Logistics Consultant: Role of Air, Rail Transit Expands in Industrial Market

Amazon is experimenting with drones as part of its Prime Air delivery system.

HOUSTON — As the growth of e-commerce continues, its impacts on logistics and operations within the industrial real estate sector become more significant.

Recent data from supply chain consulting firm Tompkins projects that by 2020, the value of America’s cross-border e-commerce sales will be approximately $486 billion. In addition, the value of cross-border purchases via e-commerce will total about $140 billion.

To meet the e-commerce demand, industrial developers will have to supply about 160 new logistics facilities spanning 800,000 square feet in top urban markets, according to Tompkins. Another 100 or so facilities in the 75,000- to 100,000-square-foot range will need to be repurposed to support delivery to secondary and tertiary markets.

Distributors in the e-commerce era have long since learned to compress their supply chains and look for logistical opportunities to save on “last-mile” expenses. To that end, industrial operators are increasingly looking to air and rail transit as distribution channels.

Steve Schellenberg, vice president of business development for IMS Worldwide Inc., a logistics consulting firm for the industrial real estate sector, discussed the rise of intermodal transit during the InterFace Houston Industrial conference on Oct. 31. Approximately 115 industrial real estate professionals attended the event, which was held at the Royal Sonesta Hotel in Houston’s Galleria neighborhood.

One If By Air

As is usually the case with e-commerce trends, Amazon stands at the forefront of the growth of intermodal distribution, particularly air transit. The Seattle-based company, whose $196.8 billion in online retail sales represents a third of the current e-commerce market in the U.S., launched Amazon Prime Air in April 2017. In addition to traditional aircraft, the cargo airline division intends to use drones as part of its delivery system.

“This is the new FedEx and UPS,” said Schellenberg. “We’re seeing substantial demand for new industrial development in both major and minor markets to support the growth of air cargo.”

Schellenberg added that the surging demand for e-commerce is going to bolster air cargo growth over the next 20 years. In response, he noted, Chicago-based aircraft manufacturer Boeing expects to increase production of its 747 jets, commonly used in air cargo deliveries, by nearly 1,300 units to meet demand.

In addition, the International Air Transport Association (IATA) estimates that the annual volume of product shipped by air will grow by 10 percent over the next few years, compared to the traditional annual growth rate of 3 percent. And according to Schellenberg, while only 1 percent of traded product by tonnage is moved by air, that portion represents about 35 percent of the monetary value of traded goods.

Two If By Rail

Rail service has become an increasingly valuable amenity of new industrial developments, such that a third of all new distribution centers are located near intermodal rail terminals, according to JLL. In addition, nearly 147 million square feet of new industrial product has been constructed within five miles of a rail terminal since 2000.

Heightened demand for rail-served properties stems from a growing volume of international trade coming into American seaports following the expansion of the Panama Canal. With more product arriving, shipping channels must get wider and deeper to accommodate the stronger water draws of larger freighters. Docks and terminals must also expand to accommodate larger vessels, and bridges and tunnels must be reconfigured to allow taller ships to pass.

As ports work to get caught up to these shifting needs, they experience heavier congestion and consequently longer product delivery times. Heavier traffic on the waterways and within the terminals spurs demand for rail-served distribution.

“The big ships are here now, and they’re having a major impact on many ports around the country,” said Schellenberg. “This congestion is creating more opportunities for intermodal transit, and industrial developers have to understand where those opportunities are growing and where they’re declining.”

Inland ports, such as Dallas-Fort Worth (DFW), Kansas City and Columbus, are also warming to the idea of developing new properties at or near rail-served sites.

“In terms of logistics, the value of being close to a rail terminal is much greater than saving a nickel or two on rent,” said Schellenberg. “Mainly because compressing the supply chain effectively is what e-commerce is all about.”

Final Takeaways

The volume of goods that changes hands via e-commerce has been expanding for the better part of a decade. But it takes time for industrial investors, developers and operators to adjust to the trend, hence the somewhat delayed growth in air transit, and to a lesser extent, rail distribution.

Still, everything connected to e-commerce is getting bigger, from the volume of traded product to the demand for storage space to the sizes of the cranes used to unload ships. While industrial players are wising up to the ways and means of accommodating the growth, the system still has room for improvement.

“Everybody in the major markets is trying to figure out how to do high-volume e-commerce processing in a way that honors the promises of delivery,” said Schellenberg. “It’s a remarkably interesting challenge for the industry, and it’s going to continue.”

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