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Riding the Rails (Again) by Staff Area Development Site and Facility Planning, August 2005

Forces have conspired to push rail transportation back into the favor of distributors, creating a nationwide demand for rail-served industrial parks.

Trey Fricke, a principal with NAI Stoneleigh Huff Brous McDowell in Dallas and a second-generation real estate man, never thought he'd be closing rail-related deals. "My father is in real estate and he always told me, 'You will probably never do a rail deal in your whole life.' Now, I'm working a ton of rail deals."

Fricke's experience helps illustrate the current market for rail- accessible industrial space. With the growth of the interstate highway system in the mid-twentieth century, trucking freight became more popular than carrying freight by rail, which meant there was less interest in creating warehouse and distribution plants with rail access. However, the rise of globalization has changed the market once again. Shipping goods internationally requires containers that can be unloaded from boats and dropped immediately onto railcars. Suddenly, rail is back in the equation.

By the turn of the millennium, two things had created a pressing need for rail service. First, the rise of China's economy meant vast quantities of raw materials had to be shipped to Asia, while finished goods were flooding into this country. All these containers needed to be transported across the country to places like Illinois, where the product could be broken down for distribution. More recently, the trend of increasing gasoline prices has made rail very competitive in terms of freight costs.

That's good news for developers such as Lacey, Wash.-based Sovran Development Group, which is building a 900-acre, rail-served industrial park between Seattle and Portland. Called the Napavine Industrial Park, the original business plan called for a buildout over a 20-year period. "We now expect to be filled within five years," says Neil Amondson, development manager for Sovran.

Cardinal Glass became Napavine Industrial's first tenant, acquiring just more than 200 acres. Of the park's 900 acres, about 530 are net usable, with the rest set aside for common areas and buffers. With Cardinal Glass taking a big chunk of that property, the park is off to a promising start.

Extending the Tracks

The demand for rail-access space has been so strong over the past five years that in some areas of North America, there's not enough product. There are no rail-access sites available in the immediate Toronto area, according to Sydney Hamber, an industrial specialist working with JJ. Barnicke Ltd. in Burlington, Ontario. Going back to just 2001, Hamber recalls, there was no one asking for rail access. Now there are some companies that won't do a deal unless rail is involved.

"About two years ago we started to see a pick up in people who wanted to ship by rail," Hamber says. Since then a significant number of transactions have taken place where rail was "a definite factor."

Intermodal traffic (containers moving via multiple transportation modes) is growing at a rate of 15-20 percent annually, he observes. If someone wants rail access today, Hamber suspects that site could get a premium of as much as 20 percent.

The suddenly heavy demand for freighting by rail has caught everyone by surprise - even the rail companies. Some developers trying to build rail-accessible business parks have come up against a serious hurdle: the railroads can't handle any more business.

Take the situation of clay Development and Construction Inc., which is building the Underwood Business Park in La Porte, Tex. The 200-acre project is to be served by Union Pacific. The idea behind the development was to accommodate an increased amount of cargo containers passing through the Port of Houston. That recent shift, reports the Houston Business Journal, led Home Depot Inc. and Wal- Mart Stores to open huge distribution facilities in die area.

The Underwood park will focus more on plastics, says Robert clay, a vice president with clay Development. "The Houston area manufactures about 50 percent of die nation's plastic resin. In fact, a lot of world's plastics come from Houston and are shipped via rail to distributors. Everybody in this park that will be using rail is a plastics distributor."

There was no existing rail into the park, so clay Development turned to Union Pacific to run a spur line into the project. While this seemed cut and dry, clay Development learned that the railroads in the Houston area "are at capacity. Their system is so full they don't want any new business," clay says. As a result, Clay Development will run 2,500 feet of rail "just so we will be able to get them into our project."

Avoiding Congestion

The other major problem with the rapid growth of intermodal rail business has been gridlock at some of the ports, particularly those on the West Coast, which receive goods from Asia.

With all the imports from China, the container business has become very busy, but the West Coast ports of Los Angeles, Long Beach, and Oakland can't distribute the products fast enough. "Typically, the product would come into the port and be offloaded onto a truck and transported to various markets," explains Gregory O'Leary, a senior vice president for Colliers International in Stockton, Calif. "But the freeways are so congested, the ports are becoming choke-points. Consequently, they are directing the product off the trucks onto rail cars." From there, product might travel to the Midwest or only as far as Stockton or Riverside, Calif.

The Port of Long Beach created a rail link for container traffic to the California cities of Riverside and City of Industry to avoid having trucks run through congested urban Los Angeles before breaking free to get out of the metroplex, observes Charles McSwain, assistant vice president of regional development for CSX Corp. in Jacksonville, Fla.

"A couple of years back, there was a change in truck rules which had the effect of reducing 10 percent of the truck capacity to haul freight," McSwain explains. "What that did was shift a lot of demand back to the railroads. So, the railroads are enjoying a good demand for their services and responding to the challenge of trying to move more freight effectively."

Port gridlock is one of the reasons Sovran is building the Napavine Industrial Park. The port of Oakland, Calif., is so backed up that some sea traffic has moved north to the port of Tacoma, Wash., north of Napavine. "Containers are offloaded and then sent to Illinois for bulk dismantling, but there is a movement afoot to relocate a deconsolidation facility in the Pacific Northwest," says Amondson of Sovran.

The need for rail access spurred a Southfield, Mich., development company, Farbman Group, to acquire DaimlerChrysler AG's shuttered McGraw Glass plant in Detroit last year. The 900,000-square-foot facility, designed by famed Detroit architect Albert Kahn in 1936, is being renovated into a multitenant warehouse and light- industrial facility.

The plant not only has access to rail lines but overhead cranes as well. "There is a rail line adjacent to the property and a spur can be built to come onto the property," says Glenn Pavey, vice president of acquisitions and development with the Farbman Group. "The property, originally a DeSoto plant, was designed so that there was adequate room for a spur to come off to service the building."

The first tenant to move in took up 500,000 square feet, but didn't require rail. Rail access is not yet among the primary marketing points in Detroit, Pavey says. Nevertheless, his company expects the environment for industrial properties to change. As he observes, "50 percent of the prospective tenants that have looked at our building inquire about rail access. To those tenants rail is a critical issue."

Smooth Handling

This isn't to say that some areas of the country aren't wide open to new rail development. Railhead Fort Worth, an industrial park served by Union Pacific and Burlington Northern Santa Fe, now boasts 100 percent occupancy in its 2.3 million square feet of space, with 275,443 square feet under construction. Plans for expanding the park call for construction of about 3.5 million square feet of space in 10 buildings on 172 acres of vacant land.

NAI Stoneleigh's Fricke has been working to lease/sell space within the complex. "This park has a very unique set up," he explains. "It was developed to have dual rail access without the obstruction of any thru traffic roads. The tenants in the park have direct access from the highway to the park's roads. Tenants don't mind having rail cars come back and forth across the streets because this is what makes this park tick." Between midnight and noon, Union Pacific will pull its cars off the main line to the individual spurs behind the buildings so product can be unloaded. Then from noon to midnight, Burlington Northern will pull its cars off its main line to the spurs.

Not only can you unload twice the product using two competing rail transportation carriers, Fricke says, "if you have trucks at the other end you can distribute the product twice as fast. In effect you are turning twice the inventory."

Among the companies needing rail are those involved in paper, beverages, chemicals, automotive parts, hand tools, an\d various food products. One of the most recent tenant arrivals was Del Monte Foods Co. "We are looking for companies diat bring in product by rail to the back of the building, then warehouse, and finally push it out the front doors to over-the-road carriers," Fricke says. "These companies truly appreciate the transportation cost savings we can provide. About 10-15 percent of the warehouse market counts rail as one of the active components in the Dallas/Fort Worth area."

Those numbers will get stronger, Fricke believes, because of the rising cost of gasoline affecting trucking prices and the fact that the rail companies have become "modern minded" and customer-service oriented.

In a similar bid to accommodate rail projects, the city of Marion, Ohio, boasts a number of industrial parks for companies requiring rail transport. The Marion Dual Industrial Park affords tenants the option of using either CSX or Norfolk Southern lines - or both.'This unique offering allows companies locating in the park to negotiate freight costs and expand their territories by utilizing new lines. At the Marion Industrial Center, a former Department of Defense depot has been transformed into an intermodalready park, with eight miles of track on the premises connected to CSX lines. The site's ability to facilitate the transport and storage of goods has attracted tenants like ConAgra Snack Foods Division, Scotts Company, and a number of other light manufacturers and warehousers.

For the freight industry it is a little like back to the future. The growth of the interstate highway system from the 1950s onward encouraged freight customers to move away from urban centers, where rail was common, to the interstate corners of a metroplex - far from existing rail lines.

The country now is projecting a 6 percent increase in freight over the next 15 years and highway officials are in a tough spot, says CSX's McSwain. "Their own funding is drained and our highway infrastructure is requiring more and more repair. The country is seeking an alternative to funding freight movement on trucks. So, the long and short of it is, the federal and state governments recommend using rail and other modes of transportation to try and reduce the amount of freight that hits the highway."

"The freeways are so congested, the ports are becoming choke- points. Consequently, they are directing the product off the trucks onto rail cars."