By Dave Noonan, SIOR, CCIM – Sr. Vice President, Principal
Published in the Structures supplement of the Business Courier – April 2007
Almost 10 years ago, I used to chuckle at my Stockbroker brother’s stories of how his brokerage business had changed – and how he and his peers were calling each other “Brokestockers”.
The Internet had knocked them for a loop; “disintermediation” was the buzz word. Just as residential real estate agents, travel agents, and other fee-charging service providers had seen their incomes take a dive due to the explosion of information over the web, even sophisticated stock trades were being discounted and sometimes even performed by “do-it-yourself” investors.
It was only a matter of time, the Ivory Tower guys were saying; the information age was making everything a commodity. Soon everyone would extract the information they needed from the web, bypass the manufacturer’s rep, the real estate agent, the equity trader – service providers couldn’t hoard their information any longer – the matchmaker function was being hijacked by the web.
…and they weren’t totally off base. The travel industry was one of the hardest hit – it was too easy for a traveler to book flights, hotels, rental cars, and even vacation travel packages – themselves. Travel Agencies failed spectacularly. The percentages taken in stock transfers took a nosedive (but the volume of trading increased so radically, also due to technology, that it offset the percentage drop), and many large manufacturing and product-assembling entities began short-circuiting their “rep” networks to go directly to their customers.
Car Dealers felt the sting; now everyone was an expert on “real” car dealer costs (related to MSRP, but loosely) and could buy cars more intelligently. Real Estate was sure to follow, the experts said. All over the country, local Multiple-listing services were putting all of their listings on the web – enabling all who were technically proficient to do on-line shopping, price comparing, and establishing the “right” price before actually talking to an agent.
The commercial brokers didn’t know what to expect. In the late ‘90’s there was such a proliferation of new investment in technology infrastructure, some involving the need for real estate, that Commercial Brokers just rode the wave.
…and then everything hit the wall, beginning with the bursting of the tech bubble, the recession that started in 2000, and the deepening of it after 9/11.
What emerged was a different world, somewhat corrected, but one still dependent on efficiency improvements that were mostly accomplished in developed nations by technology – and labor cost savings accomplished by outsourcing and exporting of our manufacturing to third world labor markets.
Commercial Brokers dodged the bullet. Not only was the world changing so rapidly that market expertise was necessary, but technology made brokers far better at performing necessary services.
They needed to be. Corporate America suddenly realized that the worst asset management internally was their real estate investment. Smaller companies were getting stung with suddenly obsolete property. Retail leases that looked like blue chip investments for a generation with regional shopping malls dictating desirable locations were suddenly in the wrong places. Suburban office developments offering free parking and easy amenities, combined with a lessening need (due to technology) for all functions to be physically located together, and easier commutes – put America’s “downtown” on notice.
Corporate excesses and meltdowns such as with Enron, WorldCom, Tyco and Adelphia, among others, further complicated the real estate world; suddenly auditors were knocking on doors, and the rush to put corporate America’s real estate house in order made FASB (Financial Accounting Standards Board) a household word – further putting commercial brokers to the task.
When will it stop? Or…will it stop? Within the Commercial Real Estate industry, those who have thrived have been those with good relationships. Is that enough?
Nope. Anyone who has cultivated relationships for years only to see the important contact replaced, fired, part of a company sale, or often, called to task by superiors to “comparison shop” knows too well how fragile the hold on an account can be. No, it takes more than a friendship, more than comfort level.
It takes the skills necessary to make a difference quickly. If a broker/agent can’t do that, he’s an endangered species. Hanging a sign in front of a building and waiting for the phone to ring doesn’t cut it any more. Meeting a management team and spending a half hour telling them how good you are will get you a quick exit. Running a search team around a market without adequate understanding of what they want will make you just another outsider very quickly.
Look around you today. Try to identify the brokers who are passionate about learning. You’ll run into a lot who aren’t – and who may spend a lot of time bemoaning their bad luck. But when you find a good one, and you know that he or she is good – you’ll be looking at someone who has evolved into an agent who will make his/her clients perform a lot better.
They’re a long way from being a “Brokestocker”.
By Gladys Risma, Senior Associate for Multifamily Investments
Published in Heartland Real Estate Business – August 2007
Economic cycles produce winners and losers. While it remains to be seen how the current cycle will impact Cincinnati’s multifamily market, a number of factors point to a favorable investment climate in the multifamily market.
Home sales continue to drop throughout the nation, and, as of May, home sales in Greater Cincinnati fell less dramatically than nationally, only declining 8% locally from the previous year’s monthly total. That marked the 13th consecutive monthly decline for the region. Nationally, home sales have dropped 10%. Average home prices in the area also dipped about 0.7% compared to 2% nationally.
Despite the price decline in home values, supply is outstripping demand, with inventory climbing as many homeowners face foreclosure and problems with sub-prime mortgages. According to the Mortgage Bankers Association, Ohio ranked first in the nation for homes in foreclosure during the year’s first quarter, with an estimated 50,000 homes in trouble or 3.4% of the nation’s foreclosures.
Credit standards have tightened against this backdrop, and average rates for 30-year mortgages increased to 6.6% in June, the highest level since last July. Coupled with rising fuel and energy costs, home ownership has become a more expensive option.
The housing market’s stuttered steps have increased demand among renters, giving landlords more pricing power both in rental rates and in limited concessions.
Vacancy rates continue to decline. Two years ago, the rate stood above 9% but now hovers around 8% in the apartment market. While this is still higher than the average 6.7% in the Midwest and the national average of 6.1%, we believe the rate will drop in the coming months as renters enter the market.
Rents continue to inch up as well as landlords gain pricing power. Rents now average $676 per month, up from $670 per month in 2006 and $657 per month in 2005. Along with this, landlords have reduced concessions, down to an average of 0.5 month’s free rent, compared to 1.5 months in the past few years.
These conditions, along with a wealth of capital, provide incentives for investors looking for opportunities in real estate.
More than $100 million of multifamily product was acquired during the first half of this year. While this was off the pace of the past two years when investors purchased $370 million of properties last year and a record $420 million in 2005, many purchases occurred during the second half of the year. Additionally, interest-sensitive loans may force sales as was the case last year when banks sold four large properties at auction or through foreclosure.
Cap rates historically remain low, averaging 7.2% during the first half of 2007, according to RC Analytics. High-quality Class A properties are seeing lower cap rates in the 6–7% range while aggressive investors can command cap rates in the 8–11% range for older Class B and C properties. As in other Midwestern cities, though, Cincinnati’s returns are more attractive than in big cities on either coast. Steady population growth of 1–2% annually since 2002 and stable employment gains of 1.2% offer further protection for investments in multifamily product.
On the development side, the resurgence and revitalization of the CBD market continues to draw interest from traditional multifamily developers as well as newcomers looking at condo, conversions and mixed-use projects. While developers have become more cautious and lenders more stringent in financing requirements, downtown and surrounding areas continue to be a focal point for development.
New and infill developments are aimed at two core audiences: young professionals and empty nesters who are willing to pay a premium to experience the urban lifestyle. Downtown renters pay a 20% premium in rents per square foot and occupancy is at 94%. For owner- occupied housing, the region’s average home price is $172,702 in the first quarter of 2007. By comparison, downtown condos average sales price is $201,631 with riverfront luxury condos selling upwards to $1 million.
Recent new developments are: Middle Earth Developers’ 617 Vine building. The former home of the Cincinnati Enquirer newspaper will be converted into 150 apartments and 54,000 square feet of commercial space. Eagle Realty’s Fifth and Race mixed-use project plans for 300 residential units. Gateway Quarter, in the historic Over-the-Rhine district, includes 100 condominiums. Miller-Valentine’s One River Plaza, a mixed-use development, includes 140 luxury riverfront condominiums.
These projects would complement several others completed in the first half of the year: The McAlpin Downtown (40% sold), and, in Bellevue, Harbor Greene (60% sold) and Water’s Edge (80% sold). The Ascent, a Daniel Libeskind signature building, also continues to move forward, with 54 of its 72 units sold. The long awaited Banks project, a 15-acre riverfront development book-ended by the Reds and Bengals stadiums, has reached a non-binding agreement with Carter Real Estate and Harold A. Dawson, developers from Atlanta.
All told, with 5,200 multifamily units either built, on the drawing board or in the proposal stage, the riverfront and downtown population will double by 2010.
Developers certainly face challenges moving forward as lenders tighten the reigns but the Queen City’s multifamily arena should see further efforts around the CBD’s periphery and the river in areas such as Mt. Adams, Columbia Tuscolum, Over-the-Rhine, the University/Uptown area and the “Incline District” to the west of downtown in East Price Hill.
Overall, the multifamily market should continue to strengthen as renters return in droves, landlords find pricing power, and investors and developers look for opportunities.
Gladys Risma is a senior associate for Colliers Turley Martin Tucker’s regional office in Cincinnati. She specializes in the investment market for multifamily properties.
By Micha Bitton
Published in Columbus Business First – May 2007
Whether looking to expand your business or for the perfect location for a new restaurant, leasing retail space can be a daunting task for small businesses. From triple net leases to negotiating a letter of intent, one can easily get lost in the myriad of details found in commercial real estate transactions.
To sort through the process, an experienced team cannot be underestimated. Just as you have a certified public accountant to handle your finances and an attorney to lookout for your legal interests, a commercial real estate agent can help avoid common pitfalls.
Beyond locating real estate opportunities, your agent is there to negotiate terms on your behalf. Because the agent is supplying a tenant, these services are typically paid for by the property owner and are already built into their rent structures.
But where do you begin? Here are a few pointers to start you on your way:
In addition to base rent, the tenant pays a prorated share of property taxes and insurance and common area maintenance charges. Common area maintenance charges are not usually negotiable. You should, however, try to cap controllable operating expenses and keep them to a minimum during your lease term. Charges include maintenance of the building exterior, parking lot, walkways, and/or green areas surrounding the building as well as property management fees.
Additionally, the tenant is responsible for anything inside the space such as utilities, while the landlord is most likely responsible for exterior expenses like roof repair and the building structure.
Also, request a free rent period between 30 and 90 days that allows time to open your doors without having to worry about paying rent.
It helps avoid miscommunications that can occur and helps avoid complicated matters down the road. Once the terms are agreed upon by both parties, the landlord prepares the lease for your review.
Always have an attorney review the lease to ensure you are protected and that the basic terms are outlined.
Micha Bitton is a commercial real estate broker on the retail team at Colliers Turley Martin Tucker in Columbus. 614-827-1724 | mbitton@ctmt.com
Published in Southeast Real Estate Business – Southeast Snapshot, April 2007
The Nashville office market posted a banner year in 2006. Nearly 1.5 million square feet of space was absorbed as 1.2 million square feet of new inventory entered the market. Solid activity helped push the area’s vacancy rate down to 10.9 percent by year’s end, more than a full point from the 12.2 percent vacancy rate at the start of 2006.
As economic and market conditions improved throughout last year and into 2007, Class A properties took center stage. In fact, there currently is a limited supply of large contiguous blocks of Class A space in the suburban markets. While Class A inventory increased by 836,000 square feet last year, positive absorption of 886,000 square feet pushed the vacancy rate down to 9 percent by year’s end.
Consequently, builders and developers are busy with both speculative and build-to-suit projects. Nearly one million square feet of space is underway and scheduled for delivery in 2007.
The office market also paced robust investment sales. In fact, the shining star in the investment sales market during the second half of 2006 was the office sector, recording big numbers in both quantity and quality of deals.
During the last six months of 2006, Nashville saw almost $210 million in office investment sales, a 25 percent increase from the previous 6-month period of just more than $168.5 million.
Significant transactions that began at the end of 2005 with the sale of One Nashville Place picked up steam in the last half of 2006. This period saw three major office transactions: Primus Financial Services Center, $69.75 million, Dover Center, $37 million, and Fifth Third Center (formally Financial Center), $62 million.
Nissan’s arrival downtown certainly was a shot in the arm but a number of new leases, along with some expansions, helped the CBD post its best year since 1997. Last year, the downtown office market absorbed 276,000 square feet.
Nissan’s move to its corporate campus in Cool Springs certainly will impact the area’s vacancy rate. Additionally, the new 13-story multi-tenant SunTrust Plaza now under construction downtown may be a mixed blessing. Scheduled for completion in late 2007, the building will add 338,000 square feet of Class A inventory to the CBD, with around half of that space yet to be leased. There also is some concern with the merger of AT&T/BellSouth, and the possible consolidation that may impact BellSouth’s presence in the CBD.
The area’s new infrastructure has given companies a reason to stay, expand and return downtown. Tenants also may explore the options downtown because of the limited supply of suburban Class A space.
While the downtown office market improves, suburban markets continue to drive Nashville’s growth. In particular, Brentwood and Cool Springs, adjacent submarkets along I-65 South, power the area’s economic engine.
Last year, the Brentwood submarket absorbed 146,000 square feet of space while adding 172,000 square feet of new inventory. The largest addition was Creekside Crossing III, a 128,000 square-foot building by Duke Realty in Maryland Farms.
Brentwood ended the year with only a 6.2 percent vacancy rate, with Alex S. Palmer’s Gateway Plaza II, a 120,000 square-foot Class A building, expected to be completed this fall. Duke also is working out its final building in Maryland Farms, Creekside Crossing IV, a 128,000 square-foot building scheduled for completion by year’s end.
The Cool Springs/Franklin submarket has become Nashville’s premiere office address. Last year, this submarket posted the top absorption at 414,000 square feet. Vacancy rates continue to drop after two Class A buildings – Cool Springs III at 153,000 Square feet and Corporate Center Eight at 156,000 square feet – added to the area’s available space. Large blocks of contiguous space are a hot commodity in this submarket.
Developers have taken notice of the submarket’s rising prominence, especially with the impending opening of Nissan’s corporate campus. Three buildings totaling more than 430,000 square feet are underway in Cool Springs, with two buildings scheduled for completion by the year’s end. Boyle Investment should finish the 175,000 square-foot Meridian II by the end of June, and Community Health Services will occupy the building. Additionally, Highwoods anticipates that Healthways should be able to move into its 255,000 square-foot build-to-suit by the end of the year.
Rental rates vary by market with a low of $15.50 for Class A space in the MetroCenter submarket located just north of the CBD to a high of $27.50 in the Green Hills/Music Row submarket.
Nashville is on the move, attracting several major corporations in the past few years. Developers have noticed the city’s dynamic growth, thanks in large part to Nashville’s ability to attract major corporations such as Nissan, Dell, Caremark, Louisiana-Pacific, Asurion and Clarcor.
Brentwood and Cool Springs/Franklin will remain leading submarkets for new office developments, with several projects nearing completion with significant pre-leasing. As construction costs finally began to stabilize, pressure on higher asking rates for new buildings will ease, while demand should allow owners to increase rates on existing buildings as tenants begin to renew their leases.
Crews Johnston III, SIOR, is a principal in Colliers Turley Martin Tucker’s regional office in Nashville, Tennessee.
Published in Heartland Real Estate Business – City Highlight, March 2007
Investors continue to discover that Indianapolis, much like many other second-tier cities in America’s heartland, offers opportunities.
This trend remained intact last year as investors made significant acquisitions in all core property types. The volume of transactions in 2006 remained consistent with those in 2005, as institutional, fund, REIT and private investors found Indianapolis a stable market supported by improving fundamentals and favorable economic conditions that provide steady growth in value.
Two other factors continue to trigger demand. Product quality and tenant integrity often exceed those in other markets. Plus, investors often are rewarded with better returns than those found in first-tier cities and in other midwestern cities of similar size.
These conditions support continued investment in the coming months, as activity remains brisk in industrial, office, multifamily and retail.
Several industrial buildings changed hands last year, with 27 transactions totaling more than 9.3 million square feet. In all, investors purchased 46 industrial buildings, with Blue Real Estate Company purchasing a portfolio of 17 buildings in Park Fletcher from Duke Realty Corporation and the David Mandel Trust buying a four-building portfolio. Other active investors included Inland Real Estate Group’s purchase of the nearly 1.1 million square-foot industrial building on South Mt. Zion Road, two large buildings acquired by Dividend Capital Trust, two buildings bought by Transpacific Development Company, four buildings of various sizes secured by JB Management and two smaller acquisitions by Welsh Investments.
While 2006 saw six more transactions than in 2005, the total square footage sold in the previous year easily eclipsed last year’s total by nearly 2 million square feet — 11.80 million square feet in 2005 compared to 9.35 million square feet sold in 2006.
Quality industrial product with solid leases continues to garner cap rates in the high 6 to low 7 range, while the price per square foot has risen to the $45 to $50 range. Well-leased, multitenant big boxes are bringing cap rates in the mid-7s. Flex space offers cap rates between the mid-8s and mid-9s, similar to cap rates for value-added acquisitions.
Moving forward, we expect these cap rates to remain the same for the first 6 months of 2007, but anticipate that rates will begin to drop later in the year as competition for properties heats up.
Institutional, fund and private investors purchased a record number of office buildings last year, acquiring 30 office buildings for $403 million. This built on record dollar volume in 2005, when three mammoth deals among that year’s 15 sales accounted for a good percentage of the nearly $775 million in office investments.
Last year, the three largest deals took place in the central business district (CBD) and included the trading of the 557,000-square-foot Ben Lytle Operations Center, the 436,000-square-foot Safeco Building and the 396,300-square-foot Market Square Center. In all, downtown saw five transactions. The most active markets, though, were the northeast with seven transactions and the north/Carmel submarket with six deals.
Class A suburban properties in particular continue to remain favored investments, as investors look for stability and less expensive pricing as compared to other similar-sized Midwestern cities. High-quality suburban properties traded from $125 to $175 per square foot, with cap rates from the mid-7 to mid-8 percent range.
This brought new investors to Indianapolis last year, including Sun Life Insurance, Triple Net Properties, Blue Real Estate and Hertz Investment. Existing owners such as Westminster Funds, DBSI and Berwind Property Group also increased their stakes in the city.
As office market fundamentals continue to improve, building owners that have sat on the sidelines may see opportunities to capitalize on the strength of the investment market. Indianapolis is well-positioned as investors seek higher returns than those that can be found in tier-one cities.
Despite last year’s interest rate increases, rates have remained historically low. The low rates, combined with a wealth of capital and a rebound in rental market fundamentals, led to an exceptional year for the multifamily investment market. In all, we tracked 31 transactions involving more than 9,900 units in 2006.
Active investors included those with private capital, TICs, 1031 Exchange funds and investors, and institutional investors — the latter group primarily comprised sellers in 2006, but many are now returning as buyers.
Last year, cap rates on stable assets averaged about 7.5 percent, down slightly from 7.7 percent in 2005. We expect these cap rates to remain stable and perhaps even increase slightly as vacancies continue to decline and investors foresee better returns from rising rental rates.
Additionally, Indianapolis continues to offer job growth, community development and quality of life, three ingredients that provide solid fundaments for investments in multifamily product. Though smaller in size than previous years, activity in the retail sector heated up last year with seven transactions. Private investors led the way in these transactions, ranging in size from 32,000 square feet to 182,000 square feet. This is partially due to the predominance of tightly held retail assets by a few dominant players in the Indianapolis area.
Investors continue to favor retail investment in growing suburban markets such as Noblesville to the north, West Clay/Carmel to the northwest, Center Grove to the south and the Fishers/Geist area to the northeast.
Looking ahead, we anticipate strong interest from out-of-town private, fund and institutional investors that have placed Indianapolis on their radar screens. Owners that previously kept their properties off the market will begin to capitalize on such interest.
Competition for Class A or core assets, especially those of more than $20 million, will remain aggressive, as the number of such offerings is limited. With several new Class A shopping centers completed during the past 2 years, expect developers to become major sellers. Additionally, look for portfolio sales to crop up as owners pare down their holdings and redirect capital into new development projects.
John Huguenard is a principal and senior vice president in Colliers Turley Martin Tucker’s regional office in Indianapolis.
Published in Heartland Real Estate Business – City Highlight, March 2007
Central Indiana continues to be one of the nation’s leading distribution hubs. Last year, occupancy grew an impressive 5.7 million square feet, the third consecutive year of more than 5 million square feet of growth. To put this in perspective, the industrial sector posted growth of more than 17.7 million square feet from 2004 to 2006, nearly two-and-a-half times the 7.1 million square feet of growth from the prior 3-year period.
This growth has been triggered by Indianapolis’ emergence as a major regional and national distribution center. Modern bulk, traditional bulk and medium distribution accounted for nearly all (16.7 million square feet) of the occupancy growth during the last 3 years. Developers and companies are attracted by the area’s central location and excellent infrastructure. In fact, four interstate highways converge in the area, more than any other metro area in the nation, allowing goods to be delivered to three-fourths of the U.S. population within a 1-day truck drive.
Manufacturing also continues as a bright spot. Indianapolis is witnessing a significant rebound as domestic and foreign investment pours into the area. According to the Indiana Manufacturer’s Association, 48,000 new jobs have been created in Indiana since 2003. During that same time frame, manufacturing has rebounded with 1 million square feet of occupancy growth.
Significant manufacturing growth is forthcoming as well, with the announcement of a new Honda assembly plant on 1,700 acres in Greenwood, Indiana, Toyota’s new Camry line in its expanded plant in Lafayette, Indiana, and Nestle’s construction of an 880,000-square-foot facility on 190 acres in Anderson, Indiana. Rolls Royce, Cummins and BP have also announced plans to upgrade or expand existing facilities in the market as well. Logistics remain the engine that fuels central Indiana’s industrial sector. The area’s location, infrastructure and the state’s commitment to attract companies with incentives have propelled significant developments.
Last year, developers built 5.5 million square feet of modern bulk, primarily in longstanding strongholds. Much of this construction occurred in the southwest submarket, as Chicago-based The Alter Group delivered its first building in Indianapolis, a 441,000-square-foot speculative modern bulk facility in Plainfield. Duke Realty Corporation, Pannatoni Development Company, Opus North and First Industrial Realty Trust also brought speculative modern bulk facilities on line in Plainfield in 2006.
But as old stand-bys such as Plainfield, Lebanon and Brownsburg, Indiana, continue to be built out, developers are branching out to new locations. Just one interchange west of Plainfield, locally based Lauth Property Group and The Alter Group have announced plans for 550-acre and 353-acre developments, respectively, in Monrovia.
Further north in Whitestown, Duke Realty Corp./Browning Investments’ AllPoints at Anson project is nearing completion of its first 631,000-square-foot speculative modern bulk building. Also in this area, Valenti Held is beginning work on its 400-acre Perry Industrial Park and Denison Property Group/Opus North are teaming up on the 158-acre Whitestown Business Center. Attracted by lower land prices than in Plainfield, these projects may bring up to 15 million square feet of new product, mainly modern bulk, when completed. This is not a case of overzealous development — while vacancy for modern bulk climbed almost 3.5 percent last year to end the year at 10.9 percent, the market absorbed nearly 3.6 million square feet of modern bulk space. That continued a trend of positive absorption of more than 2.5 million square feet of modern bulk space for 7 years running. Developers have done a good job in managing speculative development, which should lower vacancy rates for modern bulk in the year ahead.
Central Indiana’s growth has steadily lowered the overall industrial vacancy rate from its peak of 9.1 percent in 2002 to its year-end 2006 level of 6.5 percent. Combine this growth with the prudence shown by developers, which have averaged 5 million square feet of new product in each of the past 3 years, and the industrial sector will remain healthy. Looking ahead, expect manufacturing and logistics to lead the industrial sector in continued growth. This is fueled by the area’s importance as a major air cargo hub, housing FedEx’s second-largest facility, and ongoing construction at the airport to further accommodate freight volume. Ports are being upgraded, and a planned intermodal hub in Plainfield could move railroad freight directly through Indianapolis instead of Chicago. Indiana’s leadership is emerging in the nascent biofuels industry as well. As energy prices increase, the state has gone from one ethanol plant to 17 plants, as well as four new biodiesel plants, in the past couple years. Look for suppliers to move near these plants, triggering more development in the coming years.
Bart Book is a principal, senior vice president and manager of the industrial division in Colliers Turley Martin Tucker’s regional office in Indianapolis.
By Mark Sonnenberg, SIOR, CCIM
Featured in the Society of Industrial and Office Realtors® (SIOR) national publication, Professional Report, May 2007
“I’ve been working on the railroad” has returned as a familiar refrain heard across the country. America’s railroads are spending billions each year to keep up with increasing demand for hauling freight. Last year alone, U.S. freight railroads spent $8.3 billion to improve roadways and structures and equipment, according to the Association of American Railroads (AAR).
“Over the past 10 years, railroad spending for capital expenditures has averaged 18 percent of the freight haulers’ revenues,” says Tom White, AAR spokesman. That’s four times greater than the 3.8 percent of revenues spent in the manufacturing sector, which demonstrates the railroad industry’s commitment to increasing capacity and efficiency.
Intermodal shipments are the primary driver of the railroads’ hurried pace of expansion, along with record amounts of coal shipped from the Powder River Basin and elsewhere. Consumer and manufactured goods actually overtook coal as the top freight category in 2003, White reports. And while domestic shipments of products destined for distribution across the country and for export are an increasing part of the mix, the influx of imported goods stands out as a key component in the growing importance of railroads in the intermodal market.
In fact, intermodal volume set a new record of 3.7 million loads in the third quarter of 2006, according to the Intermodal Association of North America’s (IANA) Market Trends and Statistics report published in early November of last year. Imports spurred an 8.6 percent rise in international traffic during the quarter, marking the 18th consecutive quarter of growth, according to the IANA.
With international intermodal shipping growing at a 15 to 20 percent a year, imports are the leading factor in this explosion. In particular, China has become a colossus in the global economy. Goods from China shipped on massive 8,000-container ships unload the equivalent of 27 double stack-container trains that would stretch for 41 miles or a series of tractor trailers that would line up for more than 80 miles.
In a presentation last year, Skip Kalb, director of strategic development for BNSF Railway, noted that China accounted for 70 percent of the Asia Pacific imports landing on the West Coast. And there’s no end in sight as such imports led by China are expected to climb nearly eight percent annually over the next four years.
Intermodal shipments are a huge part of the railroad’s resurgence, but other factors are playing a role in the return of the golden age of railroads.
In the 1950s, America embarked on building its massive interstate highway infrastructure, which, pardon the pun, placed trucking in the driver’s seat. As freight volume diminished, railroads pared back their investments, particularly in real estate.
By the 1980s, though, imports began to take center stage, and it became increasingly clear after partial de-regulation that railroads would have an opportunity to become an important part of moving goods efficiently from ports to distribution centers across the country.
The cost-effectiveness and efficiency of railroads have become even more prevalent as the trucking industry faces several challenges: rising fuel costs, tougher emissions standards that will require immense investments in new equipment, tighter regulations of hours of service rules for drivers, and rising insurance premiums. Plus, the trucking industry faces a critical shortage of long-haul drivers, with estimates placing the shortage of truck drivers at 110,000 by 2014.
“There are probably three factors driving intermodal demand for railroads,” White notes. “The first is the increased cost of fuel (rail is about three times as fuel efficient as truck). The continuing driver shortage faced by the trucking industry is another. And the third is the growth of international trade.”
White adds, “The growth of both exports and imports mean that large volumes have to move long distances, either from port to markets or from production facilities to ports. The rail advantage over highway grows as distance and volume increase.”
Against this backdrop, SIOR brokers from across the country have seen unprecedented demand for industrial space, especially large modern bulk facilities served by railroads. Numerous developments have been completed or are in the works across the country to satisfy this demand.
In particular, many developers and the railroads are looking outside the West and East Coasts, the nation’s primary ports that are rapidly nearing capacity. (The longshoreman’s strike on the West Coast a few years ago also led many companies, especially retailers such as Wal-Mart, Target, and Costco, to rethink their distribution strategies and locations).
Michael R. Haverty, chairman and CEO of Kansas City Southern (KCS), noted in a presentation last October that Los Angeles and Long Beach are nearly at 80 percent of their capacity. Instead, railroads are often looking to the Heartland to ensure capacity is increased to meet rising demand from intermodal shipments.
Terry Stieve, SIOR, a senior vice president for Colliers Turley Martin Tucker in St. Louis, has seen this increased interest as the Gulf Coast becomes an important shipping/intermodal lane, as well as the Mexican port of Lazaro Cardenas.
“In recent years, Wal-Mart built two side-by-side distribution facilities totaling four million square feet near the Houston port on the Gulf, and other retailers such as Home Depot have followed Wal-Mart’s lead,” Stieve notes.
In all, more than one-third of Wal-Mart’s containers now go through Houston, Stieve says. St. Louis will gain in stature as a major distribution hub as international shipments arrive in ports outside the West Coast. “The significance of that to St. Louis is that now those containers are coming 1,000 miles closer than they were before. We are perfectly centered, we have the land and we have the railroad (the nation’s third largest track system), air, water, and highway infrastructure. Things are not just changing a little bit, they’re changing dramatically,” Stieve says.
As examples, he points to Gateway Commerce Center across the river in Illinois. Since its start in 1998, more than 6.6 million square feet of space has been built there, including large distribution centers for Hershey Foods, Procter & Gamble, Unilever, Dial, Lanter, and Buske Lines. Just minutes from the St. Louis Arch, Gateway Commerce Center has established a base for regional distribution centers and logistic services. And there’s still room for the development to grow.
Near the massive Gateway development, Triple Crown Services built a $7 million intermodal facility on 62 acres in Edwardsville, IL, and Lakeview Commerce Center recently opened on 600 acres with the potential for 6.5 million square feet of distribution space when completed. Ozburn-Hessey also has four million square feet of flexible distribution space to serve a number of companies bringing products to market.
Midwestern cities already established as major players in the regional/national distribution channel stand to benefit from investments in intermodal facilities as well. Take Indianapolis, which already boasts more than 223 million square feet of industrial/manufacturing space. A planned intermodal hub in Plainfield, the Indianapolis area’s largest base of modern bulk distribution, will only catapult its importance.
“The evolution of an intermodal hub in Plainfield combined with the continued price increase for oil and gas may lead to more rail requirements in the months ahead as companies look for cheaper ways to ship goods,” says John Huguenard, SIOR, senior vice president in Colliers Turley Martin Tucker’s Indianapolis office.
Coupled with this, Indianapolis is improving its ports as well, which soon may allow railroad freight to move directly to Indianapolis instead of first passing through Chicago, a city that has become a bottleneck for freight, Huguenard says.
Perhaps there’s no more promising potential for huge intermodal facilities than in Kansas City, a town long known for its railroad connections. Two massive projects are in the works.
Burlington Northern Santa Fe (BNSF) has outgrown its existing Intermodal facility in Kansas City, Kansas, which in recent years has been finishing second only to BNSF’s Logistics Park-Chicago in intermodal volume growth on BNSF’s network. The railroad chose Kansas City, which has long served as a distribution center for much of the population in a five-state region, for its central location. It also helps that Kansas City is the second largest rail hub in the country. The combination of BNSF rail lines passing through the Kansas City area en route from the ports in Northern and Southern California and Kansas City’s freeway network created the opportunity for BNSF’s third logistics park in the Kansas City area.
BNSF will begin construction on a 1,000-acre industrial development near Gardner, Kansas, a growing community in the southwestern part of the metro area. Last October, BNSF reached an agreement with The Allen Group, one of the nation’s leading industrial development companies, to develop the logistics park.
Trains hauling container shipments from Southern California’s ports would use the facility to transfer cargoes to trucks so these goods can be hauled to regional destinations or be stored on site in warehouses. The logistics park will place distribution centers adjacent to the intermodal hub and may eventually offer as much as 10 million square feet of distribution space.
While it will take several years to complete, BNSF’s intermodal facility and The Allen Group’s logistics park will be a powerful engine for economic growth in the Kansas City area.
BNSF has been a leader in such facilities, with similar centers completed recently in Elwood (suburban Chicago), Illinois and Fort Worth, Texas.
As in those areas, BNSF’s intermodal facility and The Allen Group’s logistics park will build on Kansas City’s stature as a major trade thoroughfare, Kalb says. “This center represents a significant investment in BNSF’s future in the Kansas City region and it strongly enhances the area’s future role in the global economy.”
And BNSF and The Allen Group aren’t alone in targeting the Kansas City region. CenterPoint Properties has agreed to purchase 1,400 acres on the former site of the Richards-Gebaur Air Force Base that was shuttered in 1976.
Kansas City Southern led in the development of the former base in 2000 when the International Freight Gateway opened. The full-service automotive complex allows Mazda of North America to distribute Mazda Tributes throughout the United States and for export to 100 countries. Additionally, Mazda processes vehicles for shipment to Midwestern dealerships within a 300-mile radius.
The development’s next phase will further utilize KCS’ extensive rail operations leading to the site. Most importantly, it will link Kansas City to the Mexican Pacific Coast city of Lazaro Cardenas. The port is undergoing extensive expansion to create an alternative route from the increasingly congested ports of Los Angeles and Long Beach. Freight traveling from Asian ports to U.S. markets can be directed to Lazaro Cardenas where KCS can move it to the heart of the country.
Haverty noted in his presentation last October that future expansion at Lazaro Cardenas will add storage capacity for 1.8 million TEU’s (20-foot equivalent units) annually or the equivalent of more than 400 large container ships. He added that nearly 85 percent of those containers would then be loaded on rails for the trip through the heart of the country, with possible stops at several existing intermodal centers along the way or eventually to CenterPoint’s development in Kansas City.
Additionally, KCS can drop freight at the development or hand it off to four other rail carriers in the Kansas City area. These extensive rail operations give the Richards-Gebaur and the BNSF sites the added advantage of serving all of North America since goods can be shipped anywhere in the U.S., as well as to and from Mexico and Canada, an important link in the NAFTA trade channel.
These developments and dozens more across the country clearly show that railroads are driving growth both for the economy and in the nation’s industrial markets. SIOR brokers have joined the chorus in singing that happy tune: “I’ve been working on the railroad.”
Mark T. Sonnenberg, SIOR, CCIM, is a senior vice president and director of industrial sales and leasing for Colliers Turley Martin Tucker’s regional office in Kansas City, MO. Mark also serves on the advisory board of the Colliers MultiModal Services Group. He believes rail and road have placed Kansas City on the fast track to become a leader in the nation’s industrial and intermodal freight industries.
The growth of intermodal container traffic, especially from the rising tide of imports from China, has challenged railroads to handle the load. Developers and the railroads have been working feverishly to meet this need with a number of projects throughout the country. Here are a few of the more publicized intermodal facilities either undergoing expansion, under development or in the planning stages:
Mark T. Sonnenberg, SIOR, CCIM, is a senior vice president and director of industrial sales and leasing for Colliers Turley Martin Tucker’s regional office in Kansas City, MO. Mark also serves on the advisory board of the Colliers MultiModal Services Group. He believes rail and road have placed Kansas City on the fast track to become a leader in the nation’s industrial and intermodal freight industries.