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.