Douglas Wells is CEO of Broe Real Estate Group. BREG has been acquiring, developing and managing commercial real estate in the US for 50 years.
As e-commerce has expanded deeper into nearly every consumer category, it has reshaped domestic supply chains more profoundly than at any time in the past 100 years. Onshoring is at an all-time high and this dramatic rise is driving global manufacturing and retail giants to embrace new distribution hubs that support changing consumption trends.
The $80 billion rail freight moves approx 1.7 billion tons on a nationwide rail network that includes nearly 140,000 miles of track. Almost 40% of long-distance tonne-kilometres moving in the US by rail. Moving freight by rail instead of by truck reduces greenhouse gas emissions by up to 75%, average. And track scales well; the costs and ESG benefits become more compelling as volumes increase, and companies are taking notice.
Large companies across industries are moving from just-in-time fulfillment to just-in-case solutions that prioritize flexibility to keep supply chains moving. The demand for production-related facilities has increased by 93%. All of the above has fueled the emergence of logistics parks – strategic hubs that serve distribution centers and key markets while bringing operations as close to population density as possible.
Today until 80% of corporate spending is logistics costs, with transportation accounting for 50%, and as companies continue to reinvent domestic supply chains, they are scrutinizing the key drivers of logistics efficiency that affect operational costs.
Logistics efficiency is increasingly driven by two factors: proximity and optionality.
In real estate, proximity brings benefits across the board. The right location promotes a faster market introduction and reduces transport costs, shipping times and CO2 emissions. Proximity helps shippers streamline operations, increase access and improve service. Simply put, proximity makes supply chains faster, cheaper and cleaner. But proximity alone is not enough.
Optimized industrial sites link speed-to-market to flexible logistics solutions. As transportation plans play an increasingly important role in the site selection process, rail real estate options bring real value to industrial projects. (Full disclosure: My company has partnered with a railroad company to offer this type of real estate option, as do others.) For companies moving heavy loads or high volumes over 250 miles, the efficiency of rail transportation becomes hard to beat.
An often overlooked factor in the freight decision-making process is timing. Industrial customers can realize substantial savings by making shipping decisions during the site selection process. Building a real estate project with rail connections can be faster and more efficient than designing transportation solutions after purchasing real estate.
Transport optionality is the real difference maker in site selection.
Faced with ongoing supply chain congestion, inflationary pressures and capacity constraints, manufacturing and distribution companies across the country are combining rail freight solutions with strategic real estate locations to create optionality.
A key factor in optimized rail transport is optionality. Dual rail operated sites ensure competitive pricing and shipping options. But to fully realize these savings, rail options must be fully assessed during the site selection process. Rail design is much less flexible than facilities and access roads, so it is important to explore the viability and possible agreements for rail services early on.
A few key tips can make a huge difference when considering sites with rail links:
1. Determine whether the future location is suitable for the railway. Not all sites are suitable for the strict spacing designs of rail, so it is important to assess the feasibility of rail access and rail connection early in the evaluation process.
2. Determine if the site is properly zoned or if the state and local business climate is amenable to rezoning changes necessary to align the property with the desired activities. Destination activity varies widely by community, and it is critical to properly assess a location’s destination status and potential.
3. Assess the proximity of the location. In addition to the proximity of the market, also consider the proximity of personnel and infrastructure.
What else should companies consider when selecting locations?
Good real estate decisions are based on good guidance. Independent site selectors and rail operators can provide valuable insights throughout the process. Site selectors provide impartial advice and insights shaped by their work evaluating sites for a wide range of clients. Rail operators can help prospective tenants understand a site’s viability to connect to rail, the overall timing required to obtain project-related approvals, and available connections to the domestic Class I rail network.
Two potential issues surrounding the development of rail-served sites arise from what stage in the process rail is considered and what stage in the process land is being developed. When rail is considered after land purchase, options become limited. The national Class I network is fixed. Some sites simply cannot be efficiently connected to the rail network. This is why train services should be considered along with choice of location.
A possible second problem applies to a site that can be efficiently connected to rail, but where development begins before the strict safety and design requirements of rail are fully understood. Continuing land development without that knowledge could present costly challenges or even completely disqualify train service.
Rail real estate projects require due diligence; however, given the potential benefits, it’s time well spent. Important considerations in the design of the track include the intended use, freight type, and volume of the site. Assessments should assess how many tracks are needed, how many railcars and what type of cars are needed to support the operation, the structure of shipping schedules and the growth of freight volumes.
Efficiency drives effective supply chains. As companies look for optimized assets and operations, proximity to the market is not enough. Optionality is critical to supply chain efficiency. Every CEO I talk to strives for optionality, and a key to achieving that flexibility is judging location and logistics at the same time. By evaluating both transport and location during the site selection process, companies can save time and money.
Real estate solutions served by rail help domestic manufacturing and raw materials companies make the most of land and logistics costs. Investing the time to learn how transportation option shapes supply chain efficiency can have far-reaching and long-lasting implications for operational efficiency and bottom line.