Industrial real estate patterns provide a clue of how freight flows are shifting
The last time the freight logistics and industrial real estate markets were as busy as they are now was during the six-year period during which imported container volumes from China grew at a double-digit growth rate.
Back then, it was a struggle to keep up with volume demand and equally difficult to develop capacity fast enough. Since 2014, container volumes handled at U.S. ports have been higher than the peak level of 2008 and continue to grow, albeit at a slower pace.
That demand, along with other supply chain dynamics—principally the deployment of ever-larger containerships, ocean carrier consolidation, restructuring of vessel-sharing agreements, and insufficient inland road connectivity—is creating congestion that threatens to stifle growth.
In the absence of a national infrastructure investment strategy, the freight movement industry is nonetheless adapting and moving ahead. An evolving end-user environment, due to e-commerce sales rapidly cannibalizing re-tail sales from traditional brick-and-mortar distribution channels, is further complicating matters for the freight movement industry.
Online sales in the United States alone will increase 9.3 percent annually through 2020, to $523 billion a year, according to Forrester Research. Recently, National Real Estate Investor published a list of 17 retail chains it expects to start closing a large number of store locations. With online-only platforms and traditional retailers putting greater emphasis on e-commerce, logistics as we know it is rapidly changing. That pace of growth is generating annual demand for industrial warehouse space and e-fulfillment centers in the tens of millions of square feet.
To keep tabs on this environment of end-to-end change, it is helpful to classify these trends into three groups.
First Mile: The Waterfront. Larger container vessels, some of which are too big even for the new third set of locks in the Panama Canal, have been and continue to be deployed. Larger vessels have lower per-container costs and lower emissions per container. However, it is harder to maintain 90 percent capacity utilization on a vessel that can carry 18,000 20-foot containers than one that only carries 5,000 containers.
These ships cost a lot to build, and with lower per-container costs come lower container freight rates, which makes it harder to pay for these vessels. It is no surprise that the ocean carrier industry has consolidated and will likely continue to do so.
Larger vessels and ocean carrier consolidation also requires terminal consolidation. Terminal footprints were sized to service Panamax vessels, those that carry at most 5,000 TEUs, the largest that could transit the Panama Canal prior to the new third set of locks that were opened last June. Terminal capacity is determined by horizontal size, vertical capacity or density, and dwell time. Even with automation, terminals will need to have more static storage capacity.
With worsening congestion and a need to hold more inventory in more locations to support growing e-commerce sales, importers are likely to increase the percentage of containers that they transload near ports.
Middle Mile: In Between. The freight movement industry is dealing with a chronic shortage of empty containers to support exports, as well as a need to increase the number of inland distribution centers to reach more urban markets and offset rising costs.
To that end, port authorities are developing inland ports, while private sector interests are building inland logistics centers. The railroads are also establishing large intermodal yards around which inland ports and logistics centers are being developed. These inland logistics centers and ports reduce the cost for cargo owners to distribute their imports to stores and e-commerce fulfillment centers, and serve as empty container depots where exporters can get their hands on this needed equipment.
Last Mile: To Consumers. As the rural-to-urban area migration continues and local road infrastructure fails to keep pace with population growth, congestion has worsened.
Shopping at brick-and-mortar outlets has become a time-consuming effort compared to shopping online, which has benefited from widespread wireless internet access. As e-commerce becomes more adept at delivering goods and services faster and faster, its share of retail sales will only increase. It’s anticipated that in the fourth quarter of 2016 the e-commerce share of retail sales exceeded 10 percent, five times the level 10 years ago.
E-commerce and brick-and-mortar sales strategies are being blended into what is called “omnichannel strategy.” Some traditional retailers are closing stores, while e-retailers are opening new ones as both types of businesses converge on a general strategy to maximize revenues. The shift to e-commerce sales with short delivery times requires retailers to hold more inventory in more places. Some are increasing the number of international containers being transloaded near the container terminals.
In addition, many are developing e-commerce fulfillment centers, and some will eventually develop small-footprint urban distribution centers to manage their inventory across all channels, a common practice in Europe today.
To sum up, there is a lot of change happening all along freight flow paths from the origin of the goods all the way to the consumer’s doorstep. More than ever before, decision-makers that influence the evolution of practices need to communicate and coordinate their efforts across the entire supply chain.