State of the Logistics Industry 2010: Modal Perspectives
Restocking of depleted inventories has resulted in a rebound in shipments for the first half of 2010, but year-end statistics have yet to be compiled.
Rodney Goulet, Vice President, Supply Chain Strategy and Infrastructure, Colliers International (November 2010)

On April 26, 1956, the Ideal X cast off from Port Newark, New Jersey, for Houston, Texas, specially equipped to carry 56 trailer-truck bodies, the first containers, and launched a revolution that has transformed and stimulated the growth of U.S. and world trade. - excerpted from "The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger" by Marc Levinson

Since this event nearly 45 years ago, containerized imports and the shifting trade lanes over the past two decades have had a profound impact on industrial real estate and distribution center site selection decisions.

Containerized cargo handled at the U.S. ports increased from 15.6 million TEUs (20-foot equivalent units) in 1990 to nearly 42.9 million TEUs in 2008. This accounts for an average annual growth rate of about 5.8 percent. It should also be emphasized that between 2007 and 2008, containerized cargo fell by 5 percent, reflecting the slowing of the world economy. This decline continued into 2009, but shipments have rebounded during 2010 as depleted inventories have been restocked and stakeholders have adjusted to the new economic environment.

According to Hackett Associates' Global Port Tracker, which tracks 12 major North American container ports, strong growth in 2010 second quarter volumes over the previous quarter has been experienced and a yearly 18 percent increase over 2009 imported volumes is forecast.

West Coast Dominance
Historically, West Coast ports have handled about 47 percent of all imports into the United States, followed by the North Atlantic ports, which have handled 24 percent of the container imports, and South Atlantic ports (from Norfolk to Miami), which have handled 21 percent of total containerized imported tonnage.

The San Pedro Bay ports of Los Angeles and Long Beach handle about 35 percent of imported containerized cargo into the United States. This dominance of the containerized trade by the West Coast ports, and in particular the Ports of Los Angeles and Long Beach - particularly in the late 1990s through 2002 - was driven by importers' view of theses ports as the major linkage in the imported cargo supply chain.

Before the mid- to late-1990s, steamship lines determined the port routings, and importers were essentially "port blind" as they selected an ocean carrier. The carrier decided at which port the cargo would be discharged and how the cargo would be delivered to the customer. However, as the concentration of large importers (e.g., Wal-Mart, Target, Cost Plus, etc.) increased in the late 1990s, these importers invested in large distribution centers in the Los Angeles/Long Beach area to serve as points in the importers' logistics supply chains.

As these importers gained bargaining power in terms of contract negotiations with the ocean carriers, they were able to "demand" a San Pedro Bay port routing from the carriers. Hence, with the development of the distribution centers and cross-dock operations in the San Pedro Bay region, the concentration of imported Asian containers at the ports of Los Angeles and Long Beach increased.

In addition, railroads providing intermodal services at San Pedro ports further increased investment in rail trackage and intermodal yards to facilitate the flow of containers from the Los Angeles area to the key consumption centers in the Midwest and East, including Chicago, Memphis, St. Louis, New York, Atlanta, Columbus, etc.

Trade's Impact on Industrial Demand
Due to the sudden and large drop in port activity during the recession/ downturn, industrial markets located within regions that service seaports have, on average, recorded losses greater than those of the nation as a whole. During the past two years, vacancy rates climbed at a faster pace in the port markets relative to the overall industrial market.

According to Thomas Galvin with Colliers International Market Research group, there is a clear relationship between port activity and change in industrial demand. A back-of-the-envelope calculation shows that for every 1 percent change in port TEUs, a standard measure of containerized trade, industrial demand changes roughly 0.33 percent. Thus, the 60 percent rise in port activity experienced from 2001 to 2007 led to a 20 percent rise in industrial real estate occupancy in port markets. Likewise, the 15 percent decrease in port activity in recent years saw occupancy decrease by 5 percent in port markets.

State of the Industry
According to the 21st Annual State of Logistics Report: The Great Freight Recession, in total, 2009 logistics costs were about $1.1 trillion - that's a drop of $244 billion (or 18.2 percent) over 2008. This is the greatest yearly decline in the report's 21-year history. During the recession years of 2008-09, total logistics costs dropped more than $300 billion. This year's report was sponsored by Council of Supply Chain Management Professionals (CSCMP) and Penske Logistics and once again authored by Rosalyn Wilson of Delcan Corp.

Logistics costs as a percentage of Gross Domestic Product (GDP) were reported at a mere 7.7 percent - the lowest share of GDP in the last 20 years. In fact, logistics costs had risen by some 50 percent over the five years prior to the start of the Great Recession in 2008. That 7.7 percent can be compared to 9.7 percent of GDP in 2008, and 9.9 percent of GDP in 2007.

Nonetheless, since Ideal X's inaugural voyage on April 26, 1956, globalization has taken a stronghold on the world economy and continues to impact the supply chain and industrial real estate industries. As we enter into a period of recovery from the Great Recession, it is still uncertain if North American markets will experience the same levels of explosive growth in industrial development we have seen over the past two decades or if it will be a steady growth spurred by the "greener" mode of rail and additional intermodal developments.

Modal Perspectives
Maritime and Containerized Cargo - Ben Hackett, Principal and Founder of Hackett Associates
The economic recovery still appears to be fragile, with recent volume downturns signaling that the shipping season peaked earlier than normal as the rush to restock inventories earlier in the year intersected with a combination of increased shipping capacity, a Consumer Confidence Index at levels not seen since August 2009, and the slowing growth of consumer spending after three months of level growth. The economic fundamentals are not encouraging, with import numbers in the third quarter increasing at a much slower pace than was seen in the second quarter.

There are positive signs emerging: the Commerce Department reported that wholesale inventories rose 1.3 percent in July, the best performance since July 2008. Sales at the wholesale level increased 0.6 percent, the best showing since April. Commerce also reported that consumer spending rose by 0.4 percent in August, faster than economists had forecast and the second consecutive month of growth. But consumer confidence continues to fall, evidenced by the ratio of inventories to sales as stocks are increasing.

The combination of East Coast and West Coast ports reported on by Hackett Associates Global Port Tracker are forecast to import a total of 16.2 million TEUs in 2010, a 16.7 percent increase from 2009's 13.9 million TEUs. A total of 7.6 million TEUs were imported by the combined East Coast and West Coast ports through the first two quarters of 2010, a 2.4 percent increase over the 7.4 million TEUs imported in the first half of 2009. The import volume handled by the combined coasts increased by 11.6 percent in the third quarter over the second quarter, to 4.59 million TEUs.

New Routings for Maritime and Containerized Cargo - John Martin, Ph.D., Founder and President, Martin Associates
Underlying the growth in all-water containerized service activity at the Atlantic and Gulf coast ports, as well as the investment in distribution center activity, is the expansion of the Panama Canal to be completed by 2014, and the increased deployment of vessels via the Suez Canal, particularly to serve the growing trade with ports located to the south of Singapore. But it is unclear that the expanded Panama Canal will alone actually increase the share of containerized cargo moving via the East and Gulf coasts at the expense of the West Coast ports.

As a result of the shifts in all-water services that have occurred since 2002 due to the West Coast port shutdown; the changes in distribution center geographic locations and logistics supply-chain patterns of importers; development of new container terminals on the Atlantic and Gulf coasts; and intermodal pricing by the railroads that shifted cargo away from West Coast ports; the dynamic changes in all water vs. intermodal services may be over, or at least slowing. The West Coast ports have come to realize that the demand for their usage is not inelastic, and, in fact, substitute port routings via the all-water services are viable.

Similarly, the railroads have also found that pricing of intermodal serv ices do impact importers/exporters port choice decisions, and the higher intermodal rates of the early 2000s actually did impact the West Coast port routings in favor of all-water services. What the expanded Panama Canal will most likely impact is the size of ships that will call at U.S. Atlantic and Gulf Coast ports.

As far as the Suez Canal, dimensions don't limit the size of the container ships that can transit, but there is concern over the region's political instability and piracy incidents. The Suez routing from Asia to the East Coast is longer than via the Panama Canal, but as production centers shift to South Asia and India, this routing can, in some cases, provide very competitive transit times to the use of the transpacific routings and intermodal moves from the West to the East coasts. In addition, ocean carriers are increasing India-Europe express services, with the use of Mediterranean ports for transshipment centers for cargo destined for the United States and Europe.

Changing Times for Air Cargo - Dan Muscatello: Managing Director, Cargo and Logistics, Landrum & Brown
The August 2010 imposition of the new TSA mandate for 100 percent belly screening of air cargo, on the surface, appears to have had little impact on the air cargo industry. Nevertheless, industry finds itself looking at an accelerating growth curve built on a potentially tenuous foundation. Despite the encouraging numbers for international cargo, we need to be mindful of several things as follows:

Despite the recent growth in certain world markets, the drop in volumes in 2009 brought many airports to tonnage levels last seen in the 1990s. The early 2010 growth of 25 percent quoted for many airports has slowed, and the reality is that number reflects recovery from a 30 percent drop in 2009. Much of the activity reflected a temporary surge to increase depleted inventory levels and the increased use of freighter aircraft as ocean vessels are slower to come back on line. A review of the holiday shipping season will give us a better picture of the state of the industry.

In China, the emerging giant, the middle class has grown from 30 million to 300 million in the past 10 years. This dramatic surge, along with the growth of markets in India, is creating a seminal shift in global distribution. The increased purchasing power in China and India, their rising labor costs, combined with higher fuel costs and security surcharges, are pushing many companies to reexamine their distribution strategies. The result is an emerging trend to shift manufacturing (and distribution) back to Europe and North America. Continuation of this pattern may very well impact the phenomenal growth experienced in the Middle East, where the cargo levels are driven by an aggressive transfer strategy to move goods between Asia, Europe, and Africa.

Truck and Intermodal - Charles Clowdis Jr., Managing Director-North America Global Commerce & Transport, IHS Global Insight
As diesel fuel increases, expect fuel surcharges to increase, driving overall transport costs upward. Likewise, as the economy improves, lessened truck capacity, exacerbated by an evolving "driver shortage," will be a challenge not only as a result of rate increases, but also because of the ability to source truckers with the capacity to move freight on a timely basis.

New truck sales are finally growing as aging truck fleets are being replaced. But the keys continue to be the price of fuel and the growth of the economy. As either occurs, the cost for moving goods will rise.

Inland ports, especially those with good rail and road connections, are an evolving addition to supply-chain efficiencies. As the rail corridors improve, more and more container traffic will find its way to rail-intermodal transport. The "environmental issue" of clean port initiatives, as begun in LA/Long Beach, will impact the availability to source adequate drayage providers to move containers.

On August 1, CenterPoint Properties' 3,600-acre Intermodal Center in Joliet, Illinois, opened as an inland port for Union Pacific. The success of Burlington Northern Santa Fe Corp.'s 2,500-acre intermodal center in nearby Elwood, Illinois, also developed by Centerpoint, triggered interest from Union Pacific as the real estate practices at the Elwood site demonstrated significant savings. Combined, these sites rival the Alliance Global Logistics Hub in Alliance, Texas. The intermodal developments allow retailers and distributors to cut down on shipping costs by locating warehouses much closer to railyards.

U.S. Industrial Market Registers Modest Gains - Ross J. Moore Chief Economist | USA, Colliers International
After beginning 2010 on a weak note, industrial markets across the U.S. collectively absorbed 13.3 million square feet of warehouse space in the second quarter and an additional 3.6 million square feet in the third quarter. New construction remains muted, which will be a key factor pushing vacancy down in the coming quarters. For the third quarter industrial vacancy was little changed at 11.02 percent. Despite the recent firming in fundamentals, warehouse rents fell during the third quarter decreasing just under 1 percent to $4.74 per square foot.

With the economy registering only modest growth in the third quarter, and similar expansion anticipated in the coming quarters, demand for warehouse space is expected to be tepid at best. While detracting from GDP growth, for the second consecutive quarter, imports surged during the third quarter, which acted as a net positive for many U.S. industrial markets. Although the Institute for Supply Management (ISM) manufacturing index for October was down from earlier in the year, at 56.9 this important business metric was still well above the critical "50" level, showing the manufacturing sector is still in expansion mode. For the next few quarters, the industrial market is expected to continue to form a bottom but a sharp rebound in demand is not anticipated before well into 2011.

With almost no new warehouse construction coming onto the market, however, even a modest bounce back in demand will quickly translate into stronger fundamentals. Rents are expected to firm by year-end, but apart from a few select markets, warehouse lease rates are not expected to show any appreciable increase until the second half of 2011 at the earliest.

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