Supply Chain

Inland Ports as Real Estate Opportunities

By Chris Steele, President Real Estate Line of Business, TranSystems

“Real Estate” can be a misleading term — both too broad and too narrow, making the listener think of building and lease deals, brokers, and everything we had to go through when we got (or tried to get) our mortgages. In point of fact, real estate — when viewed from the perspective of manufacturers and shippers — is a highly strategic aspect of business.

Every real estate decision carries with it implications for a company’s access to markets and labor and for its operating costs, impacts to the balance sheet, tax and regulatory exposure, and other items important to the company’s success. Essential to shippers and manufacturers is finding the proper balance among what may be the three most important considerations:

• Access to the point of import or production

• Access to the point(s) of consumption

• All-in cost

As discussed last month in this column, West Coast ports have unparalleled access to Asian points of production and have experienced a huge amount of warehouse and distribution development over the past 20 years. As congestion and costs grew around Los Angeles, further development pushed out into the sprawling suburbs of Riverside and San Bernardino. While these developments satisfied — for a time — the requirements of being near zones of consumption at a slightly lower expense, they came at a price in the form of increased drayage costs.

Inland Option

Both regional governments and major developers have identified the congestion, cost, labor competition, and in some cases, remoteness of traditional ports as opportunities. By expressly linking already strong (or historically strong) transportation infrastructure with some form of international trade, they are able to serve as inland ports with similar external access, better access to the end consumer, and a better operational cost base. Inland ports provide a more comprehensive strategic real estate solution to many corporate users by serving as alternative ports of entry or waypoints to the traditional ports.

The Norfolk Southern Rickenbacker project and the CSX National Gateway project — both in Ohio — represent two of the largest new investments of inland ports. By linking the Port of Norfolk directly with the American heartland, both are expected to serve as alternatives for multi-modal transportation, with the added benefit of mitigating the downturn in the economy by creating jobs in one of the regions in most need. Of course, this also means that tenant companies will benefit from exceptional international transportation infrastructure, minimal congestion outbound, and access to a trained and motivated workforce! Other areas, such as Toledo and Cleveland, are expected to gain from increased water traffic through the St. Lawrence.
In a similar vein, CSX is investing additional monies into a large intermodal facility in Winter Haven, Fla., to be tied into the Ports of Tampa and Jacksonville. While still in the concept phase, this development will provide direct access to the growing populations of the Southeast, while virtually turning the I-4 corridor — an already vibrant economy — into a massive, cross-state dock.

Future Inland Port Locations

Areas directly along the U.S.-Mexico border are also eyeing future inland port opportunities. While this will, of course, include direct trade between the two countries, the proposed inland ports will accommodate increased container and import traffic coming over the Mexican Border from some of the growing Mexican ports of Guaymas and Lazaro Cardenas.

As container volumes shift to these ports, increased infrastructure for handling entry of those containers must be developed. Union Pacific (UP) is currently developing an intermodal terminal in San Antonio, which is expected to handle many of these consumer goods. In addition, Southern Dallas is investigating the development of logistics and supply chain facilities, and is already home to UP’s Southern Dallas Intermodal Terminal, a potential BNSF intermodal facility. All of the above could serve as powerful low-cost alternatives to operating an import center on the West Coast.

Westward View

Of course, the West Coast will not be left out. As one of the country’s largest consumption areas (Los Angeles, Orange, San Diego, San Bernardino, and Riverside counties are among the country’s 15 most populous), developers and local governments alike are looking for solutions that maximize economic opportunity while minimizing costs and remove truck traffic from local freeways. Both Victorville (the former George Air Force Base) and Barstow (junction of I-40 and I-15 and the location for the BNSF’s main west coast classification yard) provide the basic connectivity that would allow either direct import or staged movement from Los Angeles/Long Beach.

Major Real Estate developers already act as prominent partners in these inland ports. Centerpoint, Opus, and Duke Realty all play a part in the Rickenbacker development, and IDS, First Industrial, and others have invested in West Coast and Midwest opportunities. These projects’ ability to flexibly match world-class logistics with low cost and access to markets provides their tenants with a huge competitive advantage.
But wait – How is anyone going to invest in these interesting projects now that the capital markets have melted down? How does finance impact real estate decisions? Tune in next month for a brief discussion of how real estate finance and accounting works (or doesn’t).