming; Galesburg, Illinois; and Springfield, Missouri. In contrast, back in 2002, the industry laid off 4,700 workers.

What’s behind all this activity? Simply stated, freight demand is expected to increase a whopping 67 percent by 2020, according to AAR. Much of current and future demand is tied to the increase in America’s appetite for Asian imports, the U.S. economy (even though it has slowed), and rising fuel costs.

Traditional and New Freight Product
Over 40 percent of all American freight moves by rail, according to AAR. For Class 1 railroads, the top commodities hauled in 2006 were coal, with 44 percent of tons moved (21 percent of revenue), followed by chemicals/allied products (8.6 percent), farm products (7.6 percent), non-metallic minerals (7.2 percent), miscellaneous (6.4 percent), and food and related products (5.4 percent).

Coal and export grains are truly the “two major lines of business” for rails today, says John Ficker, vice president of supply chain logistics for First Industrial Realty Trust of Chicago, a provider of industrial real estate supply chain solutions. Another growing area is ethanol, he says, which must be hauled due to its inability to travel through a pipeline. CSX, for example, reported a 46 percent improvement in its 2008 first-quarter results thanks to agricultural products, most notably ethanol and feed ingredients.

However, the most dramatic change is that in addition to traditional commodities, the railroads are moving increased tonnage of finished consumer goods at unparalleled levels. “America continues to outsource its manufacturing, and so these products are pouring in through ports on the East and West Coasts,” says Ficker, adding that it’s not uncommon these days for mile-long trains to pull several hundred double-stacked rail containers of consumer goods. “A large portion of these containers go from the West Coast to Chicago, as well as Atlanta and Dallas, really wherever the people are.”

According to Ficker, competition between truck and rail “is marginal at best” in this new logistics world. “It’s not so much competition as it is collaboration,” he says. “There’s enough freight volume for everyone. Some experts say freight growth will double by 2035. We do have a challenge before us, and the solution is found in how we improve supply chain logistics.” Trains produce one-third fewer emissions than trucks, and are three times more fuel efficient. Those realities — combined with ever-rising fuel costs — are behind the forging of new rail–truck relationships nationwide. More often than not, the longer portion of cross-country hauls are conducted by train while the shorter piece is a truck’s responsibility.

As a direct result of railroads moving more containerized goods, companies are now building more new “big box” and warehousing facilities at existing and newly built rail yards, or planning to do so in the near future. These super-charged intermodal sites combining rail and truck services are also spurring secondary-level industrial operations in some areas, as well as supportive non-commercial businesses. Effectively, they function as inland ports, freeing up often congested ocean ports and serving as more efficient movers of containers to prime population and/or distribution centers.

Logistic Hubs
Tim Feemster, senior vice president and director of global logistics for the Grubb & Ellis Company, and a 35-year veteran of supply chain and logistics services, lauds companies that understand that besides labor costs, the key drivers to determining where a site is based should be based on both outbound and inbound transportation. “Transportation costs are two and a half to five times higher than the cost of actually running the typical distribution center,” he says. “Rent is only a very small piece of a center’s cost.” That’s why Feemster advises companies to not only research the benefits of intermodal centers, but also take time to research which one would be best suited to meet their unique distribution or warehousing needs.

There are already some notable logistics hubs in the United States, with some new ones on the horizon:

• • Nearly 20 years old, AllianceTexas is the “granddaddy” of logistics hubs. Located in the Dallas–Fort Worth metroplex, this 17,000-acre master-planned, mixed-use community includes industrial, office, and retail space; an inland port; a BNSF intermodal yard; BNSF and Union Pacific rail lines; Fort Worth Alliance Airport, a 100 percent cargo airport; and 6,700 homes. Over 27,000 workers are employed by AllianceTexas’ 170 companies.
• • The Dallas Logistics Hub is a 6,000-acre master-planned venue offering up to 60 million square feet for distribution, manufacturing, office, and retail uses. Its first two warehouses, now under construction, are scheduled for completion this summer. The park’s owner, the Allen Group, says the park is expected to create over 60,000 jobs and have a total economic impact of $5.4 billion when completed in about 30 years. The Hub is adjacent to Union Pacific’s Southern Dallas Intermodal Terminal, a potential BNSF intermodal facility, four major highways, and the Lancaster Municipal Airport, a future cargo airport. The park will be a vital inland port accepting products from the Ports of Houston and Los Angeles/Long Beach, in addition to deep-water ports in western Mexico.
• • Near downtown St. Louis, Norfolk and Southern provides rail service to Gateway Commerce Center. This 2,300-acre commercial/industrial development site at the intersection of Interstates 255 and 270 connects with four major interstates: I-44, I-55, I-64, and I-70. Triple Crown Services Company operates a 62-acre intermodal facility on Gateway’s north side. In addition, the park is close to four cargo-handling airports and the nation’s second-largest inland port. Tenants include facilities for Dial Corporation, Procter & Gamble, and Hershey Foods, plus a 1.2 million-square-foot Unilever logistics/distribution facility. Gateway has created 2,000 jobs, and attracted more than $200 million in new investment and nearly 8 million square feet of new construction.
• • The 750-acre BNSF Logistics Park Chicago in Elwood, Illinois, is the centerpiece of a 2,200-acre intermodal distribution center and warehouse development. It offers direct rail, truck, intermodal, and transload services, and provides access to key rail routes to and from all West Coast ports. Tenants include Wal-Mart, Potlatch, DSC Logistics, and Georgia-Pacific.
• • In August 2007, Union Pacific broke ground on a $90 million, state-of-the-art intermodal terminal in San Antonio. Once operational later this year, the 300-acre rail port is expected to generate $2.48 billion in cumulative economic impact for the region over 20 years. The terminal will accept and ship household goods and similar items destined for retailers and distribution centers as well as auto parts for the San Antonio’s Toyota plant. It will serve as a prime NAFTA logistics point for goods going to and from Mexico, as well as commodities moving between San Antonio and Houston, and points beyond. The facility is expected to process 100,000 trailers per year at first, and eventually perhaps 250,000.
• Feemster advises businesses using these and other intermodal facilities — notably those firms importing from Asia — to consider inserting “risk diversification” plans into their overall logistics strategies. “They must take into consideration all the risk levels involved in bringing in all their products through West Coast ports,” he says, adding that an increasing number of companies now are altering their supply chain by using California ports as well as coming up through the Panama Canal.

Ficker notes that “people are paying very close attention to the plans of rails.” Revitalized and renewed, U.S. railroads are clearly taking a more prominent role in helping America’s companies thrive in these uncertain economic times, and remain globally competitive in the decades ahead.

Funny thing. We recently met with representatives of the Kern County Economic Development Corporation and many industrial users ask about rail access. Kern EDC always responds whether the industrial user has spoken with the railroad first. So yeah, many industrial users are looking at intermodal so that they don't have to put all their eggs in one basket regarding trucking. The issue, however, is that the economics of railroad freight haven't really changed too much over the last few decades. The railroads won't go out of their way to service users in the way that users are used to in the trucking industry.

It will be interesting to see long-term how the present economic realities of the railroad industry bump up against the future trend of using intermodal facilities to better service clients. Basically it's a clash of the 21st century versus the 20th or even 19th century.

The Changing Economics of the Logistics Industry

This was from this week's California Real Estate Journal:

Fuel Prices Challenge Industrial User, Development Trends
Transportation costs, while always an issue, are now center stage in site selection process

By KARI HAMANAKA

CREJ Staff Writer

When construction workers tilted the last wall on a 1 million-square-foot industrial facility at the Southern California Logistics Centre, attendees toasted the occasion July 18 under a white tent in the middle of the Victorville desert.
Victorville City Councilman Bob Hunter called the event a "symbolic gesture thumbing our nose to the word 'recession.'"
However, if current economic conditions persist, the rising cost of fuel stands to shake the foundation upon which the supply chain and industrial real estate have come to rest. The cost of fuel, while tied to overall drayage costs, is forcing those in the industry to question its effect on everything from industrial user demand to development patterns and the implications for properties near rail or intermodal facilities.
"People are going to keep buying things, so I think the outlying areas will be profoundly affected if fuel prices move upward, and that's more than obvious," said Dennis Higgs, president and chief executive officer of Newcastle Partners of the Inland Empire. "We already see a stoppage of demand in outlying areas, and it will take a while for it to sort itself out. It will slow down development a lot for the short term and mid-term."
A Grubb & Ellis second-quarter 2008 market snapshot placed vacancies highest in outlying, eastern Inland Empire submarkets such as Moreno Valley/Perris and Redlands/San Bernardino, which reported vacancies of 21.9 percent and 17.6 percent, respectively.
Newcastle is developing two industrial projects in Redlands. One, the Almond Industrial Center, totals 180,000 square feet. The other, the Alabama Industrial Center I & II, is a 600,000-square-foot warehouse distribution project. The project is entitled, but construction will not begin until the market improves.
Although the discussion of the implications of additional fuel costs is nothing new, it has been more significant in recent discussions of where to locate or where to develop an industrial property.
"It's something that's going to be considered," said Walt Chenoweth, senior vice president in the Ontario CB Richard Ellis office. "Companies are going to be looking at it closely. There's more emphasis on transportation costs now than in previous years."
Chenoweth, along with CB Richard Ellis Executive Vice President Frank Geraci, recently represented Shea Center Ontario LLC in three lease renewals totaling $27 million and 1.3 million square feet at its Shea Center in Ontario.
All three tenants made the decision to stay in their western Inland Empire location. Although fuel costs were not the sole reason for whether any of the three Shea Center tenants decided to renew their leases, drayage costs, which include fuel, go into any tenant's decision when leasing a building, Chenoweth said.
"It depends on where the client is bringing their product in from or sending it to," Chenoweth said. "Because of the additional mileage and associated costs from the port to San Bernardino/Riverside versus Chino or Ontario, transportation costs are a factor in any location decision. How these transportation costs are handled depends on who's paying the cost of the freight. Sometimes the cost is paid by the supplier or passed on to the end client, and sometimes it's absorbed by the company warehousing the product."

Location vs. Access
Location always has played an important role in where an industrial tenant wants to lease space. If fuel prices continue to increase in the future, some are speculating that it will change the dynamics between the Los Angeles port markets and the Inland Empire. For some time now, companies have been moving to the Inland Empire for larger buildings and lower rents, a move enabled by lower fuel costs.
At the end of the second quarter, the vacancy rate for the Los Angeles County industrial market was 1.8 percent compared to the 7.9 percent vacancy for the Inland Empire, according to Grubb & Ellis.
For the few that would be able to squeeze back into the Los Angeles market the question now is if they could, would they?
"It's always a balance between the cost of rent and the availability of properties," said Tim Feemster, senior vice president and director of global logistics at Grubb & Ellis. "If you want to get a 1 million-square-foot building near Los Angeles/Long Beach, there's nothing. If you need 1 million square feet, you're going to have to pay the cost of the drayage to be in the Inland Empire."
The issue is the same on the development side when developers consider where the next wave of industrial development will occur.
"The challenge is there aren't vacant land parcels in the areas closer to the ports and even, for that matter, in the Ontario Airport marketplace," Chenoweth said. "While people may say we need large warehouse development closer to the ports, if there isn't any land to acquire to build in the Ontario marketplace, developers will have to go east or up to the High Desert."
MGA Entertainment recently decided to go east, leasing 749,000 square feet of space in AMB Property Corp.'s AMB Redlands Distribution Center, a move that consolidates its distribution operations. MGA expanded its operations with the deal and went to an area of the Inland Empire where lower rent and other concessions are the norm.
Feemster said higher fuel prices could exacerbate the balancing act between the cost of rent and the availability of properties. This upset could potentially lead to higher rents in the Inland Empire.
Additionally, he said some companies may be forced to have more market center distribution points than one regional point, which would run counter to the trend in consolidation that has been taking place over the last 10 years.
While some companies may decide to go against the consolidation movement or move closer to the ports to cut transportation costs, others are questioning if location is as important as access to various transportation modes.
Global Access, the multimodal facility in Victorville that held its wall-tilting ceremony last month, is a prime example of how access could trump location for some industrial users. Victorville is not a port market, but the fact that Global Access offers air, rail and trucking options could be appealing to some company's business models.
"Before, you would see goods being loaded onto trucks at West Coast ports, but with diesel so high, we're starting to see companies use a combination of truck and rail, and a lot of it is still up in the air about how serious this trend will turn out," said Luciana Suran, an economist at Torto Wheaton Research.

Magic Formula
With any trend that has the potential of being born out of the fuel discussion, it will depend on a company's business model. In the case of the intermodal trend, the need for rail is not for every company.
"If you're getting goods from domestic sources closer to your location, being closer to the rail or an intermodal facility is not a requirement for you," Feemster said. "But where you locate needs to be driven by the total cost of the supply chain - not just one individual element."
Transportation costs account for 50.3 percent of total logistics costs. Rent, on the other hand, accounts for 4.3 percent of total logistics costs, according to the logistics operating cost formula used throughout the industry. Other costs include inventory at 21.8 percent of total logistics costs and labor at 9.5 percent of logistics costs.
"What sometimes happens when people look for real estate is, depending on whether its the operations people or the real estate people, the real estate people are not necessarily aware of the 50 percent [transportation costs] or the 9 percent [labor costs]," Feemster said. "They tend to be motivated by free rent, low rent and incentives, but the poor operations person has to live with those drayage costs from the ports, so there has to be that balance."
Port activity is yet another factor in the discussion of development patterns in inland markets versus port markets.
"A lot of it has to do with geography," Suran said. "It's not just higher fuel prices; it's also a slowdown in import traffic that has to do with the value of the American dollar."
Suran said the belief many people have that export growth will offset the decline in imports is not true for most markets.
"Imports have a stronger effect even though exports are growing at a fast rate," she said. "It's not going to replace the loss of demand from the slowdown in imports."
Port traffic will be an important factor in analyzing industrial tenant demand and development in port markets if consumer spending starts to ramp up. This interest is based on two factors intertwined: consumer spending and increasing diesel prices.
Toronto, Canada-based CIBC World Markets Inc. released a transportation costs report in May stating that current transportation costs are the equivalent of a 9 percent tariff rate, leading some to speculate on a more global scale.
According to the report, some U.S. companies are moving their businesses from Mexico to China. Currently, U.S. importers spend 150 percent more to ship product from East Asia than they do to ship product from Mexico to the East Coast, the CIBC report said.
Despite a slowdown in import activity, Suran said she did not see a slowdown in new industrial supply at the national level in the first half of the year. According to Suran, Riverside alone accounted for 20 percent of the industrial completions in the nation despite posting negative absorption.
"In the future, if fuel prices continue to rise, we're not going to see such strong completion rates on the West Coast," she said. "It's really too early to say. We're pretty much on the cusp of a trend, and oil prices seem to be stabilizing, but it's too soon to tell."

As economists tracking the Los Angeles Basin industrial market, Thomas and I have spoken at length about the changing economics of the logistics industry. Basically, the entire economic model of the logistics industry since the early 1990s has been based on low fuel costs. With the recent and continued rise in fuel, many industrial users are re-evaluating their entire location strategies. While no one really knows how the industry will look like in the era of $200/barrel gas, we do expect over the long-term that manufacturing production will probably locate closer to final points of consumption and the decade-long trend in industrial consolidation to slow if not end entirely.

Green Supply Chain: Long Term Sustainability

Logistics Management has a pretty good piece on green supply chains. Getting goods to you in some instances can pollute as much or more than actually making a product.

Think of bottled water, milk and other liquids that are costly to transport or store, or bulk perishables such as bananas or flowers, these items come from far away and take a lot of energy to get from producer to consumer.

Companies are conscious of their fuel usage and also of the small costs that could easily be eliminated by proper planning. Saving the planet, reducing traffic and reducing pollution are positive externatlities of a leaner supply chain.

Senior Loan Officer Opinion Survey - Money Makes The World Go Round

The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months.

In the current survey, large net fractions of domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months.

Questions on commercial and industrial lending.

About 60 percent of domestic banks—a slightly larger fraction than in the April survey—reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. About 65 percent of those institutions—up notably from roughly 50 percent in the April survey—also indicated that they had tightened their lending standards on C&I loans to small firms over the same period. Significant majorities of domestic respondents indicated that they had tightened selected price terms on C&I loans to firms of all sizes: About 80 percent of banks—up from roughly 70 percent in the April survey—noted that they had increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms, and about 70 percent of respondents—a somewhat higher fraction than in the April survey—reported having widened spreads on loans to small firms. In addition, considerable fractions of domestic respondents reported having boosted non-price-related lending terms on C&I loans to firms of all sizes over the survey period, and the fraction of banks that tightened such terms on loans to small firms increased significantly relative to the April survey.

About 35 percent of U.S. branches and agencies of foreign banks—down from about 60 percent in the April survey—indicated that they had tightened their lending standards on C&I loans over the past three months. Majorities of foreign respondents reported that they had tightened various price terms on such loans, although the fractions of those institutions that reported having tightened such terms over the previous three months were, on net, significantly smaller than in the April survey. For example, about 60 percent of foreign banks—down from about 80 percent in the April survey—reported having raised spreads of loan rates over their cost of funds over the past three months.

Very large majorities of domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook, their bank’s reduced tolerance for risk, and the worsening of industry-specific problems as reasons for tightening their lending standards and terms on C&I loans over the past three months. Roughly 65 percent of foreign respondents—up from about 45 percent in the April survey—also noted that concerns about their bank’s current or expected capital position had contributed to the more-stringent lending policies over the past three months. In contrast, only about 25 percent of domestic respondents—down from about 35 percent in the April survey—reported having tightened their lending standards because of concerns about their bank’s current or expected capital position.

On balance, the July survey pointed to a further weakening of C&I loan demand over the past three months. On net, about 15 percent of small domestic and 25 percent of foreign banks reported weaker demand for C&I loans from firms of all sizes over the survey period. About 15 percent of large domestic banks, on net, experienced weaker demand from small firms, although about 5 percent of these banks, on balance, reported that demand for C&I loans from large and middle-market firms had increased over the past three months.

Substantial majorities of domestic institutions that experienced weaker loan demand over the past three months cited a decrease in customers’ needs to finance investment in plant or equipment as well as firms’ decreased need to finance inventories. In addition, about 65 percent of domestic and 70 percent of foreign respondents pointed to a decrease in customers’ needs for merger and acquisition financing as a reason for the lower demand for C&I loans. Regarding future business, small domestic and foreign institutions, on balance, reported that inquiries from potential business borrowers were about unchanged during the survey period. In contrast, about 15 percent of large domestic banks, on net, reported an increase in the number of inquiries from potential business borrowers over the past three months.

Questions on commercial real estate lending.

About 80 percent of domestic banks—a fraction similar to that in the April survey—reported having tightened their lending standards on commercial real estate loans over the past three months. About 35 percent of foreign banks—down from roughly 55 percent in the April survey—also indicated that they had tightened their lending standards on commercial real estate loans. Regarding demand for these types of loans, about 30 percent of domestic banks and 45 percent of foreign institutions—fractions somewhat smaller than those in the April survey—reported weaker demand for commercial real estate loans over the survey period on net.

And you think that the housing market in the IE is bad...

From the Detroit News:

DETROIT -- One dollar can get you a large soda at McDonald's, a used VHS movie at 7-Eleven or a house in Detroit.

The fact that a home on the city's east side was listed for $1 recently shows how depressed the real estate market has become in one of America's poorest big cities.

And it still took 19 days to find a buyer.

Yikes!

Greetings

Greetings! Since Thomas will be on vacation until the 25th, I will be guest blogging until he comes back from his Alaskan cruise.

A little about me: I'm his Research department colleague with Colliers in Los Angeles, my research coverage is the South Bay, as well as the San Fernando Valley & Ventura County office and industrial markets, and I think his home-made beer rocks.

Anyway, this was from this week's issue of The Economist:

THE END OF THE DREAM?
Aug 14th 2008 | MORENO VALLEY

The suburbs have been hit hard by the credit crisis . But reports of their death have been exaggerated.

“KEEP your house” reads the handwritten sign on a chain-link fence some 60 miles east of downtown Los Angeles. It is an advertisement, although it could be the attitude of an overstretched buyer who owes the bank more money than his home is worth. Many people in Moreno Valley have simply walked away from their properties. As abandoned lawns turn brown in the desert climate, the fallout spreads. It is no longer a matter of saving individual houses, but a whole city.

Until recently Moreno Valley was one of the fastest-growing cities in America. It lies in the Inland Empire, a two-county region in southern California that is so called largely because it is difficult to know how else to characterise such a sprawling expanse of detached homes, strip malls and warehouses. Between 1990 and 2007 the Inland Empire’s population grew from 2.6m to 4.1m—the equivalent of adding a city the size of Philadelphia.

As in other regions now suffering from a rash of foreclosures and falling house prices, such as south Florida and Nevada, rapid growth is itself largely to blame. Moreno Valley had the misfortune to swell at a time of lax lending practices. Whole neighbourhoods were built on cheap credit and inflated expectations—palaces for the middle class. Around Camino del Rey, on the city’s southern edge, huge Spanish-style houses with three-car garages sit empty. The city’s population growth appears to have gone into reverse. Moreno Valley’s high schools expected to enrol 9,850 pupils last year. They fell short by 780.

Fewer people with less disposable income is bad news for shopkeepers. The Moreno Valley commerce centre (a strip mall, despite the grand title) has six vacant units in its main building. Stores along Alessandro Boulevard, the city’s main drag, have been occupied by Pentecostal churches—a sure sign of low rents. John Husing, an Inland Empire economist, says the housing slowdown has scared off financial-services and civil-engineering firms, for the moment at least.

A bigger economic threat is just coming into focus. The Inland Empire is America’s warehouse: goods, mostly from China, are sorted and assembled there before being distributed across the country. Until recently increasing trade could be counted on to prop up the economy. Traffic through the ports of Long Beach and Los Angeles, America’s two biggest by container volume, levelled off only briefly during the early 1990s recession and continued to grow in 2001. Now it is declining. In June imports through the two ports were 15% and 12% below last year’s level. Moreno Valley’s office-vacancy rate is already the highest in the region.

All this would be a shock to any city, but it is particularly startling in a place used to double-digit percentage increases in tax revenues. Moreno Valley has been forced to tap its reserves to make up a $7.1m shortfall. That may grow, says Bob Gutierrez, the city manager. State politicians are still trying to close an enormous hole in California’s budget, which is now seven weeks late. When it comes, the budget is likely to involve a raid on local finances that will put places like Moreno Valley further in the red.

Despite the gloom, a few souls are rather cheerful. Public-transport advocates and planning groups such as the Congress for the New Urbanism have seized upon the crisis in far-flung regions like the Inland Empire as evidence that sprawl is no longer viable. “The frontier of endless mobility that we’ve known our entire lives is closing,” wrote Bill McKibben, an environmentalist, in the Washington Post. At last, the urbanists predict, Americans will return to city centres. They will swap their sport-utility vehicles for public transport and begin to act more like well-behaved Europeans.

Some of these cheerful forecasts appear to be coming true. Across southern California, use of the skeletal rail network is rising. Property prices are indeed holding up fairly well in older neighbourhoods near the coast. It can be difficult to convince people in Beverly Hills or Santa Monica that the state has a housing crisis. But the growing price gap between such burghs and places like Moreno Valley can be read in two ways. It is both a sign of the suburbs’ plight and the thing that is gradually renewing their competitive edge.

The Inland Empire’s housing market did not collapse because people chose not to live in sprawling suburbs. They clearly did, hence the huge growth there. The problem was that buyers could not really afford the houses that were being built. Now they can. Mr Husing reckons 39% of residents can now afford the average property—up from just 18% in 2005. House-builders are at last creating smaller homes, and a few buyers are returning. Now the task is to ensure that neighbourhoods are not snapped up by slumlords. The nearby city of Grand Terrace has done that in part by levying a small tax on renting.

Places like Moreno Valley retain two enormous advantages over traditional cities. They have lots of cheap, available land and a pool of workers keen to avoid the ever-lengthening commute to Los Angeles and Orange County. When it comes to attracting businesses, these two factors outweigh high petrol prices. The city of Ontario, which contains the Inland Empire’s main airport, already has more than two jobs for each home. Greg Devereaux, the city’s manager, reckons it will eventually have more than three.

Bill Batey, Moreno Valley’s mayor, is frank about the city’s present problems. When asked about its future, though, he brightens. Pointing to a large aerial photograph on the wall, he outlines plans for a new warehouse, a cluster of medical offices and a lot more houses. There is plenty of empty space in the photograph; indeed, there is a huge expanse of bare earth directly across the street from city hall. The frontier is not closed yet.

One of the most profound thinkers on the topic of urban sprawl is Robert Bruegmann who is an architectural historian at the University of Illinois Chicago. A few years back, Bruegmann wrote a book called Sprawl: A Compact History. One of the most interesting things Bruegmann brings up in his book is that sprawl is more a function of societal affluence.

That said, one of the long-time criticisms of sprawl stems from elitist views of how people "should" live as opposed to how they really want to live. In the book, Bruegmann mentions how wealthy Londoners and members of the aristocracy in the 19th century expressed outrage at suburbs constructed for London's new middle class since a.) what was being constructed destroyed the natural environment and b.) the types of row houses being built looked ugly. Today, these neighborhoods like Islington in North London are held up by many urbanists as the pinnacle of how people should live in the 21st century.

If anything, The Economist is correct in that the IE's abundance of cheap land isn't going away anytime soon. However, the pressure is on developers and municipalities to find creative ways to finance the appropriate levels of infrastructure for new development. In addition, the challenge will be to develop communities that include a mix of uses, less auto dependency, and employment opportunities already in place once houses are built so that homebuyers don't have to commute two hours in order to get to work.

In essence, the era of high energy prices may not signal the end of the suburbs in general but instead, the end of the traditional bedroom community in particular.

Building Boom Masks Slump

SB Sun

Commercial real estate oversupply lowers rents
Matt Wrye, Staff Writer
Article Launched: 08/10/2008 07:56:24 PM PDT

Even in a bum economy, Inland Empire office-space builders are finishing multimillion dollar projects and putting bread on the table for construction workers.

But don't be fooled.

If anything, it's an omen of tough times around the corner - not for tenants, but for the developers who invest heavily in concrete, steel and glass.

It could take five to seven years - and maybe even longer - for commercial brokers to lease a boatload of existing office space and projects under construction because builders overshot the market.

"A five- to seven-year supply is a big deal, especially if you're in the construction or building finance industries," said Thomas Galvin, regional research analyst at Colliers International brokerage firm in Ontario.

It might take a whopping nine years, Galvin said, depending on economic assumptions based on history.

"Who knows, it may be a lot sooner," he said. "If the economy recovers faster than we expect, and if the Inland Empire is able to attract businesses so people don't have to commute two hours to work, things might turn out better than it seems now."

No doubt, it's a tenant's market.

Historically speaking, it's also the Inland Empire office real-estate industry's first huge step back since it took off like a rocket in the early 2000s.

During the inflated housing boom, commercial builders couldn't stop building. The area was awash with outside big wigs scoping out our land and looking to stay ahead of the competition.
Then the housing market collapsed. Thousands of local layoffs in the financial industry have all but halted the raging real-estate machine. Cubical space isn't prime real-estate anymore.

"It's a perfect storm of things happening all at once," said CresaPartners tenant representative David Salazar. He manages the real-estate firm's Inland Empire business from its Ontario location.

"They were hoping the rents would be in the $2.50 to $2.75 (per-square-foot) range," Salazar said about commercial brokers who are trying to lease space. "Instead, they're around $2. Until inventory is absorbed, it'll probably hang right around there."

He's finding deals for clients.

"The most I've seen is one month per year, where you sign a five-year deal and get five months free," he said. "Twelve months ago, you couldn't find that."

Office developers eager to push inventory off their financial books are giving brokers the OK to make deals that would've been laughable a couple of years ago. Some are even offering a whole year's rent free if companies sign a 10-year lease.

"There's a lot more free rent being offered," said Mary Sullivan, independent contractor for Grubb & Ellis. "The concessions being offered are much more aggressive than 18 months ago."

Not only are companies taking their time shopping for space, some are having trouble getting financing. The credit crunch is making it harder for businesses to secure loans.

Sullivan said a 6- to 12-month office space inventory is considered healthy.

"We've got more inventory coming online," she said, "and the slowdown in absorption has come at the least desirable time."

Then and Now: 1908

The Census every now and then produces these fact sheets that highlight changes and progress in the United States.

The latest one is a comparison of the dawn of the automotive age with present day.

Some highlights:

On Oct. 1, 1908, Ford Motor Co. introduced the Model T, generally regarded as the first affordable automobile and the car that industry experts say “put America on wheels.” The first Model T, produced for the 1909 model year, was assembled by hand and sold for $850. The demand for the cars was so high that Ford started producing them on an assembly line, enabling it to turn out a Model T every 10 seconds. Many consider the Model T to be the most influential car of the 20th century.

181,000
The number of passenger cars manufactured in 1910. Ten years later, the number was 1.9 million.

16.46 million
The number of new motor vehicle sales in 2007. Of these, about 5.2 million were domestic cars, 2.3 million were imported cars and 7.1 million were domestic light trucks.

89 million
U.S. population in 1908. One new car sold for every 491 people.

304 million
U.S. population in 2008. One new car sold for every 18.5 people.

$480 billion
Value of shipments (motor vehicles and parts) in 2007 for the nation’s auto industry

$87.6 billion
Estimated revenue in 2006 of the nation’s automotive repair and maintenance businesses.

West Coast Green Conference: San Jose

Website:

Who: Al Gore & Other Hippies
What: A House Made Out Of Shipping Containers! + Other Green Building Stuff
When: September 25 - 27
Where: San Jose
Why: Because Green Buildings Are The Next Hot Thing, Did I Mention The House Made Out Of Shipping Containers?

This green movement thing is only going to get worse, so you might as well get in on the ground floor. Admission is $575 bucks (talk about a lot of green) but it is a good way to learn about organic, recycled/ renewable, "eco-friendly", agro-forest, sustainable, building materials and to network with others who enjoy your passion of earth-destroying guilt reduction via green consumerism.

I am a little jaded about these things, for every new movement there is going to be a bunch of charlatans trying to capitalize on the next big thing.

Remember all the start-ups in the Internet age, and all the hype associated with how that is going to change everything? History might not repeat itself, but it definitely rhymes.

After a few years we will see how legit all these "high-end" green supply companies do.

The people who make the most money are those that are able to bring something elitist to the mainstream. Think of Henry Ford changing cars from a rich persons play thing to the workhorse of the everyman , Charles Schwab bringing Wall-Street to the masses, Bill Gates and Microsoft allowing almost anyone to use a PC (remember DOS?), Wal-Mart bringing everything to everyone.

Once the cross-over occurs these high margin green companies will bust or will have to go to an even more niche market.

Richard K. Green Comes To Town

The new Lusk Chair and Director has a Blog.

His blog roll is similar to what I would have if I ever got off my duff and created one:

Brad Delong
Marginal Revolution
Greg Mankiw
EconBrowser
&
Becker Posner

Might I suggest:

Curbed LA
Crooked Timber
EconLog

The Los Angeles area took awhile for me to warm up to and I am not sure if I would call it home yet. For me, it is always the case that you miss what you can't have, at times I am nostalgic for Las Vegas or San Luis (not Santa Maria for some reason though).

Intermodal cargo: Economic rebound for shipping forecast for 2009

From Logistics Management:

Intermodal cargo: Economic rebound for shipping forecast for 2009

SAN FRANCISCO—While shippers will continue to struggle through this year, a leading transport consultancy maintains the economy will begin to recover in 2009.
“Irrespective of modes, we see more industry players poised for growth next year,” said Frank Harder, principal with The Tioga Group Inc.

In its recently released study, “Containerized Intermodal Goods Movement Assessment” (CIGMA), Harder and other analysts examined North American containerization trends and the outlook for imports and exports. Ocean cargo shippers may be surprised by some of its findings. Among them are these:

China will continue as the dominant supply source; India and Southeast Asia imports are growing but on a relatively small base;

· Some additional Asian cargo will shift to East Coast ports, but the West Coast will continue to grow;

· Southern California container transloading will continue to play a major role to East and Midwest destinations; however, the efficiency of on-dock rail and inland logistics parks will continue to attract Inland Point Intermodal (IPI) traffic;

· South Atlantic ports will expand due to all-water routings and regional market demands;

· NY/NJ and Virginia Ports will continue as the primary East Coast entry points;

and

· A shortage of bulk shipping capacity is shifting grain exports to containers, creating a shortage of containers in grain growing regions.

Supported by interviews with more than 60 leading firms linked to the supply chain, the report also supports some of the conclusions reached by LM readers in recent months.

“Shippers are no longer placing so much reliance on U.S. west coast ports,” said Harder. “They have other sourcing strategies in place if there’s a labor disruption there, or something else contributing to congestion.”

The wide-ranging report also examines ocean routing trends, ocean carrier rationalization, and port issues and capacity.

Wal-Mart Map

Wal-Mart is the second largest employer in the United States, right behind THE US GOVERNMENT.

With 1.8 million employees and 3176 stores, how did this company get so big?

Here is a time series map of all the Wal-Mart stores in the Unites States by year built.

Enjoy!