Economic Development Outlook: Focus on 2011
Does lingering uncertainty about economic conditions, freight demands, and funding sources pose a threat to industrial real estate development and transportation infrastructure projects?
When the economy is stalled, “economic development” may sound like an oxymoron. But in fact, development and infrastructure projects at the local, state, and federal levels are forging ahead. Economic development organizations, government entities, public-private partnerships, real estate developers, and officials involved with all transportation modes are working together to keep development and improvements to the nation’s transportation, distribution, and supply chain networks from falling prey to the recession.
Like all aspects of business today, economic development activities have felt the financial climate’s pinch. Private developers have been challenged to find construction financing; projects developed with public funds are under greater government scrutiny; and companies skittish about the slow recovery of consumer spending have been reluctant to invest in new distribution centers or logistics facilities.
Uncle Sam, however, has pitched in. Though not lauded by all, federal stimulus programs aimed at investing in transportation infrastructure have helped jump-start some improvement projects. Awarded on a competitive basis for capital investments in surface transportation projects, the U.S. Department of Transportation’s (DOT) Transportation Investment Generating Economic Recovery (TIGER) grants are a $2.1-billion source of funding that has affected all modes.
The Oregon International Port of Coos Bay, for example, received a TIGER grant to help rehabilitate and re-open a 133-mile rail line on the southern Oregon Coast. The refurbished tunnels, bridges, and track infrastructure on the line, which serves several lumber/plywood mills and will link to the national rail network at Eugene, Ore., are scheduled to re-open in June 2011.
The TIGER program has been through several phases and has support from some entities to become a permanent part of infrastructure development funding. “Programs such as TIGER are good vehicles for competitive, performance-based opportunities for infrastructure investment— both at the ports and for strengthening land-side transportation connectivity,” says Kurt Nagle, president of the American Association of Port Authorities (AAPA).
Nagle is also encouraged by what he sees as “a more visible and vocalized bipartisan recognition of the need to improve our nation’s infrastructure.”
That increased awareness is certainly positive, but finding the appropriate level of federal investment and involvement is the tricky part. The lack of a long-term plan for reauthorizing the landmark 2005 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) is troublesome as well, notes Joni Casey, president and CEO of the Intermodal Association of North America (IANA).
“The short-term extensions for surface transit reauthorization will not help achieve a sustainable transportation infrastructure funding program,” Casey says. “We need to institutionalize some of the funding programs that have proven beneficial to the industry.”
So while traditional government wrangling and the Great Recession’s lingering hangover are hampering the frenzy of infrastructure and real estate development the logistics sector saw a few years ago, development continues at a moderate pace. What, then, can we expect to see in 2011 and beyond? Here is a closer look at major transportation and industrial real estate developments.
Road Transport Surges
One of the biggest infrastructure and economic development drivers is the predicted growth of freight in the United States. While tepid consumer spending has temporarily dampened import and export volumes, the consensus within the industry is that this will soon change. The American Association of State Highway and Transportation Officials (AASHTO), for example, predicts that:
- By 2020, the U.S. trucking industry will move three billion more tons of freight than is hauled today. To meet this demand, the industry will put another 1.8 million trucks on the road.
- In 40 years, overall freight demand will double, from 15 billion tons today to 30 billion tons by 2050.
- Freight carried by trucks will increase 41 percent; by rail, 38 percent from today’s volumes. The number of trucks on the road compared to today will also double.
If these numbers even come close to bearing out, the struggle for greater transportation capacity will become paramount.
“The transportation system that supports the movement of freight across America is facing a crisis,” notes AASHTO’s July 2010 report, Unlocking Freight. “Our highways, railroads, ports, waterways, and airports require investment well beyond current levels to maintain— much less improve— their performance.”
Projects that help expand freight capacity are going strong. Various transportation corridors across the United States are continuing to bring together public and private entities in the name of highway infrastructure expansion and improvement. These include initiatives such as:
- Ports-to-Plains Corridor: The 2,300-mile collection of roadways runs from Mexico, through 10 states in North America’s agricultural and energy center heartland, and into Canada.
- I-39 Logistics Corridor: Adjacent to Chicago, the corridor spans a 10,000-square-mile area encompassing two states and 14 counties.
- North America’s SuperCorridor Coalition (NASCO): The multimodal transportation network traverses the heart of NAFTA trade and commerce territory in the United States, Canada, and Mexico.
Highway improvements and expansions in these corridors are designed to raise the efficiency, safety, and cost-effectiveness of freight transportation throughout North America. These types of initiatives score high ratings from groups such as AASHTO.
To further update over-the-road freight transportation, AASHTO advocates expanding the interstate highway system’s capacity through improvements such as adding 32,000 lane-miles to the current interstate system and upgrading 14,000 lane-miles of the current national highway system to interstate standards. The group also believes in creating and funding a national freight program to include multi-state freight corridor organizations at the state, regional, and multi-state level.
“The country has a lot at stake,” says AASHTO Executive Director John Horsley. “Our national leaders must address the challenges ahead and fund the freight system capacity we need.”
2010 was a decent year for U.S. ports, as container traffic began to tick upward again. The Port of Los Angeles, for example, posted a 16-percent increase in container traffic in 2010, while U.S. ports overall have showed year-over-year improvement for 12 straight months, according to the National Retail Federation’s monthly Global Port Tracker report.
Ports are getting ready to greet the increasing numbers of cargo ships. Despite the dip in commerce over the past few years, many U.S. ports have continued with ongoing infrastructure improvement projects. The Port of Charleston, for example, is working on a 10-year, $1.3-billion capital improvement plan that includes constructing a new container terminal. Begun in 2007, the 280-acre terminal will boost the port’s capacity by 50 percent. And the Port of Los Angeles is spending nearly $1 million a day on multi-year capital projects including terminal expansions, a street-widening project, and deepening its main channel.
“These projects take years to plan, develop, and construct, and will be in operation for 30 to 50 years,” Nagle explains. “Ports look at the long term.”
For many East Coast and Gulf Coast ports, the long-term view is driven by the Panama Canal expansion, slated for completion in 2014. The expansion will allow large, post-Panamax ships to pass through the Canal, making the all-water route from Asia through the Canal and into the U.S. East and Gulf coasts more popular— and potentially more lucrative for the ports that can accommodate the larger ships.
For that reason, the Port of Baltimore broke ground in March 2010 on a new 50-foot berth that will make it only the second U.S. port (in addition to the Port of Virginia) with enough water depth to dock the larger ships that will traverse the expanded Panama Canal.
“A new 50-foot berth is critical to the Port of Baltimore’s future because it will help keep the business we have, and let us handle new business that will come aboard the larger ships,” says Maryland Governor Martin O’Malley. The $105-million project is being funded by a private-public partnership between the Maryland Port Administration and Ports America Chesapeake.
U.S. ports are also juggling broader infrastructure issues such as ongoing maintenance and improvements to the federal navigation channels that lead into and out of the ports, as well as upgrades to land-side connections from the ports to rail lines and highways.
“Ports are challenged with making improvements inside their gates— which they usually have direct control over— and improving transportation connections, which usually involve partnerships at the federal and/or state level,” Nagle notes.
Rail Rolls On
During the past few years, U.S. rails have been on a spending spree, investing nearly $10 billion annually in capital expenditure since 2008. These huge infrastructure investments include upgrades to existing track, and adding new track, terminals, equipment, and maintenance facilities. As a result, rail carriers have continued to see steady freight volumes despite the rocky economy.
“Rail trends have been positive because the industry has invested in capital improvements,” explains John T. Gray, senior vice president of the Association of American Railroads (AAR). “We have created the capacity to handle business efficiently while meeting customer service expectations.”
Rails have one big advantage over other modes when it comes to these infrastructure projects: they are privately funded. The amount of public money that gets into the rail system is minute— generally less than one percent of rail capital expenditures involve public funding.
Gearing Up for growth
A slew of ongoing rail improvement projects is helping rail carriers prepare to meet the continuing demand for freight rail service throughout the country. In addition, regional rail projects such as The Chicago Region Environmental and Transportation Efficiency Program (CREATE) are having a significant national impact on freight transportation.
CREATE, which represents a unique mix of public-private organizations including the U.S. DOT, the State of Illinois, and the City of Chicago, as well as six of the nation’s largest freight railroads, will invest billions in rail infrastructure improvements in the Chicago area. “CREATE is critical to the national freight rail network that will greatly improve efficiency and operability throughout the region,” says AAR President and CEO Edward Hamberger.
By reducing the time rail traffic requires to transit Chicago, CREATE— which has received $100 million in TIGER funds— will improve nationwide freight flows, and help save shippers an estimated $40 million annually in reduced inventory costs.
One obstacle potentially stands in the way of these continued infrastructure improvement projects: positive train control (PTC) systems, which are designed to increase rail safety by helping prevent train-to-train collisions and derailments. Class I railroads will be required to implement PTC systems over the next few years as a result of the 2008 Rail Safety Improvement Act, and the industry is worried that the expense will detract from rail carriers’ ability to add capacity.
Intermodal In Demand
Additional capacity is definitely an issue when it comes to intermodal transportation. Shippers are showing increased interest in intermodal, thanks in large part to concerns over increasing fuel prices and the desire to improve transportation and supply chain carbon footprints. Total intermodal volumes in 2010 are up 15 percent over 2009, and nearly back up to 2008 levels— an increase that IANA calls “encouraging.”
“We have seen a measured increase in volume, with a resurgence in international traffic driven by import demand, as well as a steady increase in domestic container activity,” says IANA spokesperson Tom Malloy, who predicts more of the same for 2011.
Not surprisingly then, intermodal facilities and rail corridors have been sprouting up around the country, and are a source of many large-scale economic development projects funded by partnerships involving rail carriers, private funding sources, and local, state, and federal government agencies.
“These corridor projects are aimed at increasing rail and intermodal capacity, shortening transit times, combating highway congestion, and responding to environmental concerns,” says IANA’s Casey, noting that many of today’s projects are modeled after California’s successful Alameda Corridor project, which helped to improve freight transportation into and out of the Ports of Los Angeles and Long Beach.
Examples of current ongoing public-private rail corridor investment partnerships include:
- The Crescent Corridor: This $2.5-billion Norfolk Southern initiative aims to establish an efficient, high-capacity intermodal freight rail route between the Gulf Coast and the Northeast. The project includes constructing new intermodal terminals and expanding existing intermodal facilities, as well as a host of infrastructure improvements along a 2,500-mile rail network. It also calls for adding freight rail capacity in Virginia and Mississippi, and investments in rail route improvements, signaling systems, and other track speed enhancements.
- The Heartland Corridor: Another Norfolk Southern project, the $150-million Heartland Corridor will create the shortest, fastest route for double-stacked container trains moving between the Port of Virginia and the Midwest. At nearly 250 miles shorter than previous routings, the new routing will reduce transit time between Norfolk and Chicago from four days to three.
- The National Gateway: CSX Corporation’s $842-million National Gateway project seeks to improve the flow of rail traffic nationwide by increasing the use of double-stack trains. Stretching from Northwest Ohio to Chambersburg, Pa., the project will address several key freight rail corridors that link Mid-Atlantic seaports and Midwest distribution points and population centers.
As many of these projects indicate, intermodal connectors are a vital aspect of intermodal transportation’s future success, and securing funding for connector projects tops IANA’s agenda.
“Intermodal connectors are the first and last highway segments going in and out of ports and intermodal facilities, and studies show they are the weakest link,” says Casey. “This impacts global trade because it can adversely affect the connectivity of the highway system to import/export facilities.”
Casey cites a newly announced intermodal connector project at the Port of New York/New Jersey as a step in the right direction. With nearly $65 million in funding, the project will upgrade three major roads at the agency’s New Jersey marine terminals to increase cargo capacity and enhance safety. The upgrades will help relieve the bottlenecks and long waits endured by trucks entering and exiting the terminals.
“The more efficient we can make cargo movements through our ports, the better it is for our customers whose businesses depend on speed and reliability,” says Chris Ward, executive director of the Port Authority of New York and New Jersey. “These major investments will help relieve traffic congestion and increase safety along some of our busiest roadways.”
Intermodal’s ability to meet increasing demand and serve shippers efficiently depends on the continued funding of these types of projects. But that, says Casey, is tough to rely on. “The wild card is where to secure the funding,” she notes.
real estate impact
Not surprisingly, the challenges and opportunities currently facing the users and providers of our transportation and distribution systems— as well as the economic development investments and projects that serve them— are closely related to the state of industrial real estate.
“Industrial real estate is logistics-based at its core,” says Neil Doyle, executive vice president, infrastructure and transportation for CenterPoint Properties, an Oakbrook, Ill.-based industrial real estate development company. “It’s all about being located close to either the raw product or the finished product; the labor pool; or the consumers— one or all of the above.”
The types of industrial real estate projects that are currently in favor reflect the nation’s concern over energy prices, a drive for sustainability, weak consumer spending, and the move toward intermodal transportation.
“In 2008 and 2009, we experienced a drop in demand within our traditional industrial parks, but less so in our intermodal-based logistics parks,” Doyle says. “Companies are looking for buildings that are close to rail and port terminals because they are trying to cut drayage and demurrage costs, and fuel consumption.”
In tough times, he adds, many businesses focus on becoming more efficient, and have time to pay more attention to back-end operations like the supply chain. “When companies try to streamline and gain efficiencies, they look at intermodal transportation,” Doyle says. “The whole theory of putting trucks on trains is about lowering fuel costs, being greener, and creating efficiencies.”
CenterPoint recently expanded its intermodal center in Elwood, Ill., for example, from 3,000 acres to 6,000 acres and completed a facility for Union Pacific in the same park.
By contrast, building logistics and intermodal properties on speculation has come to a screeching halt, says Tim Feemster, senior vice president and director of global logistics for Grubb & Ellis. The spec boom of a few years ago created a glut in the market, driving average vacancy rates for industrial properties to 10.4 percent at the end of 2010, down 50 basis points from its second-quarter peak. Continued unemployment and weak consumer spending are the culprits for these ongoing rates.
Vacancies vary wildly, however, depending on the market— the Los Angeles metro area stands at only 3.3 percent, while cities such as Boston, Atlanta, and Las Vegas are stuck with vacancy rates in the teens. Determining why can be tricky.
“Take Savannah, for instance,” Doyle says. “The port is doing tremendously, but because the city was inundated with speculative construction for years, Savannah has a very high vacancy rate for industrial properties.”
a Buyer’s market
For developers, these circumstances all amount to one thing: the need to be flexible. Securing tenants for industrial properties today is far more complex than it used to be. “It is difficult to get traditional financing to construct a building if the tenants want a lot of flexibility in their leases,” Doyle explains.
Shippers looking for industrial real estate are in the proverbial cat seat, then, with the ability to negotiate favorable terms. “Given the market conditions today, many companies are demanding benefits such as more sustainable buildings— especially when it comes to lighting and Energy Star HVAC systems,” Feemster says. “Tenants expect a landlord to perform sustainability upgrades at no additional cost, and if the landlord isn’t willing to, the tenant will cross that building off their list.”
Such wrangling isn’t necessarily the best long-term strategy, he notes. Shippers seeking logistics facilities should make sure the supply chain and real estate teams are working together to find the most strategic options for warehouse and distribution facilities.
Factors such as low rents, free rents, tax abatements, and incentives may make a property attractive, but if it does not meet supply chain needs, such as proximity to an intermodal site or airport, it is not the best choice. Paying higher rent at a building that leads to a more efficient supply chain is a better investment, because transportation costs consume more of a corporate budget than rents do.
“Locating a DC in an adjacent state because you can get $2-per-square foot rent is not a great supply chain strategy if you then have to spend up to $6 per square foot to bring in 15,000 international containers a year through an intermodal facility 150 miles away,” Feemster notes.
As with all things supply chain-related, transportation costs are still the barometer by which all initiatives— economic development projects, infrastructure investments, and industrial real estate efforts— are measured. With so many factors at play affecting the logistics sector, 2011 is shaping up to be an interesting year.