Keep on Trucking?

Much of the industrial market’s growth is attributable to the evolution of the supply chain network, as businesses seek to distribute goods ever more quickly and efficiently. A structural issue has emerged, however, that threatens to disrupt the flow of goods through the supply chain: a nationwide shortage of truck drivers.

Now five years old, the present expansion of the U.S. economy has been driven by forces closely tied to the industrial real estate market—production, trade, inventories, and consumption—so it’s not surprising that the industrial market is in the midst of its own expansion.

Although we see trucks on the highway every day, we don’t often think about their impact on the economy. Each year, nearly 9.2 billion tons, or 70% of the nation’s freight, moves over the road in more than 3 million heavy-duty trucks that naturally require more than 3 million drivers.

The American Trucking Association reports that the industry currently has 35,000 fewer drivers than it needs, and it expects the situation to worsen—to 240,000 drivers by 2020. Among the factors contributing to this acute shortfall are an improving labor market (which offers a variety of employment options that do not require long times away from home), an aging driver demographic (the average age of a driver is 55 years), and an increasing turnover rate (90% over the past nine quarters, versus 39% in 2010). In an attempt to attract and retain drivers, the industry has responded by dramatically increasing wages, which has helped to push freight’s rate per mile up by 8% on the year, with forward rates up an additional 14% by 2016.

According to CBRE Supply Chain Services, transportation costs account for approximately half of an operation’s total costs. Increase in this highly volatile and significant cost component has a significant impact on operations, and has elevated real estate’s importance in supply chain cost structures. Warehouses and distribution centers are where much of the supply chain’s action happens, but their share of the operational costs is surprisingly small—5% of the total.

Real estate’s influence on cost structure extends beyond occupancy costs. A facility’s location and how it fits into the overall network can have a real impact on the larger cost components, namely labor and transportation.

Rising transportation costs, particularly those associated with trucking, are forcing supply chain users—manufacturers, importers, and exporters—to devise blends of warehouses and distribution centers that will most efficiently service the need for port access while enabling quick delivery to end users in densely populated metropolitan areas.

While trucking plays a large role in the distribution of goods across a supply chain, the unpredictable nature of its cost is driving users to find other options for transport over land. Rail is an obvious and very cost-effective choice. The Association of American Railroads has recently been reporting increased U.S. rail traffic. The week ending October 25 registered the third-highest level of intermodal use in U.S. history, with traffic up 6.7%, year over year. The trade-off with rail is time, as it runs along a fixed route and on a fixed schedule, limiting its speed and flexibility, whereas trucks can run on a nearly infinite number of routes and on a “just-in-time” schedule, which allows for faster and more flexible service.

Demand for warehouse and distribution space in markets that feature a significant intermodal component has been a strong indicator that users are choosing access to the rail network as a solution to some portion of their long-haul transportation needs. Each of the secondary distribution markets projected to grow most quickly over the next 12 months contains a significant intermodal facility. Much of the new construction in these markets is on or near intermodal pathways, largely to take advantage of the link that rail lines provide to ports and major distribution hubs.

Recognizing the need and demand for intermodal access, market leaders are investing significantly in expanding or developing new intermodal projects. One such project is the Central Florida Intermodal Logistics Center (CFILC), which opened in April in Winter Haven, Florida. Strategically located in central Florida, the 318-acre rail facility can reach 18 million people living within a 200-mile radius, with access to major domestic markets that include Atlanta, Chicago and New York. The terminal has the capacity to move 300,000 containers annually, and is designed for scalable expansion as freight volume grows. The terminal is anchored by a 932-acre business park that will house nearly 8 million sq. ft. of warehouse distribution centers, light industrial and office facilities upon completion. The CFILC will serve as a centralized hub for transportation, logistics and distribution for Florida, and will help reduce congestion on state highways, reduce freight costs, increase shipping reliability and provide cleaner, sustainable operations.

While rail is providing supply chain users alternatives for locating their distribution centers, the role of trucking is still prominent. A supply chain can be envisioned as a series of connected wheels, with intermodal facilities and large regional distribution centers as hubs, and trucking routes as the spokes. It is along these spokes that goods move to their ultimate destinations. These routes are a necessary component to the overall supply chain and must be managed effectively. An efficient supply chain solution that reduces exposure to the highly variable cost of trucking will depend on a sound strategy of locating distribution centers, incorporating access to all modes of overland transportation, and rail in particular.

By David Egan, Director of Research and Analysis, Americas Research, and Shanna Drwiega, Research Analyst.