Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.
The U.S. industrial property market is on track for another record year in 2016, and the market could expand well into 2018 despite the possibility of higher interest rates that would increase the costs of carrying inventory, according to a leading industrial real estate and logistics firm.
JLL Inc.'s optimistic longer-term outlook for industrial demand and pricing goes beyond earlier projections by other real estate and logistics consultancies, which said the market would cool in 2017 as abundant new supply comes online to satisfy what has been a multiyear surge in demand. Richard H. Thompson, JLL's international director, supply chain and logistics solutions, said demand will be powered by the dramatic growth of e-commerce and the fulfillment networks developed and expanded to support it. E-commerce accounts for only 8 percent of all U.S. retail sales, according to JLL estimates. (Other estimates are somewhat higher than that.) That figure will undoubtedly rise as traditional retailers begin shifting massive resources that were once reserved for brick-and-mortar investments to the digital world.
Through the end of the third quarter, the national vacancy rate stood near all-time lows, at 5.8 percent, despite additional supply being delivered to the market, JLL estimated. Net absorption, which measures the amount of space occupied at the beginning and end of a reporting period, has been in solidly positive territory for the past few years, signaling that strong demand continues to absorb available square footage.
As of the end of the third quarter, JLL said that all of the top 50 industrial markets it surveys were experiencing either "peaking" or "rising" conditions.
Capitalization rates, which represent the ratio of an industrial property's value to the operating income it generates, will compress at a modest rate, meaning buyers will continue to pay more for space that generates the same amount of income, JLL said. For top-rated "Class A" properties, the widening spread between the so-called cap rate and yields on long-term Treasury bonds will allow for ongoing cap-rate compression, the firm said.
In virtually every market except for southern California and Seattle, where demand has been nearly off the charts and vacancies are in the low single digits, industrial portfolios can be acquired at cap rates of between 5 and 6.5 percent, according to JLL figures. As of Friday, the yield on the 30-year Treasury bond stood at 2.46 percent.
In addition, an absence of portfolio acquisition activity so far this year has left large amounts of capital on the sidelines that could potentially be committed to industrial property, JLL said. The sector's record performance in 2015 was capped by more than $20.5 billion in transactional activity in the fourth quarter, the best quarter for total closing volumes in history, according to the firm
In a presentation made late last month at the Council of Supply Chain Management Professionals' (CSCMP) annual meeting in Orlando, Kris Bjorson, JLL's international director retail/e-commerce distribution, said the strongest relative growth for 2016 will be in markets like Denver, Salt Lake City, and San Antonio. Those areas are not normally considered first-tier industrial property centers like southern California's Inland Empire east of Los Angeles, eastern Pennsylvania, and Indianapolis. This reflects the desire of traditional retailers and e-tailers to build fulfillment centers nearer to end markets so product fulfillment and delivery can be executed more rapidly, Bjorson said.
In May, Chicago-based real estate services giant Cushman and Wakefield projected a 5.9-percent industrial vacancy rate by year's end, on par with levels not seen in 30 years, and well below the 10-year average. The firm said at the time that an uptick in construction activity in 2017 would help to alleviate some of the space shortages.
The industrial market collapsed along with the rest of the U.S. economy during the Great Recession, but began recovering around 2011 and has been gaining steam ever since.
The market's current growth cycle will dovetail with what will likely be a period of rising interest rates. The Federal Reserve dropped the rates on federal funds—the interest on overnight loans between member banks—to near zero during the 2007-08 financial crisis that precipitated the recession. Since that time, the Fed has raised rates just once, a quarter-percentage-point increase last December. However, there is an emerging consensus it will be do so again this December, and many market participants believe more rate increases are in the offing. That's because the Fed is looking to normalize rate conditions as the U.S. economy improves in an effort to stop inflation before it can take root.
Businesses in 2015 experienced, on average, a 5.1-percent rise in inventory-carrying costs due to higher capital costs, according to the most recent annual "State of Logistics Report," which was written by the consulting firm A.T. Kearney for CSCMP and was presented by Penske Logistics. At the same time, the report found that business inventories—which had grown steadily at approximately 5 percent per year between 2009 and 2014—flattened out in 2015 due to sluggish domestic demand and a slowdown in exports, a byproduct of a strengthening U.S. dollar.
Businesses today have costlier inventory loads to finance than at any time in years, the report found. In 2009, inventory value stood at $1.93 trillion. At the end of 2015, it stood at $2.51 trillion, according to the report's data. However, the Kearney analysts said the data point to an inventory correction, not a more widespread problem such as a recession.
"Rents have been rising faster than interest rates and are at a level that justif(ies) new construction in most markets, so the concern of rising rates hasn't been an issue," said Jeffrey Havsy, chief economist in the Americas for Los Angeles-based real estate services giant CBRE Inc. "Rising rates are lower on the list of concerns for industrial developers."
The number of container ships waiting outside U.S. East and Gulf Coast ports has swelled from just three vessels on Sunday to 54 on Thursday as a dockworker strike has swiftly halted bustling container traffic at some of the nation’s business facilities, according to analysis by Everstream Analytics.
As of Thursday morning, the two ports with the biggest traffic jams are Savannah (15 ships) and New York (14), followed by single-digit numbers at Mobile, Charleston, Houston, Philadelphia, Norfolk, Baltimore, and Miami, Everstream said.
The impact of that clogged flow of goods will depend on how long the strike lasts, analysts with Moody’s said. The firm’s Moody’s Analytics division estimates the strike will cause a daily hit to the U.S. economy of at least $500 million in the coming days. But that impact will jump to $2 billion per day if the strike persists for several weeks.
The immediate cost of the strike can be seen in rising surcharges and rerouting delays, which can be absorbed by most enterprise-scale companies but hit small and medium-sized businesses particularly hard, a report from Container xChange says.
“The timing of this strike is especially challenging as we are in our traditional peak season. While many pulled forward shipments earlier this year to mitigate risks, stockpiled inventories will only cushion businesses for so long. If the strike continues for an extended period, we could see significant strain on container availability and shipping schedules,” Christian Roeloffs, cofounder and CEO of Container xChange, said in a release.
“For small and medium-sized container traders, this could result in skyrocketing logistics costs and delays, making it harder to secure containers. The longer the disruption lasts, the more difficult it will be for these businesses to keep pace with market demands,” Roeloffs said.
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
As the hours tick down toward a “seemingly imminent” strike by East Coast and Gulf Coast dockworkers, experts are warning that the impacts of that move would mushroom well-beyond the actual strike locations, causing prevalent shipping delays, container ship congestion, port congestion on West coast ports, and stranded freight.
However, a strike now seems “nearly unavoidable,” as no bargaining sessions are scheduled prior to the September 30 contract expiration between the International Longshoremen’s Association (ILA) and the U.S. Maritime Alliance (USMX) in their negotiations over wages and automation, according to the transportation law firm Scopelitis, Garvin, Light, Hanson & Feary.
The facilities affected would include some 45,000 port workers at 36 locations, including high-volume U.S. ports from Boston, New York / New Jersey, and Norfolk, to Savannah and Charleston, and down to New Orleans and Houston. With such widespread geography, a strike would likely lead to congestion from diverted traffic, as well as knock-on effects include the potential risk of increased freight rates and costly charges such as demurrage, detention, per diem, and dwell time fees on containers that may be slowed due to the congestion, according to an analysis by another transportation and logistics sector law firm, Benesch.
The weight of those combined blows means that many companies are already planning ways to minimize damage and recover quickly from the event. According to Scopelitis’ advice, mitigation measures could include: preparing for congestion on West coast ports, taking advantage of intermodal ground transportation where possible, looking for alternatives including air transport when necessary for urgent delivery, delaying shipping from East and Gulf coast ports until after the strike, and budgeting for increased freight and container fees.
Additional advice on softening the blow of a potential coastwide strike came from John Donigian, senior director of supply chain strategy at Moody’s. In a statement, he named six supply chain strategies for companies to consider: expedite certain shipments, reallocate existing inventory strategically, lock in alternative capacity with trucking and rail providers , communicate transparently with stakeholders to set realistic expectations for delivery timelines, shift sourcing to regional suppliers if possible, and utilize drop shipping to maintain sales.