Logistics industry from the institutional investor's perspective
Article 3: Logistics location characteristics
1. With respect to this article series
This is the third article in a Logistics Community of Inquiry series in the following four linkedIn groups:
Global Logistics & Supply Chain Professional Group
For a more comprehensive explanation of this CoIs (Community of Inquiry) purposes and objectives, please read the first article in this series. The first article dealt with
investment considerations from an institutional investor's perspective, looking at macro-economic figures and analysis, logistics location characteristics, a technical
due diligence data set, and an assessment of important legal and tax issues. The second article discussed risk mitigation in supply chain networks and the possibilities
for the landlord to (partly) aid in this mitigation.
In this third article we will look at logistics location choices in more detail. Here we will examine location choices from both points of view: that of the logistics service
provider (LSP) and the institutional investor. The final goal is to understand why an institutional investor purchases a building on a certain location. Ultimately,
I think we will find that there is not much difference between the two parties' site selection criteria, as the institutional investor's choice will tend to depend
on the LSP's specific predilection for certain locations.
2. Identifying main logistics site characteristics
Since 2000, the supply of logistics stock has grown exponentially. LSPs have changed the way they operate in response to e-commerce growth and changing security requirements.
This, in turn, has led to changing needs for logistics real estate. In addition, consolidation within the sector has led to a strong upscaling trend (Jones Lang LaSalle, 2015).
In the table below, Jones Lang LaSalle analyses the main criteria for location selection by need (assumptions) and major influencing factors (measurement methods). The
table examines this criteria from both the investor's and the LSP's perspectives.
Because there is no clear-cut global rating system for evaluating logistics locations, institutional investors tend to create their own ranking and scoring tools. Deka, for
instance, has a very intricate scoring system called DIRI Logistik (Deka Immobilien Regionen Indikator, freely translated as "Deka Property -Region Indicator).
This tool combines economic ratios with data such as population density, the status of trade and industry in a certain region and gross value added changes and forecasting.
As Mr. Wellstein of DekaBank (Münchow et al., 2012) states, a tool like DIRI Logistik is helpful to enhance location appraisal, but it will never be able to substitute the
expert-knowledge of logistics specialists.
Table 1: Critical characteristics logistics location choice (sources: Alam 2013, Botha & Ittmann 2008, Jones Lang LaSalle 2015, Lipscomb 2010, Münchow et al. 2012,
O'Healy 2005, Ruriani 2007, Sosef & Nassiri 2013, adapted by the author)
As another example, here is a ranking system Bulwiengesa AG (2015, pp. 142-145) uses to analyze the attractiveness of regional logistics markets.
Table 2: Sustainable attractiveness factors of logistics regions (Bulwiengesa AG 2015, adapted by the author)
Veres-Homm et al. (2015) found another thesis on ranking the attractiveness of logistics locations, called the Attraktivitätsindex, which starts with three main categories Supply,
Demand, and Management and breaks down the various influencing elements within each.
Figure 1: Attractiveness Index according to Fraunhofer Institute (Veres-Homm et al., 2015, adapted by author)
Veres-Homm et al. (2015) also compiled a so-called Intensitätsindex (intensity index) that mirrors the actual concentration of logistics activities in a certain
region. Again Veres-Homm et al. breaks their analysis into three main categories that make up the current logistics activity situation.
Figure 2: Intensity Index according to Fraunhofer Institute (Veres-Homm et al., 2015, adapted by author)
Finally, Veres-Homm et al. (2015) creates a method of forecasting the future development, opportunities, and possibilities in a logistics region, called the
Potentialindex (Potential Index). Figure 3 represents the elements that are considered important for this ranking.
Figure 3: Potential Index for future forecasting of logistics area development (Veres-Homm et al., 2015, adapted by author)
Upon analysis of the aforementioned tools, however, there are still a number of elements that still need to be considered, such as:
The image problem of the logistics industry: big grey boxes that take up too much space, have a negative impact on the total landscape,
provide comparatively little employment, create highway congestion with trucks, etc. This has a negative impact on (governmental) authorities when
analyzing whether or not to make plots available to logistics investors and LSPs.
Social issues such as the sustainability of buildings
Air pollution and traffic noise due to the growing amount of trucks, decarburization of the logistics industry
The relatively short lifecycle of logistics buildings induces undesirable side-effects as vacancy, continuing future refurbishment measures
(environmental impact), empty logistics parks, etc.
3. Strategic considerations rank choice
Where to place a distribution center or warehouse is one of the most important strategic components of any supply chain, or for any 3PL, and thus this question also
impacts the investor. The main issues concern balancing the proximity to the customers with cost, access, speed, available labor, and available space.
Often, there are specific logistics areas where clusters of more or less the same type of 3PL are assembled. In best case scenarios, the specific ancillary
industries for the 3PL are also there, and most of the time the infrastructure is adapted to the logistics processes that take place.
Logistics settlements can be considered heterogeneous and depend heavily on the specific logistics tasks being performed: it can be necessary to start an
operation in the vicinity of an airport, or next to production plants and other manufacturing activities, the e-commerce LSP can be anywhere with his
mega distribution centers, and the human nutrition LSP needs to be close to city boundaries.
Another important factor in choosing the right logistics location is one that the institutional investor cannot influence: The application of logistics systems,
such as Material Requirement Planning (MRP) / Distribution Resource Planning (DRP), Quick-Response System (QR), Make-to-Order/-Commerce etc. (Li, 2007).
The combination of all these variables leads to five different types of logistics regions. Regardless, the main functions of the logistics enterprise stay the
same: transportation, storage, distribution processing, packaging, loading, unloading, and information transmission (Golinska, 2014).
Industrial logistics locations
The most important factor for a LSP to decide on an industrial logistics location is the density of production and manufacturing suppliers in the area.
This guarantees the industrial-oriented LSP the best chances to get new servicing contracts after termination of other contracts. A huge density of
industrial-oriented LSP also offers the suppliers enough options to find a LSP that suits their needs. Due to the nature of their business, suppliers
demand a lot of quality control, reliability, and user specific layout and fittings. Costs for this kind of logistics housing are often very high.
Because of the very specific utilization, institutional investors are not very willing to make an investment in industrial logistics.
Central logistics locations
These kinds of logistics facilities have distribution operations on a very large geographic scale and are customer oriented. Within their area of coverage,
the LSP should be as centrally located as possible , with highways or, even better, multimodal shipment facilities in close proximity. An important
factor for this kind of DC is the cost of purchasing property. E-commerce and spare parts distribution centers have a need for spaces as large as
100,000 sq m or more.
Institutional investors are willing to invest in these kinds of logistics facilities provided there is a long term lease agreement in place. Otherwise,
these space requirements would make it difficult to find a tenant in the future. Restructuring a space of this dimension can be an expensive investment
for the landlord.
Regional logistics locations
Regional DCs typically serve metropolitan city areas, making this the decisive criterion for the LSP. The most important factor here is the demand of consumers
and industrial suppliers. The typical distribution radius for LSPs of this nature is approx. 40 km, as they have time-critical goods, e.g. same day delivery.
Because DCs in regional logistics locations have a very standardized construction concept (which can be built for relatively low costs), it is often easy for the
landlord to convert the building into a multi-tenant facility when a lease agreement runs out, and refurbishment costs are on an acceptable level.
Given the average space requirements of these DC (approx. 25., 000 sq m) and their utilization, vacancy risks are calculable and vacancy periods are relative limited.
Gateway logistics locations
LSPs in the gateway logistics industry process bundled deliveries of goods from foreign countries (mostly oversea territories), and distribute them in their
own country, mostly by means of a complex distribution network. Locations are chosen based on the source of the commodities.
Goods produced overseas need to be imported in the most efficient manner possible, which can either be via air transport (very expensive), or with seaports.
Gateway logistics locations often harbor manufacturers (assembling services), wholesalers, retailers, technology, electronics and capital goods LSPs.
A flexible and effective infrastructure is one of the most important factors, as is the proximity of multimodal transport infrastructure, such as airport,
container seaports and trans-shipment train stations. As with regional logistics locations, we have space requirements with an average of approx. 25,000 sq m and
a lot of the logistics premises have a standardized construction, making this another attractive product for institutional investors.
Network logistics locations
All transport networks are made to connect the customer and production on the one hand and main operation on the other.
New locations function as an extension of already existing stores and depots, with the collection and distribution routes being a major cost factor.
Thus, ensuring depot locations are appropriately connected to the customer and key junctions is of great importance.
Depending on what the LSP client wants, soft location factors such as available qualified manpower, funding and building regulations can also influence location choice.
These LSPs are typically LCL (Less than Container Load) providers, meaning they transport small ocean freight shipments not requiring the full capacity of an ocean container.
This sector may also include trans-shipment warehouses, which service courier, express and small packages delivery.
The average surface area is approx. 20,000 sq m and a lot of these warehouses have multi-faceted docking areas for cross-docking logistics, etc. This means that there should
be a lot of outside area available that can be used as marshalling yard.
This type of logistics location is also favored by institutional investors because of a high market demand.
Table 3 gives the reader an overview of the various location types as discussed before, along with a listing of criteria important to choosing the right area. In the third column
we have indicated if this type of product could be of investment interest to an institutional investor.
Table 3: Overview of strategic rank considerations for logistics (source: Jan van den Hogen, author)
4. The clustering approach
In his book The Geography of Transport Systems Dr. Jean-Paul Rodrigue chooses a somewhat different approach by introducing the concept of logistics zones or Freight
Distribution Clusters. Dr. Rodrigue is of the opinion that "logistics tend to agglomerate (cluster) at specific locations, mainly because of the accessibility they confer,
the availability of land as well as the benefits logistics activities derive from being close to one another. There is a wide array of benefits to be derived
from improved logistics capabilities. The development of logistics zones has been an important component of globalization since the growth in international trade
and the related material flows requires activities supporting their consolidation, deconsolidation, transloading and light transformation" (Rodrigue, 2013).
A logistics zone is defined as a grouping of entities involved in freight distribution such as distribution centres (warehousing, storage, light transformation),
transportation (freight forwarders, shippers, transport operators, customs brokers) and supporting services (human resources, maintenance and repair) within a
defined and often planned area.
Following the above definition, we can conclude that there are a lot of different functions connected with a logistics zone, varying from simple cargo consolidation
to very advanced logistics services. This means that logistics zones need to provide space for both the pure logistics companies and the supportive companies such
as shipping agents, trucking companies, forwarders, container repair facilities and packing firms. The emergence of logistics zones has been driven by two factors:
The developing complexity of freight distribution.
Supply chain management is often done over long distances, which implies that intermodal and distribution strategies must be applied at strategic locations.
This is also necessary when cargo loads are in transit. Often, due to the complexity of supply chain practices, additional operations need to be performed to
have smooth distribution along the whole chain.
Massive amount of cargo (the "massification" effect).
The emergence of large logistics zone complexes at strategic locations is driven by two things: 1) the amount of cargo being handled, and 2) the concentration of commodities
at specific gateways and along distribution corridors. These strategic locations must provide the necessary infrastructure for large-scale operations as well as future
Logistics zones can be classified according to their modal orientation, their geographical scope or their function. A classification of logistic zones suggests four
major forms; port-centric logistics zones, inland ports, logistics zones and freight villages.
Figure 4: A taxonomy of logistics clusters (adapted by Rodrigue from Sheffi, 2012)
The following definitions of logistics clusters are taken out of the book from Dr. Rodrigue (2013).
Port-centric logistics zone
This is a logistic zone that has been planned in co-location or in proximity to a port terminal facility. It supports freight distribution activities directly related
to maritime shipping and thus has a dominant international trade orientation. The common value proposition of port-centric logistics zones is the availability of
land next to a port terminal which also has the convenience to tap the labor pool that is generally available in a port-city. For a freight distribution perspective,
inventory management tends to be facilitated since the containers can be easily picked up or dropped at the terminal facility. Empties can immediately be brought back
at the terminal, improving container utilization levels. Container weights are not bound to national road restrictions, implying higher container load factors and
their related shipping economies. The added security a port-centric logistics zone offers is also a positive factor, particularly in developing countries.
Port-centric logistics zones also have some drawbacks, particularly since they involve higher land costs with potentially more restrictive labor regulations if they
are within the jurisdiction of dock workers. They also lock the shipping options of its customers to the port, which may not be the most suitable.
Airport-centric logistics zones work on a similar principle where logistics activities are co-located and often directly accessible to runways.
This is an intermodal terminal (commonly rail) built or updated concomitantly with the development of adjacent logistical and service activities. An inland port can
also be serviced by trucks, which often takes place in developing countries, but this does not represent an efficient strategy as massification of cargo cannot be implemented.
The inland terminal is directly integrated to co-located distribution activities, which is one of the main advantages of such facilities as they appeal to their respective customers.
The term "dry port" is often used to label them since it refers to a facility that performs a similar intermodal function to a port but is not directly serviced by deep-sea
maritime services (with the exception of fluvial ports).
The inland port is conceivably the most advanced form of a logistics zone since it links co-located freight distribution activities to a gateway through a rail (or fluvial) corridor.
This is a planned zone composed of distribution centers and light manufacturing activities. It provides geographical advantages in terms of accessibility, land availability and
infrastructures as well as operational advantages in terms of favorable regulations and economies of agglomeration. However, the degree of accessibility varies depending on the
array of intermodal terminals available in vicinity. Logistics parks in proximity to an intermodal rail terminal are often labeled as intermodal logistics parks.
Logistics parks are often independently planned and it is common to see them emerge after the construction of an intermodal terminal (or other logistics zones) as a promoter
seizes an opportunity to provide land for logistics. Commonly, logistics parks are only serviced by road and do not require significant planning, but simply a change in
zoning and some basic amenities (e.g. road access to the lot and utilities).
A freight village is an integrated cluster of support activities for freight distribution such as office space, fueling stations, hotels and restaurants. A freight village
mostly focuses on the service and transactional dimensions of freight distribution and could exist in a context where limited freight distribution is taking place.
It does not require an adjacent intermodal terminal, but this terminal is commonly in the vicinity.
A freight village can also be linked with an airport terminal since this type of high value freight is intensive in transactions. The definition of a freight village
is subject to different interpretations, but the term should be applied where a high intensity of freight related services have clustered within a logistics zone.
It can be said that a freight village is a cluster of supporting service activities within a distribution cluster.
It may be clear, logistics zones have a lot of criteria to fulfill regarding whether the location is suitable for logistics. In his clustering approach, Dr. Rodrigue
distinguishes two different sets of advantages. In the site selection process these advantages function as selection criteria: if one of the advantage factors is not met,
the attractiveness for LSPs to start operations in that specific location is reduced.
The table on the following page shows the location factors as determined by Dr. Rodrigue. Here, one could argue that there are three forms of important logistics zones in place.
Gateway logistics zone
Logistics zones consisting of large warehousing parks in a suburban setting near ring roads. Proximity to a main container port is necessary due to the usage of port-centric
logistics zones and satellite terminals. Integration of multimodal transportation (e.g. linking ports and warehousing parks directly to the national railway system, or
creating direct connections with airports) is a huge advantage for gateway logistics zones.
Development and expansion of these zones is often supported by land-use incentives that attracts investors, domestic or international, as is the case with policy
incentives for infrastructure, transport and logistics services (Hall et al., 2011).
Table 5: Geographical and operational site selection criteria (source: Jan v/d Hogen, author, partly derived from Rodrigue, 2013)
Inland (rail) terminal logistics zones
The nodes in the hinterland have been referred to as dry ports, inland terminals, inland ports, inland hubs, inland logistics centres, inland freight villages, etc.
Bimodal and trimodal inland terminals have become an intrinsic part of the transport system, particularly in regions having a high reliance on trade. Nowadays inland
terminals are incorporated within co-located freight distribution activities, commonly labelled as logistical parks. Inland terminals (particularly rail) have
always been present since they are locations from which specific market coverage is achieved (Notteboom & Rodrigue, 2009).
Highway corridor logistics zones
These logistics zones service a large metropolitan area or a group of metropolitan areas. Due to their operational requirements, which are space intensive, distribution
centres in these zones have migrated to more affordable locations at the periphery of metropolitan areas. Market accessibility is the main driving force of this process.
Logistics clusters emerged in suburban (or exurban) settings to accommodate two market accessibility factors and their distribution requirements. The first requirement
is the proximity to customers and major transport terminals. The second requirement is intermediacy where a DC must find a location within corridors of freight
circulation that enables a reliable and constant supply (Rodrigue, 2013).
Figure 5: Proximity and intermediacy for distribution clusters (Rodrigue, 2013)
5. In conclusion
Looking at the various theories about the origin, development and future of logistics locations one can conclude that, regardless the different academic viewpoints,
it is possible for an institutional investor to identify main logistics location characteristics. Based on these criteria the investor is capable of making a rational
decision to buy logistics housing in a certain area (or zone if you want).
Whether you are looking from the point of view of an LSP or an institutional investor, the criteria largely overlap. The differences occur with the interpretation of the criteria.