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The Changing World of Trade

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Navigating New Channels to Success …

Navigating New Channels to Success

As technology, demographics and infrastructure continue to accelerate the speed and efficiency with which goods are produced and moved among world markets—global supply chain strategies are being revisited and new models are emerging.

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  • 1. THE Changing World of Trade A Cushman & Wakefield Research Publication 1 GLOBAL ECONOMIC OVERVIEW 2 E-COMMERCE: NO. 1 GAME CHANGER 7 GLOBAL TRANSPORTATION 15 REAL ESTATE IMPACTS 28 CONCLUSION: WINNING REAL ESTATE STRATEGIES 2013
  • 2. the Changing World of Trade A Cushman & Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation Changing World of Trade Navigating New Channels to Success As technology, demographics and infrastructure continue to accelerate the speed and efficiency with which goods are produced and moved among world markets—global supply chain strategies are being revisited and new models are emerging. If global trade continues to grow by an average of 9.5% per year for the next 10 years, about $2.7 trillion in new goods will be added per year to the global pipeline. By 2021, an astounding $45 trillion in goods could be crisscrossing our planet every year. That compares to $6.5 trillion in 2001. As Cushman & Wakefield’s White Paper on the Changing World of Trade explores, technology and demographics are dramatically altering global labor and consumer landscapes – which is driving change across commercial estate sectors, including warehouse and distribution, manufacturing and retail. Rising wages in some Asian countries, increasing transportation costs and advanced automation have some manufacturers rethinking their business models and moving all or parts of their operations back to North America or Eastern Europe or emerging new markets. As e-commerce takes hold, retail is undergoing a revolution – and brand new real estate strategies are emerging. Omnichanneling REAL ESTATE IMPACTS CONCLUSION allows shoppers to purchase virtually anything at anytime from anywhere. Some experts estimate that up to 25% of all retail sales in both the US and UK will take place through online channels by 2020. Retailers and mall developers are responding with futuristic store formats and sophisticated delivery systems including highly automated distribution centers. Strong economic growth coupled with rising incomes have made Brazil and China dominant players on the global scene. With European and American brands expanding their presence in these markets and cross-border retail on fire around the world, there is a growing urgency to accommodate changing distribution networks. Major markets around the world are positioning themselves to capitalize on trade opportunities by investing heavily in infrastructure improvements to ports, airports, highways, railways, industrial parks and intermodal hubs. Market leaders include Toronto,Vancouver, Chicago, Miami, Berlin, Moscow, Upper Silesia, Shanghai and Hong Kong, to name a few. Meanwhile, governments are focused on negotiating new trade agreements and easing foreign direct investment regulations. Winning strategies in our Changing World of Trade will demand flexibility and diversity, collaboration, automation, technology -- and a keen balance of scale and scope, most likely through consolidation and vertical integration. 2
  • 3. the Changing World of Trade A Cushman & Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation REAL ESTATE IMPACTS CONCLUSION GLobal Economic overview The Trajectory of Global Trade Global trade has been increasing at an average rate of 9.5% per year for the past 63 years.The latest surge in growth began in 2002 on the heels of China joining the World Trade Organization in 2001 when exports were at a then-record high of $6.5 trillion. Since then, global trade has nearly tripled. In 2010 and 2011, even as economies struggled to recover from the global recession, world exports surged by almost 21% each year, jumping from $12.5 trillion in 2009 to $18.3 trillion. If global trade continues to grow as some expect by an average of 9.5% per year for the next 10 years, it would add about $2.7 trillion per year in new goods to the global pipeline. By 2021, an astounding $45 trillion in goods would be moving around the world. Even at half of this pace, exports would reach nearly $30 trillion in 2021. WorLD GOOD EXPORTS (1948-2012) 20,000 18,000 16,000 Billions of US Dollars 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 SOURCE: World Trade Organization $2.7 Trillion 9.5% If global trade continues to grow by an average of 9.5% per year for the next decade, $2.7 trillion in new goods would be added to the global pipeline per year. Turning Point: 2014 For global trade to sustain high growth rates, the global economy must first recover. It was on the verge of taking off after two years of sluggish expansion following the 2007-2009 recession when the U.S. and European sovereign debt crises suddenly slammed the brakes on growth. With 2013 growth projections in the U.S., euro zone and Asia Pacific still falling short of the recovery pace set in 2010 and materially slower than those seen during the 2002-2007 period, growth remains constrained, although green shoots are emerging in countries and markets around the world. As governments work to resolve their debt issues, consumers and businesses will continue to gain confidence and act on significant pent-up demand. Spending and hiring will gain traction. Reinvigorated demand will feed into the global manufacturing system, driving healthy output in many mature and emerging markets, and stimulate the flow of goods around the globe. The result will be stronger growth in global trade in 2014 – and a projected return to that long-term growth trend of roughly 9.5% per year. 1
  • 4. the Changing World of Trade A Cushman & Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION E-COMMERCE: No. 1 Game Changer Omni-Channel: The Future of Retail Retail today is undergoing seismic change, as it becomes more global, urban and specialized due to the rapid rise of online shopping, mobile technology and changes in consumer spending patterns. These trends are driving a retail revolution that has made the logistics of delivering goods to customers a top priority. Omnichannel requirements are putting new inventory, location, transportation and space cost-control pressure on retailers and shippers at a time when they are expanding into new continents and adapting to the challenges of retailing in increasingly dense cities. In addition, because of the unique requirements of each shopping channel and changing consumer demands, retailers will be expected to constantly adjust their strategies, optimizing costs and service levels within the integrated cross-channel experience. As more consumers shop through multiple channels, retailers are taking action in greater numbers to integrate their online and physical store presence. Consumers are comparing products and prices online at home or price shopping and comparing variants in a physical store. While in the store, they’re using their mobile phone or tablets to compare selected goods with other store availabilities. Return strategies must offer maximum ease and flexibility, allowing consumers able to use both in-store delivery and parcel post if they are dissatisfied with a purchase. In some retail sectors, experts believe that up to three-quarters of all transactions will be completed via multiple channels before the end of the decade. For the customer, the expectation is that the process – inventory, price and service level – will be one stable, consistent experience. GLOBAL E-COMMERCE GROWTH PROJECTIONS: COMPOUND ANNUAL GROWTH RATE 2011-2016F 70% 60% 50% 40% 30% 20% 10% 11.0% 11.2% 25.4% 11.4% 22.7% 24.7% 57.3% UK 0% US - Total US - Mobile Japan Brazil China India SOURCE: Cushman & Wakefield, Forrester Research 2
  • 5. the Changing World of Trade A Cushman & Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation KEYS TO ON-LINE SUCCESS E-commerce retail leaders identify the following as being critical success factors: 1. Scalability: Ability to leverage inventory to offer a wider range of products and services “cross channels” to a larger market (multi-country, multi-consumer). 2. echnology: Ability to manage online T traffic, the payment and processing of orders and the entire e-fulfillment supply chain, which includes interfacing with e-fulfillment partners. This is a significant growth industry in the technology space. 3. upply Chain: Understanding that the S supply chain is a critical part of the financially driven business model and not the other way around. A cost-effective supply chain should be integrally linked to the cash-to-cash order cycle. 4. ustomer Experience: The customer C must receive what was ordered when promised. Increasingly, customers will expect purchases to be delivered the next day or same day for free and, if needed, returned for no shipping or restocking cost. REAL ESTATE IMPACTS CONCLUSION E-Commerce 2.0: Combining Online and Physical Worlds In the first phase of e-commerce – let’s call it e-commerce 1.0 – retailers generally created separate and dedicated business channels for e-commerce and physical retail stores. Retailers who mastered this phase are now pushing into a business model that combines online and physical retail worlds. In this model, the customer can buy anywhere, fulfill anywhere, return anywhere. Major consumer expectations of “e-commerce 2.0” include: • he physical and online buying experience is seamlessly merged T into a single branded interface. • he same items are available both online and in a store. Inventory T allocation between the physical stores and the e-commerce channel is postponed for as late as possible. • f a store is out of an item, it can be shipped directly to a I customer through the e-commerce channel or to any store for later customer pickup. • nventory location information is made easily available to the I customer to support the decision on where to purchase a product. • tems can be physically handled in the store, but easily bought I online for later home delivery. • oods can be returned online or to any store regardless of G where they were purchased originally. 3
  • 6. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE U.S. E-Commerce Sales as Percent of Total Retail Sales CONCLUSION Shanghai: Perfectly Suited to E-Commerce 6.0% In China, several companies have been making home delivery their core business. The Shanghai region has the tenth largest population density in the world with over 16,500 people per square mile – more than double that of typical cities in Western Europe. Population density can make a dramatic difference to the cost of home delivery since more deliveries can be made per mile driven. 4.0% 5.4% 4.8% 4.5% 4.1% 3.6% 3.6% 3.1% 2.6% 2.2% 1.9% 1.6% 1.2% 1.0% 0.6% 2.0% 0.0% REAL ESTATE IMPACTS 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 SOURCE: U.S. Census Bureau, Cushman Wakefield Research. 4Q Sales E-Commerce 2.0: Integrated Supply Chain Networks In the e-commerce 1.0 model, retailers typically use one of the following models: • TORE DISTRIBUTED GOODS Items are picked, packed S and shipped from individual retail stores that are closest to the customer. Although this can work well when shipment volumes are relatively low, it tends to be the least efficient way to ship items direct to the consumer when volumes increase due to the high cost of retail space and store labor. There is no major impact to distribution centers in this model. • COMBINATION CENTERS Store and direct-to-consumer orders are fulfilled out of the same building. At midrange shipment volumes, this supply chain setup can work well if the direct-to-consumer orders can be processed in the same way as store-replenishment orders. Online transactions tend to be characterized by fewer items per order, which typically increases the overall labor required within the distribution center. The facility needs to be designed to accommodate the additional inventory, extra headcount and seasonal peaks. • EDICATED DISTRIBUTION CENTERS At high shipment D volumes, many companies see the advantage to developing e-commerce-specific distribution centers. By placing locations closer to their customer base as well as to the hubs for dominant parcel networks, retailers are able to reduce shipping costs and decrease lead times. Automated order processing technology specifically designed for e-commerce also supports increased efficiency. In Shanghai, for example, it’s possible for a delivery van to have all of its customers in one high-rise building. Since only one person out of 23 owns a car in Shanghai, having goods delivered at home is appealing to those with the disposable income to afford it. Over 65% of the people in Shanghai have access to the internet and this number includes almost 100% of the people who are likely to use home delivery services. Not surprisingly, many of the top retailers in Shanghai offer home delivery. Did you know? China online shopping reached 1,304 billion Yuan in 2012 and grew by 66.2% over last year. It accounts for 6.2% of the total retail sales of consumer goods. B2C accounted for 29.7% and it expected to increase faster in the future. China online shopping market will keep a rapid growth rate and its GMV (Gross Merchandise Volume) is expected to exceed 3,000 billion Yuan in 2015 or 2016. MARKET SHARE OF CHINA b2C sHopping websites in 2012 Vanci, 1.2% Vipshop, 1.4% Yihaodian, 1.2% Gome, 1.4% Dangdang, 1.9% Amazon China, 2.7% Others, 3.7% Tencent B2C, 4.7% Suning, 5.5% Tmall, 56.7% 360buy, 19.6% SOURCE: iResearch. By GMV. The data is based on the financial results published by enterprises, interviews with experts and iResearch statistical model. 4
  • 7. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION CLIck-and-CollECT Drives NEw demands A recent report by Morgan Stanley has estimated that around 12% of all retail sales in the UK will be from e-commerce sources by 2016. To accommodate this rapid change, some stores will become small-scale click-and-collect operations, where the consumer orders product online and then collects merchandise from the relevant store, while other stores will rely more on technology to create an online showroom presence. In an e-commerce 2.0 supply chain, all three models may run simultaneously. This allows orders to be processed and fulfilled as best fits the customer’s needs: at the store or at the closest distribution center. Localized inventory stock-outs will be hidden since products can be shipped from any location or sent to any store for customer pickup. As stated earlier, retail physical and online operations will increasingly be seen as one business rather than separate entities with separate management. The concurrent optimization of multiple channels will require a flexible network of smaller urban locations that fill parcel orders delivered direct to customer homes within a day and large distribution centers that replenish both stores and in-market distribution centers. Multiple in-market distribution centers will be smaller and run fleets of trucks into neighborhoods, perhaps twice a day, for same-day and next-day delivery to households. Ecommerce penetration of retail sales (2014-2016 forecasts) 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2014 2015 Spain Italy Mexico Chile Argentina Brazil Russia France China Germany Australia UK Japan US South Korea 2016 Whatever route is taken, retailers are hastening to refine and adapt their supply chain and distribution operations in order to meet changing expectations. Fulfillment and seamless logistics are crucial in the omni-channel world. According to the BCSC, at least 25% of logistics space secured by retailers in the UK last year was directly related to online business. Most retail supply chains were built to supply their high streets and not the growing online market. To meet new demands, supply chains must be more flexible and responsive, and distribution centers equipped with the latest advanced technology. An example of this is the emergence of what are known as “dark stores” within the food retail sector where facilities are fitted out like a standard store but are only operated in order to fulfil online orders. The successful integration of the click-and-collect model can be seen with UK retailer Argos, which began as a catalogue merchant with a high-street presence. This business model allowed Argos to grow seamlessly into online operations and expand into click-and-collect, and Argos became a pioneer in this area. Today, online sales account for 43% of Argos’ business, and it is well positioned as an early adopter to benefit from a rise in click-and-collect options for consumers. Additionally, on the back of its strong beginnings as a catalogue-only retailer, Argos has the distribution network and capacity to potentially serve as a collection point for other online-only retailers, such as Amazon, that may wish to utilize the click-and-collect method via Argos going forward. At a time when large-scale online aggregators are gaining an increasing share of the sector, high-street businesses such as Argos may be just ahead of the pack in the changing retail market. Source: Morgan Stanley 5
  • 8. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation REAL ESTATE IMPACTS CONCLUSION RAMPING UP EFFICIENT DISTRIBUTION As we enter the next phase of e-commerce, customer demand is playing a larger role in physical site selection, as goods must arrive on an increasingly quick turnaround. Multiple, well-placed distribution centers minimize the time and distance spent on the final leg of delivery. To accommodate the changing landscape, many bricks-and-mortar retailers are setting up dual operations backed by mega-distribution facilities that support both online and in-store inventory. As well, leading e-commerce companies are implementing labor-intensive picking and packing strategies to fill online orders. It is not unusual for cutting-edge direct-order fulfillment distribution centers to cost three times as much to build and require three times as many employees to operate as the traditional warehouse. Locations must be close to an affordable labor force and have access to rail, highways and air transportation. Online sellers are targeting large population centers near FedEx or UPS hubs that have an abundant seasonal workforce. what does the future look like? More, smaller distribution centers that are closer to markets; multi-stop, truck-store replenishment that runs to stores two times a day; and more remote distribution centers with more safe stock replenishing territory centers. Automated Case Piece Handling Facilities Around Mega Centers Mega Centers Replenishment (Flow Through) Automated DC in proximity to Population centers Non-Fossil Fuel Powered Store Delivery Vehicles Manufacturers/Ports 6
  • 9. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION GLOBAL TRANSPORTATION Today’s pressure paving way for bright future Transportation often represents a large component of total supply chain cost and total operating costs. The growing global economy has put ever-greater pressure on scarce resources, and forecasting fuel rates has never been more difficult for the transportation industry. Without a crystal ball, the best anyone can do is “weigh” the fundamentals of global supply and demand. For example, if demand grows faster than production capacity, then surplus production capacity – the world’s buffer against supply shortfalls – will fall and prices rise. Conversely, if production capacity grows faster than demand, we would expect some easing in price volatility, though not necessarily price levels. While the transportation industry remains under significant, perhaps unsustainable pressure, the pain today may give way to new prosperity tomorrow. As production and manufacturing become more local to meet growing customer demand for faster delivery, the average distance transported goods move will continue to shorten. Emerging economies, as well, may find that regionalization, or establishing locations in multiple places closer to local markets, may be the way to go to meet escalating demand while controlling costs and remaining competitive. Vessel Evolution: Big Gets Massive Triple E 2013 18,000 TEUs New Panamax 2006 15,500 TEUs Post Panamax Plus 1997 8,100 TEUs Post Panamax 1996 7,100 TEUs Accommodating the latest generation of large container ships is key to a port’s competitiveness in the changing world of global trade. In 1997, shipping lines could handle vessels with a capacity of 8,000 TEUs. In 2006, the biggest container ship doubled in size to nearly 16,000 TEUs – too massive to pass through the recently expanded Panama Canal. By 2013, ships were nearly five times as big as the first post-Panamax vessels, with an 18,000 TEU capacity. The new ultra-large container vessels will be too deep for any port in the Americas or to cross the Panama Canal, but will be able to transit the Suez Canal when sailing between Europe and Asia. Maersk Line, the world’s biggest container shipping company, will stop plying through the Panama Canal to move goods from Asia to the U.S. East Coast. It will send vessels through the Suez Canal that can carry as many as 9,000 20-foot boxes at a time, instead of using two 4,500-box-vessels through the Panama Canal. 7
  • 10. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation AMERICAS: INTERMODAL backbone Trucking, which remains by far the most common way to move goods throughout the Americas, is faced with a growing shortage of drivers, stricter regulations and increased fuel prices. As demand increases, yield management will remain top of mind for trucking company leadership. Though hurt by the recession and subsequent slow recovery, the industry is poised for significant growth as pent-up demand is steadily acted upon and consumers exert increasing pressure on companies for faster delivery. In recent years, the perspective on transportation has shifted from an emphasis on each of the four modes – air, rail, marine and road – to a horizontal and holistic system-wide view, with freight moving end-to-end through increasingly seamless connections. Intermodal REAL ESTATE IMPACTS CONCLUSION systems have become the backbone of the rail freight industry, due primarily to fuel efficiency (rail is four times more efficient than truck) and investments made by railroad companies to improve network systems. Rail is the only viable alternative to trucking, as barge transport is not feasible and airfreight is too costly for most companies. Trains also move year-round in almost every type of weather and, domestically, offer the lowest-cost-per-mile. To take advantage of holistic systems, companies are investing heavily in intermodal parks that link several modes of transportation and integrate them with seamless connections. Not only has this increased intermodal volume, but it has also led to greater integration across transportation modes, keeping costs low. According to the Association of American Railroads, seven Class I railroads presently serve the United States, with combined revenues of more than $65 billion, and some $13 billion was invested in railroad infrastructure in 2012 to support its continued growth. FREIGHT RAILROADS IN THE UNITED STATES Source: National Rail Freight Infrastructure Capacity and Investment Study prepared for the Association of American Railroads by Cambridge Systematics. 8
  • 11. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION TOP 25 WORLD CONTAINER PORTS Shanghai, China 32.5 Singapore, Singapore 31.6 Hong Kong, China 23.1 Shenzhen, China 22.9 Busan, South Korea 17.0 Ningbo-Zhoushan, China 16.8 Guangzhou Harbor, China 14.7 Qingdao, China 14.5 Jebel Ali, Dubai, United Arab Emirates 13.3 Tianjin, China 12.3 Rotterdam, Netherlands 11.9 Port Kelang, Malaysia 10.0 Kaohsiung, Taiwan, China 9.8 Hamburg, Germany 8.9 Antwerp, Belgium 8.6 Los Angeles, U.S.A. 8.1 Dalian, China 8.1 Tanjung Pelepas, Malaysia Keihin Ports, Japan* 2012 TEUs (in Millions) 7.7 7.6 Tanjung Priok, Indonesia 7.2 Xiamen, China 7.2 Bremen/Bremerhaven, Germany 6.1 Long Beach, U.S.A. 6.0 Laem Chabang, Thailand* 5.7 New York-New Jersey, U.S.A. 5.5 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 SOURCE: Port Authorities Official Websites *2011 TEUs (in Millions) 9
  • 12. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation CANADA TARGETS TRANSPORTATION Canada’s geographical scale and relatively small, spread-out population has always been a challenge for business. To help expedite transportation, the federal government is focused on integrating transportation modes through increasingly seamless connections. It committed over $47 billion to improve and integrate infrastructure systems within 10 years, and a number of large projects are already underway. These include: • he construction of a road, rail and utility corridor at the Port of T Prince Rupert to boost Canada’s trade capacity and ability to export goods to Asia-Pacific markets. • number of major infrastructure projects to support the A Atlantic Gateway and Trade Corridor, such as an advanced modular fabrication and multimodal transshipment facility being built at Port of Belledune, which will expedite shipping operations on the eastern seaboard. As well, route improvements are being made to the trade corridor connecting Atlantic Canada and the New England region. • fter many years of intense lobbying, a $2.2-billlion bridge A between Windsor and Detroit will be built to replace the existing 84-year-old Ambassador Bridge. Construction on the bridge, expected to be completed by 2020, is expected to create 12,000 direct jobs and as many as 31,000 indirect new jobs. Canada will pay Michigan’s share of the construction, $556 million, recouping the outlay through future toll revenue. The Detroit-Windsor border — encompassing the bridge, a tunnel and ferries — is the busiest in North America and carries a quarter of all U.S. trade with Canada, which reached $120 billion in 2012. REAL ESTATE IMPACTS CONCLUSION 68 Number of hours the Port of Prince Rupert is closer to Shanghai than Los Angeles. This port is closer to key Asian markets by up to three days, including 36 hours closer to China’s largest city than Vancouver. South America: facing many challenges In general, South America transportation systems are substandard and in need of improvement. Unlike the U.S. or Europe, rail and waterway transportation – modes known for their ability to cover long distances economically – are of limited use in the region, with trucking being the most commonly used mode. This has driven up costs and undermined trade activity between the main economies of the Pacific and Atlantic coasts. In addition to poor infrastructure, bureaucracy in most South American countries makes intra-regional cargo transportation even more difficult, increasing shipping costs and time. Most of the cargo that moves between Brazil and other countries is carried by ships, with trucks coming in second, as shown in the following chart. 10
  • 13. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE Cargo Shipments from Brazil to other South American Countries 15% 2% Ocean River Air Road 22% 58% Rail Other * 0.1% 3% *Pipelines, mail and proprietary SOURCE: MDIC/BR. South America is actively working on easing regional trade barriers, along with physical barriers caused by years of mismatched infrastructures. Formed in 2000, the Initiative for the Integration of the Regional Infrastructure of South America (IIRSA), aims to integrate logistics through new transportation infrastructure, as well as energy and telecommunications projects.Trade between Brazil – the region’s main hub – and other regional nations soared by about 73% between 2002 and 2005, underscoring the urgency to make improvements. Although railways are considered an efficient means of transport and constitute an important link to Brazil’s ports, only 20% of domestic cargo is hauled by rail. While Brazil has the tenth largest railway network in the world, it is still considered a complement to trucking. According to the National Association of Cargo Transport and Logistics, in 2000 about 60.5% of cargo in Brazil was transported over roads and highways, which have been undergoing steady improvement programs for the last 10 years. Brazil’s Substandard Port System Brazil has 34 public and 42 private ports. About 90% of the export cargo, accounting for 13% of the total cargo handled in Brazil, is shipped by sea due to the mode’s lower cost and reduced environmental impact.The largest and most important port is the Port of Santos, which handled 71.9 million tons of cargo shipped abroad in 2012. According to the World Economic Forum, the port system in Brazil is among the worst in the world, ranked 135th on a list of 144 countries in terms of the quality of its ports.This is primarily due to high costs, REAL ESTATE IMPACTS CONCLUSION inefficiency and bureaucracy. Operations in the Port of Suape in Pernambuco cost five times as much as they would in Cartagena, Colombia, and three times as much as similar services in Hamburg, Germany.The time it takes to clear cargo is also very long – about 5 days, which is more than the time it takes in China (3), the Ivory Coast (2), Germany (2), Chile (1) and Singapore (1). Only 0.3% of the cargo in Brazil is shipped by air, which is normally reserved for small-volume/ high-value cargo and associated primarily with passenger transport. Brazil’s substandard transportation infrastructure is by far its biggest hurdle to developing foreign trade, and a strong barrier to economic growth.The cost to ship goods is prohibitively high due to poor or inadequate infrastructure that does not cover the entire nation, and a system that depends heavily on overland transportation by truck. In order to strengthen domestic output and development, a National Transportation Logistics Plan was formed with the Ministry of Transportation to implement long-term multi-modal projects, with specific goals for each mode. By September 2012, about 38.5% of the logistics goals under the plan had been completed.The port system is also earmarked for a complete overhaul, which, among other initiatives, would allow private ports to compete with those owned by the government.The winning bidder will be the party offering the lowest combined rates for the best services, not the company willing to pay more for the right to operate a terminal. Fair competition is expected to result in increased investment, improved port capacity and efficiency and significantly reduced costs. VALUES IN US$ PER TON OF SOYBEAN Production cost of soybean in Brazil is similar to the US, but Americans spend much less with transportation – and are more profitable. brazil Price in the port: Shipping from farm to port: Production costs: 440 128 (highway)* Net income for the producer: 230** 82 U.S. Price in the port: 440 Shipping from farm 38 (highway and waterway)* to port: Production costs: 197** Net income for the producer: 205 *Distance more than 2.000 km, from Sorriso (MT) to Port of Santos (Brazil) and from Iowa to New Orleans (U.S.) **Excluding costs with land SOURCE: Cepa / Esalq - USP 11
  • 14. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation EUROPE: WESTern EASTern POLARIZATION Transport infrastructure within Europe is among the most advanced in the world, with good quality arterial roads and an expanding high-speed rail network throughout the region. However, although improving, there is a clear polarization in infrastructure quality between Western and Eastern Europe. In terms of logistics and distribution, in 2010, 75% of all goods transported within the EU-27 were moved via road transport, with rail accounting for the movement of approximately 17% of all goods. Rail transport accounts for a fairly low percentage, for example, in the UK, a rail hub is seen as useful to have but ultimately not business critical at the current time. The three largest sea ports within the EU are Antwerp in Belgium, Rotterdam in the Netherlands and Hamburg in Germany, and these three ports dominate the region in terms of the amount of cargo and containers that are transported through these ports. Currently, within the EU there are 40,451 miles (65,100 kilometers) of motorways, 68,662 miles (110,500 kilometers) of electrified railway line and 26,533 miles (42,700 kilometers) of navigable inland waterways. Going forward, the key issues facing transport and logistics distribution will consist of infrastructure quality and provision (for example, railway gauge differences between Russia and the rest of Europe), as well as concerns of congestion and emissions. The Trans European Networks (TEN-T) were initially devised by the EU at the Maastricht Treaty in 1992, with the aim of improving social and economic cohesion throughout the region.The TEN-T network was established to promote the multimodal functions of land, sea and air transport.The EU is currently revising the policy with the intention of creating a more multimodal ”core network,” linking major cities and bringing together the Western and Eastern parts of Europe. As transport infrastructure is currently unevenly developed, countries within Central and Eastern Europe will require significant upgrades particularly in the quality of the arterial road network but also in the provision of high-speed rail networks. These schemes are funded by several financial instruments, namely the EU Cohesion Fund and the European Regional Development Fund (ERDF). Traffic congestion affects both road and air traffic within Europe and is estimated by the EU to cost Europe around 1% of its annual GDP. However, with both freight and passenger transport set only to increase, new infrastructure will need to meet future demand and offset the major challenges that lie ahead. In addition, concerns regarding the price and the availability of oil are growing within Europe, particularly as supplies are expected to become increasingly scarce. Forecasts show the price of oil more than doubling by 2050 from the 2005 level of $59 a barrel. REAL ESTATE IMPACTS CONCLUSION Furthermore, in order to meet emissions regulations, the EU needs to achieve a 60% cut in transport sector emissions by 2050, compared with 1990 levels.With road transport accounting for 28% of the CO2 emissions, the EU is also working on new legislation to lower limits for carbon emissions from car transport as well as promote fuel efficiency and the use of alternative fuels. Currently, about ten large retailers are utilizing electric vehicles to deliver goods across London, and companies such as DHL and FedEx are increasing the amount of electric vehicle trials in a number of cities across Europe. European Modal Split Latvia Estonia Romania Switzerland Austria Lithuania Sweden Netherlands Germany Bulgaria Belgium Croatia Slovakia Finland Hungary EU-27 Czech Republic Poland France Slovenia FYR of Macedonia Norway Denmark United Kingdom Italy Luxembourg Portugal Turkey Spain Greece Ireland 0% Roads 20% Railways 40% 60% 80% 100% Inland water-ways Source: Eurostat 2012 12
  • 15. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation REAL ESTATE IMPACTS CONCLUSION momentum and meet the consumption needs of a rising middle class. Plans to connect the Indonesian islands of Sumatra and Java at a cost of nearly $11 billion were finalized last year. The Indonesian Airport Authority is swiftly expanding the capacity of major airports in the country to aid trade and logistics industry and simultaneously improve the connectivity between the islands. Indonesia Port Corporation also announced it would invest $2.5 billion in starting the development of Kalibaru port. PT Pelabuhan Indonesia is coordinating with China Merchant Holdings to construct a new container and iron-ore shipment facility in the island of Batam with a nearly $2-billion investment. ASIA: Massive infrastructure investment underway Transportation has become more dynamic in Asia during the last decade. Rapid urbanization in most Asian economies is driving up the volume of freight and passenger transport, and several countries are scaling up their infrastructure to meet growing demands. China, the most populous and the largest economy in the region, took the lead with the launch of several new high-speed railway corridors, as well as announcing plans to expedite the development of a comprehensive transportation system to boost the economy. It has plans to build a large-scale network of railways and expressways, and develop distribution centers, ports and regional hubs and provide easier access to all towns and rural regions in the country by 2015. India has already witnessed the shifting of manufacturing activity from large metropolitan areas to smaller cities with the development of an interstate highway system in the last decade. It announced plans to improve the transportation network and develop logistics and manufacturing hubs as a part of its five-year commitment (20122017) to invest $1 trillion in infrastructure. The Delhi-Mumbai Industrial Corridor (DMIC) that is currently under development with an investment totaling to US$ 90 billion is adding several high-capacity transportation links (roads, rail, port and air connectivity) and logistics facilities to boost industrial/manufacturing activity and growth. A similar corridor between Mumbai and Bengaluru has been proposed recently. Further initiatives to boost the intra-city connectivity include development, expansion and modernization of airports in several tier II and III cities, development of private ports and improving road and rail connectivity across the country. Indonesia also unveiled plans last year to invest nearly $110 billion in overhauling its transport system, improve the inter-island connectivity and upgrade the logistics system to sustain growth In Vietnam, despite an average annual growth rate of 18% in trade volume over the last 15 years, the logistics sector is still in its nascent stages. The government has started to focus on reducing transport costs, increasing access to ports and developing port infrastructure. In the short term, it is encouraging Public-Private Partnership (PPP) models and reducing trade barriers. Thailand recently rolled out an investment program worth nearly $75 billion to enhance connectivity with ASEAN neighbors, boost ocean trade, lower transportation costs and reduce the existing bottlenecks. It has plans to develop and strengthen the trade corridors linking Cambodia,Vietnam, Laos, Myanmar and China. The Philippines has recently laid out plans to invest approximately $4 billion in inland transportation and port infrastructure to strengthen supply chains between intermediate and terminal markets in the island archipelago and increase trade with neighboring countries such as Indonesia, Malaysia and Vietnam. Hong Kong and Singapore are investing heavily in high value-added logistics to reinforce their position as regional logistic hubs. Singapore and Malaysia have recently agreed to build a high-speed rail system connecting Kuala Lumpur with Singapore to improve connectivity, enhance business linkages and cross-border trade. These two countries are also exploring rapid transit links between Singapore and the Malaysian city of Johor Bahru, and a possible third cross-border road link. These links could accelerate commercial development in the Malaysian state of Iskandar. Temasek Holdings Pte. Ltd., Singapore’s state investment company, has already unveiled a joint venture with Malaysia’s Khazanah Nasional Bhd. on two retail and residential projects. Port expansion plans in Australia have been hit by a slowdown in trade and exports. However, the billion-dollar upgrade and modernization of the east coast interstate railway network presents an upside growth factor for the rail freight sector. 13
  • 16. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION Intra Asian Air Cargo 7 6 4 3 2 4.5 4.6 5.5 5.7 6.0 6.2 5.9 5.3 6.1 6.0 1 4.0 Tonnes (in millions) 5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0 Source: Boeing World Air Cargo Forecast 2012-2013 South Korea started construction of an international seaport at Saemangeum last year with a $200-million investment to facilitate trade and manufacturing growth in automobiles, industrial materials and reusable energy sectors. Taiwan relaxed its trade barriers again in 2012 by opening up its market to Chinese investors, allowing them to invest heavily in several business categories in manufacturing, public infrastructure and service sectors. Nearly all Asian economies are keen on removing regulatory barriers to attract foreign investments and facilitate trade flows to keep the economic growth intact. Growth in ASEAN and other emerging markets is partly benefiting from a shift of some industrial and manufacturing facilities, particularly shoes, clothes and electronic equipment, away from China and, hence, the need for improved infrastructure. These markets present numerous high-yield investment opportunities, and with export growth in the double digits, they are highly attractive. Infrastructure investments are being made on a large scale to create a competitive landscape and drive sustainable growth. Intra-Asian air cargo takes off Most Asian countries are separated either by ocean or large land distances. The growing sophistication of supply chains, rapid growth in e-commerce, rising fuel costs and minimal ground and ocean transport alternatives in the region have made air cargo an essential element in the overall trade. The intra-Asia air cargo market accounts for nearly 15% of the world market and is growing at an annual rate of 6.3% (as of 2012, source: Boeing). It is largely concentrated in Mainland China, Japan, Singapore, Hong Kong, South Korea and Taiwan so far; however, ASEAN markets are catching up quickly in parallel with their economic development. Trade agreements, economic growth and currency exchange rates have largely contributed to growth in this sector in the last decade. Growing links between low-cost manufacturing facilities (in the region) and global production chains, and the rise of domestic markets backed by growing consumption levels, are driving trade among regional economies and, subsequently, the demand for air cargo. Lighter and higher value goods are increasingly replacing bulk shipments and the airlines are using hub-and-spoke models to maximize efficiency across the region. Rising per capita incomes and consumption levels and the migration of low-cost manufacturing to emerging economies such as Indonesia,Vietnam, Philippines, Thailand, Myanmar and Cambodia have the potential to radically accelerate intra-regional trade flows in the near future, thus further increasing the demand for air cargo. 14
  • 17. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION REAL ESTATE IMPACTS AMERICAS DEMAND DRIVERS Global supply chain strategies are undergoing revolutionary change. Linking worldwide networks of sourcing, manufacturing and consumption, supply chains today are longer and more complex. To meet demands being driven by e-commerce, technology and transportation costs, companies are actively streamlining their fulfillment processes – maximizing efficiencies in inventory, service time and delivery – which is driving demand for high-quality space. Moreover, with companies sitting on large amounts of cash and capital and with pent-up consumer demand building, the manufacturing sector is steadily expanding and preparing for the next significant growth cycle. The rise of regionalization to support e-commerce is a leading demand driver that will increasingly influence real estate decisions and markets. One of the biggest challenges facing industrial space users across the Americas is the shortage of quality space, as technological advances have rendered many facilities obsolete. Land constraints and functional obsolescence is spurring more redevelopment and retrofitting of existing facilities, and the top markets will command a premium for these types of projects. From a real estate perspective, Mexico is well positioned to benefit in this changing landscape, as the country offers low-wage labor and direct access to the U.S. market. Mexico City, states bordering the U.S., and the central states or Bajio region are all experiencing significant growth. In Canada, a revived U.S. housing sector has rejuvenated the lumber industry in British Columbia, a pick-up in U.S. vehicle purchases has benefited the auto sector in southern Ontario and many other industries and business are positioning for growth based on clear signs of U.S. recovery. Additionally, an increase in trade between the U.S. and South America is driving growth, particularly in the Brazilian logistics market. North American Top Container Ports (2012 Total TEUs) Los Angeles Long Beach New York/NJ Savannah, GA Port of Vancouver (BC) Oakland, CA Virginia Houston Seattle TEUs (in Millions) Tacoma 0 1 2 3 4 5 6 7 8 9 Source: Port Authorities Official Websites 15
  • 18. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation Americas Port Locations: Heating Up Demand for industrial space is strong around Americas ports, particularly in Southern California, Philadelphia and New York-New Jersey. But it is also growing at other ports – in some cases, quite quickly. Prince Rupert Port in British Columbia, for example, has been steadily eating into the market share of the ports of Los Angeles and Long Beach, North America’s largest container complex. Prince Rupert, which opened its Fairview Container Terminal in October 2007, handled about 550,000 TEUs in 2012. About twothirds of that container traffic moved to or from the U.S. Midwest and Midsouth, which are prime markets for the Southern California ports. Prince Rupert’s impact has been greatest in Chicago, Memphis and Toronto, all of which are well connected to the Canadian rail networks and have long track records for receiving such freight. With wages in China rising, manufacturing is shifting to South East Asia and the Indian subcontinent, which is driving more business to U.S. East Coast ports. Additionally, since two-thirds of the U.S. population resides east of the Mississippi River, after the Panama Canal expansion is completed in 2015, many of the products traditionally transported to the West Coast may be left on vessels to make the journey all the way to eastern ports. Growing demand for industrial real estate in southeastern U.S and Gulf Coast port locations has been further propelled by land that is relatively more affordable and abundant in cities like Savannah or Charleston compared to that in Los Angeles and Long Beach. In preparation for the updated Panama Canal, four East Coast ports are deepening their harbors in order to handle post-Panamax ships: Baltimore (2013), Miami (2014), New York (2015) and Norfolk (ready). East Coast and Gulf Coast port traffic will be further bolstered by new manufacturing operations from Airbus (Mobile, AL), Boeing (Charleston, SC), and Caterpillar (Athens, GA), and a new commitment from Disney to use the port of Jacksonville exclusively for all imports bound to the Magic Kingdom. As global supply chains are reconsidered and U.S. manufacturing grows in the right-to-work states (states that do not force people to pay union dues as a condition of employment) in the Southeast, Midwest and Gulf Coast, continued port volume growth is anticipated. Rise of the Inland Port The pressure for greater transportation efficiency has spurred the development of intermodal facilities, and inland ports are becoming a critical part of supply chain dynamics. The major inland logistic hubs of Chicago, Columbus, Dallas/Fort Worth and Atlanta have benefitted the most from increased international container volume specifically from Asia. This has allowed them to experience the largest increase in demand for industrial space. Dallas is especially well positioned with two major multimodal transportation centers. REAL ESTATE IMPACTS CONCLUSION Several secondary markets such as Kansas City and Winnipeg have also experienced improved market fundamentals thanks to large investments in intermodal capacity to accommodate freight movement via several modes of transportation. After many years of planning and stalled progress due to the recession, the BNSF Railway’s Intermodal facility in the south Kansas City area will be operational this year. The 440-acre site, which will be capable of handling more than 500,000 container units a year, has triggered significant growth in the industrial real estate market. As well, Winnipeg’s CentrePort Canada, a new 20,000-acre inland port and trade area, seeks to leverage the city’s geographic location on north-south and east-west trade routes by acting as a multimodal hub (road, rail, air) for international transportation, manufacturing, distribution and warehousing activities. As a result, several privately owned industrial parks are being developed at the location. SELECTED PORT TO HUB TO MARKET CONNECTIONS Seattle Chicago New York Columbus Oakland Kansas City Norfolk Memphis Los Angeles/ Long Beach Dallas Ft. Worth Atlanta Savannah/ Charleston Houston Other markets widely recognized as full-fledged inland ports are Houston, St. Louis, Memphis, Inland Empire, Charlotte, Prince George, Edmonton, Regina, Calgary (under development), Montreal and Quebec City. The rise of inland ports has been largely driven by retailers such as Walmart and Home Depot, which were among the first and largest users of such ports. At CenterPoint Intermodal Center in Joliet, IL, the largest master-planned inland port in North America, Walmart occupies 3.4 million square feet and is the largest tenant. CIC-Joliet, on more than 6,500 acres just 30 miles southwest of downtown Chicago, is strategically positioned at the epicenter of the region’s immense transportation infrastructure. Home Depot is another CIC-Joliet tenant, with a 1.6-millon-square-foot build-to-suit. In addition to existing inland ports, a number of new locations are under development such as the 4,000-acre Florida Inland Port in St. Lucie, which is being engineered specifically in preparation for the Panama Canal expansion, and the 580-acre Port Arizona in Casa Grande, which will become the first inland port to serve the top two ports in the U.S. — the ports of Los Angeles and Long Beach. 16
  • 19. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation Changing Supply Drivers Stronger Links: High-Tech Big boxes support Efficient shipping Part of the just-in-time delivery equation rests with big-box warehouse space that is large enough to store and re-pack various products, and is easily accessed by both rail and truck. As companies shift their supply chains from a centralized sourcing and manufacturing model to a more regionalized approach, they are finding their networks may need new facilities such as freight-pooling hubs or mixing centers in order to aggregate shipments and move them as full containers or truckloads. An increase in intermodal transportation has led to the construction of intermodal hubs that serve as both transfer points and logistics hubs, and offer valueadded services such as kitting, a process that groups, packages and supplies separate but related items as one unit, thereby reducing handling and logistics. REAL ESTATE IMPACTS CONCLUSION Such supply chain shifts are redefining warehouse/distribution buildings. Direct-to-consumer sales require retailers to consolidate online and store-based fulfillment operations under one roof, which is spiking the demand for high-tech, big-box facilities. Today’s most advanced distribution facilities offer clearances of about 35 feet, energy-efficient lighting and green building materials. E-commerce providers are harnessing radio frequency identification systems (RFID) that allow machines to store and retrieve goods in the warehouse on the basis of the label number assigned on the package. To support its rapidly growing global distribution network, Amazon.com acquired Kiva Systems, Inc. for $775 million in 2012, a material handling company known for its advanced warehouse fulfillment systems. The acquisition is just part of its continued investment in cutting-edge facilities and operations that support a booming business expected to reach $100 billion in sales by 2015. 17
  • 20. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION In Canada, as well, e-commerce is behind the growing demand for bigger, more efficient warehouses in strategic locations.Third-party logistic companies are also being used to manage shipping in markets that don’t justify a full-sized distribution facility. Bigger in Canada generally falls within the 500,000 to 800,000-square-foot range, with some exceptions.Target recently completed a 1.3-million square foot distribution facility in Milton (part of the Greater Toronto Area) – one of three such facilities the giant retailer will use to service its new Canadian locations. Distribution Centers: BIG GETS Mega The need to improve supply chain fuel efficiency is behind the rise of the new mega development. Operators need space that is large enough to consolidate shipments for easier transportation to regional distribution centers as full containers or truckloads, since less-than-full container or truckloads can cost four-to-five times more to move than full loads. The trend towards more efficient distribution centers has resulted in a shortage of class A speculative warehouse space of over 500,000 square feet in major logistics hubs.These giant distribution centers allow companies to experiment with different fulfillment strategies and respond to the demands of high-turnover online retailing. In the U.S., more buildings over a million square feet were leased in 2012 than from 2009 through 2011 combined.Tenants include retailers like Amazon.com, Home Depot and PetSmart and manufacturers like Owens Corning and General Electric.The trend towards this mega-size distribution center is so prevalent in some markets, particularly the Inland Empire market in Southern California and the PA I-81/I-78 Distribution Corridor market on the East Coast, that some buildings are even being developed on a speculative basis. Number of BuildingS over 400,000 SF in the U.S. 1200 1000 800 Adequate trailer parking is critical in order to create a large enough staging area for the efficient movement of trailers in and out of facilities. Clear height has reached 35 feet in some cases to allow for additional racking and maximize pallet capacity. Greater vertical capacity creates a reduced footprint, which translates into major savings in gross occupancy costs for larger companies over the term of the lease. Developers are also becoming more strategic. For example, the zoning of land parcels can be upgraded to sell off units at higher prices for other commercial use, allowing developers to lower the cost base of the remaining land where a distribution facility will be constructed. This results in a more competitive rental structure for the tenant. World-class specifications Today, multi-tenant warehouses built by international developers such as Prologis and CPA offer world-class specifications. In Mexico, class A first-generation industrial inventory grew from virtually zero in 1994 (just after the signing of North America Free Trade Agreement) to over 300 million square feet in 2012, and industrial parks are often industry specific, with companies representing automotive, aerospace or electronics. Industrial markets were once dominated by single tenants in owner-occupied buildings. Today, multi-tenant warehouses built by international developers such as Prologis and CPA offer world-class specifications. 600 1,047 1,036 834 0 677 200 640 400 1963-1972 1973-1982 1983-1992 1993-2002 2003-2013 Source: Cushman Wakefield Research 18
  • 21. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation Most Dynamic Regional Markets Miami: International Trade Will Drive Strong Growth International trade will continue to positively impact the industrial sector as trade agreements with Central and South America and Asia are executed. The increase in trade between the U.S. and South America – Brazil is one of the U.S.’s largest trading partners – is driving recent growth in the Miami market. Additionally, the expansion of the Panama Canal could be a game changer for South Florida industrial real estate. Miami, which handles more traffic from Asia than any other Florida port, still gets 54% of its trade from Latin America and the Caribbean compared to 18% from China. Florida’s location is unique in the U.S. because of its position for east-west and north-south trade. The Port of Miami will also be able to handle the post-Panamax ships – a huge advantage that will drive demand for modern, institutional-quality buildings able to handle the newest containers and trucks. Due to the limited supply of industrial-zoned land in the area, land and warehouse prices are expected to rise significantly and rents grow by at least 13% in the next four years. Increased trade will also lead to the expansion of ancillary businesses such as customs brokers, freight forwarders and logistics firms, all of which will also need additional warehouse and office space in Miami. Chicago: Major Inland Hub The Chicago metropolitan area continues to attract tenants thanks to its superior transportation infrastructure. The market is home to more than 20 intermodal parks that serve as the Midwest hub for manufacturing and distribution. As inland ports increasingly become a critical part of supply chain dynamics, Chicago’s distribution network will remain a key attraction in the location-selection process. REAL ESTATE IMPACTS CONCLUSION Development activity has been modest in recent years, focused mainly on facilities in the 300,000- to 700,000-square-foot range to satisfy big-box distribution needs. Acquisition and consolidation activity continues to drive occupancy decisions as companies seek greater efficiencies and location advantages. Despite the slow recovery after the recession, the GTA’s industrial real estate vacancy rate is only 6.2% – a testament to prudent development strategies and an overall healthy market poised for growth. VANCOUVER: Mini Boom Spurred on by factors such as the growing U.S. demand for British Columbia lumber,Vancouver’s industrial real estate market is undergoing a mini boom. Demand for industrial space gained significant momentum in the latter half of 2012, with absorption averaging 1.3 million square feet per quarter, up over 83% from the first half of the year. In this robust market, demand is also coming from reconstruction projects arising from widespread damage inflicted on Japan by the 2011 earthquake and tsunami and on the U.S. Northeast in 2012 by Hurricane Sandy. Mid-sized Mexican cities reap benefits Trade expansion has given a major boost to commercial real estate in a growing number of regions. The Mexican cities that had a head start or small original advantage have seen their trade relevance snowball, as evidenced by Monterrey, which was transformed by NAFTA trade into the country’s second largest urban-economy (after Mexico City). Cities with good transport connections and a well-trained labor market are reaping the largest benefits, such as a string of mid-sized cities in the State of Guanajuato – Silao, Irapuato, Salamanca, Celaya and Leon – which, together with Queretaro and San Luis Potosí, form the backbone of the Bajio. BRAZIL: STRONG GROWTH OUTSIDE RIO-SAO PAULO This market is home to more than 500 million square feet of manufacturing space, the largest concentration in the country and more than double that of Greater Los Angeles. We expect construction levels to remain healthy in this market in the coming years as the demand for high-quality industrial space continues. Industrial demand is at its peak in Brazil, driven by higher income and expanded consumer consumption. Industrial warehouse park (or condominiums) construction is booming. Although facing challenges such as a poor highway infrastructure and a scarcity of suitable sites, either due to accessibility or document and permit problems, the real estate landscape shows tremendous potential. Greater Toronto Area: Poised for growth Most of the new industrial park construction has taken place on the Rio-Sao Paulo axis due to its proximity to large consumer centers, but an increase in public and private infrastructure investment is creating new markets such as the city of Tres Lagoas in Mato Grosso do Sul. Companies such as Petrobras,Votorantim, Fibria and Eldorado are investing heavily in developing industrial plants to manufacture cellulose, fertilizers and steel, and this activity should attract hundreds of suppliers to the area. The Greater Toronto Area’s industrial market is one of the largest in North America with about 790 million square feet of inventory. In healthy economic times, it is not unusual to see annual growth in the 10-to 12-million-square-foot range. 2012 saw modest growth and a pick-up in demand momentum by year end. In the past few years, significant demand has been generated by tenants seeking megadistribution centers, particularly as U.S. retail giants such as Target enter the Canadian market. 19
  • 22. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION NORTH AMERICA: RESHORING WHEN IT MAKES SENSE Caterpillar, Nissan, NCR,Yamaha, Ford and Electrolux. In addition, GE, Ford Motor Company, Master Lock and General Motors have also bought into the reshoring value proposition. It’s true that some manufacturing is coming back to North America. From 1998 until 2010, the U.S. experienced a 35% drop in total manufacturing jobs. Since the end of 2010, the sector has grown by 4%. Why? When China joined the WTO in 2001, its average manufacturing wage was $0.58 per hour. Between 2005 and 2011, Chinese wages rose each year by an average 19%, and The Boston Consulting Group forecasts increases of 18% each year through 2015. Increasingly, location selection is all about being able to better serve and reach customers as quickly as possible. One of the major reasons why manufacturers choose to reshore to North America is to achieve lower transportation costs. When transportation, duties, supply chain risks, industrial real estate, speed to market and other variables are fully accounted for, reshoring may increasingly make good business sense. In 2005, U.S. manufacturing wages were almost 25 times that of China. Today, that wage gap multiplier is under 10 and will likely be under five by 2015. Mexico’s cost of labor is beginning to mirror that of China’s. Reshoring is likely to gain traction as the “total landed cost gap” of offshore manufacturing narrows, and labor costs become more globally balanced. High oil prices, the natural-gas boom in the U.S., increased risks associated with natural disasters and economic instability in emerging markets are other factors that support reshoring. As well, U.S. manufacturers are leaders in lean manufacturing and automation, making U.S.-based factories less labor intensive and more cost effective. ANNUAL CHANGE IN MANUFACTURING WAGES (IN US $) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% While the reshoring movement is still young, companies are at the very least examining their production options more closely. A project that five years ago would have considered only China due to labor-cost advantages may now look at Mexico, Canada or the southeastern U.S. Large companies that have announced plans to reshore portions of their manufacturing to the U.S. include -5.0% -10.0% -15.0% 2004 2005 2006 U.S 2007 Mexico 2008 2009 2010 2011 China Source: U.S. and Mexico hourly wages per Bureau of Labor Statistics. China annual wages per Chinese National Statistics Bureau ANNUAL Wage Comparisons (in US $ before benefits) $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Tokyo* San New York* Los Francisco* Angeles* Chicago* Sydney* London* Dallas* Machine Operator Hong Kong* Taipei* Beijing San Paulo Mexico City Buenos Aires New Delhi Manager *Cities chosen based on Top 10 for Industrial Investment, Winning Cities, published by CW in 2012 Source: Economic Research Institute (ERI) 4Q 2012 data. 20
  • 23. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation EUROPE Demand Drivers With the prolonged euro zone uncertainty taking a toll on business confidence, market activity within the European logistics sector has been mixed. Many occupiers have been adopting a “wait-and-see” attitude before making any strategic real estate decisions, which has led to a slowing in demand. However, locations such as Moscow, Warsaw and Berlin have recently seen encouraging levels of activity as logistics operators take advantage of positive economic growth in parts of Central and Eastern Europe (CEE), combined with the improving transportation networks. The Polish and Russian economies in particular have performed well in contrast to the majority of Europe since around 2011, with demand for well-located, high-quality space remaining strong in both Warsaw and Moscow. The picture across others parts of Central and Eastern Europe is less certain, with countries such as Bulgaria and Romania witnessing much more subdued occupier demand. This pattern is similar across Southern Europe: Spain and Portugal have been particularly affected by the euro zone debt crisis, and overall logistics activity in the region has been slow. In the rest of Western Europe, tenant interest has been more stable with the focus on modern space in the best locations, although transactions take longer to conclude due to the cautious outlook of many occupiers. Retailers shine Spotlight on Prime Space Cost-reduction strategies and the focus on achieving greater operational efficiencies have put the demand spotlight on prime space, with secondary units left largely ignored by tenants. This trend runs parallel with developments in the logistics sector where supply chains have become increasingly flexible in order to accommodate fluctuating consumer demand. REAL ESTATE IMPACTS CONCLUSION Not surprisingly, large-scale retailers have become the main drivers of logistics redevelopment and expansion. These operators need to move vast volumes of goods at a fast rate, which has resulted in the growth of progressively larger distribution centers built to the highest specifications and located in the most suitable locations. As a spin-off to this growing trend, we are also seeing the emergence of smaller units located closer to the consumer, away from the principal distribution hubs in a variant to the traditional hub-and-spoke model. Beyond retailers, 3PL operators have seen a significant expansion in the amount of outsourced contracts in the logistics sector, becoming an increasingly important occupier group in Europe. The rise of 3PL companies is largely attributed to the need to provide distribution and warehousing services to smaller companies. Many of these include manufacturers and retailers whose current strategy or scale makes outsourcing such services the most cost effective or suitable route. It is estimated by the BCSC that approximately 25% of leased logistics space for retailers was purely for e-commerce-related activities. Furthermore, the “click-and-collect” option, where customers can order on the internet and collect their purchases from designated locations such as an existing store, are emerging in many areas, notably France and the UK. Changing Supply DRIVERS Quality Space in short supply Although the logistics sector is generally perceived to be less volatile than other property groups, the amount of good quality space throughout Europe has continued to decline. Therefore, the market is characterized by a high level of demand for well-located, high-quality space, contrasting with secondary space, which is becoming increasingly obsolete. As a result, there is a growing scarcity of modern space in most markets throughout Europe. Although this has placed marginal pressure on rents in some areas, it has also given rise to the re-emergence of build-to-suit developments, particularly with space that requires a high degree of automation and technology. The lack of availability within the sector is attributed mainly to limited speculative construction in a market where confidence has yet to be restored. Moreover, with speculative development having largely ground to a halt across European markets – with a few notable exceptions such as Moscow – the availability of high-quality space is restricted in many of the key logistics hubs. For example, the UK market is currently characterised by extreme scarcity in terms of high quality space. Therefore, it is anticipated that the preference for space via the build-to-suit or pre-let route will remain the norm – at least until economic recovery takes a stronger hold. 21
  • 24. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation Pent-Up Demand and New Strategies Looking forward, a slow increase in activity is forecast as the economic outlook becomes steadily more positive. There will remain a degree of pent-up demand, although relief will be subject to occupiers finding suitable quality stock in what is expected to remain a pre-let and build-to-suit market. Corporate strategy will also drive the location of new facilities. For example, retailers may choose to operate a large centralized hub with satellite depots in order to serve more remote locations. Furthermore, when considering the central hub, occupiers will have to determine whether it will be more cost effective given the lack of available high-quality buildings to become an owner-occupier or undertake a long leasehold. In parts of Southern Europe, tenants are also re-gearing leases but on flexible terms in order to reduce rents. These tenants may look to renew for three years if they’re two years from expiry in return for a lower rent. Alternatively, the occupier may choose to outsource these operations to a 3PL; therefore, how will the 3PL decide on the correct location for its warehousing? Will it implement the traditional hub-and-spoke, a series of small satellite depots or share the facilities of other 3PL operators? These location choices depend on many factors, but in our view, the requirement of high-quality, well-located space will remain the principal driving factor for virtually all occupiers over the coming years. REAL ESTATE IMPACTS CONCLUSION Most Dynamic Regional Markets Upper Silesia: Poland’s Top Performer The majority of Upper Silesia, situated in southern Poland, has historically been a major industrial center, with mining and the iron and steel industries serving as important constituents of the local economy. Out of these industries have grown significant Polish cities such as Katowice, Gliwice and Chorzow. The region possesses a modern road network and is home to a number of manufacturers, most notably from the automotive industry. Over the past few years, Upper Silesia has seen development from both manufacturing and warehousing sectors as a result of its favorable location within Poland and Central and Eastern Europe. Indeed, Upper Silesia is currently the top-performing regional warehouse market within Poland. Moscow: Location Strength Home to over 10 million people, the Moscow region is at the centre of the logistics sector within Russia due to its large population and excellent transportation links. Additionally, it is an important strategic location for those operators looking to expand further eastwards into Russia. The Russian economy has performed consistently well over the past couple of years, and this has helped to maintain solid occupier demand for industrial space, particularly throughout the Moscow region. In response to sustained demand, both speculative and build-to-suit development is expected to rise, which should help to alleviate the lack of good-quality supply. Demand is largely being driven by retail operators and industrial companies, with retailers in particular looking for larger, multi-modal facilities. Berlin: Heart of Europe Located in the heart of Europe, Berlin has become an increasingly important logistics market in both Germany and in the wider European market. Berlin serves as a key east-west corridor from Amsterdam and the Rhine-Ruhr region towards Warsaw and Moscow in the east. Furthermore, the city is relatively close to the Port of Hamburg, the third busiest sea port in Europe, and is situated near the mouth of the River Elbe on the North Sea. As a result of Berlin’s prime location, occupier demand for logistics and warehousing space has risen over the past few years.These demand levels are expected to hold firm over the next year or so as logistics operators in Europe look increasingly eastwards in search of growth. 22
  • 25. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation REAL ESTATE IMPACTS CONCLUSION In Shanghai, which is one of the key logistics and warehousing markets in the region, demand has once again exceeded supply. Despite annual rental and capital-value growth of about 10% to12% over the last two to three years, and a slowdown in exports, tenant interest remains strong. Australian cities such as Perth and Brisbane, which depend on mining, have benefited from China’s demand for iron and steel. However, with slowing Chinese demand, the economy and industrial markets have felt the impact. Leasing activity remains moderate in Melbourne and Sydney. E-COMMERCE GIVES RISE TO NEW STRATEGIES ACROSS ASIA ASIA PACIFIC DEMAND DRIVERS Despite continued global economic challenges and the related manufacturing slowdown in China and other major Asian economies, industrial, warehousing and logistics market activity has remained generally steady and is gaining momentum. Moderate demand from large-scale industrial players and traditional manufacturers was offset by the growing demand from retailers and logistics and warehouse service providers. In 2012, for example, U.S.-based retailer Walmart entered the growing Chinese online retail industry through the purchase of a majority stake in Yihaodian, a Shanghai-based e-retailer, and Sumitomo Corporation of Japan launched operations in China and Indonesia. Transportation and logistics service provider MNX moved to South Korea to capture growing opportunities in the life sciences sector and Australian freight firm Toll Group started augmenting warehousing facilities in the second half of 2012. Rapid growth in online trading and mobile technologies has spurred e-commerce sales all across Asian countries. With companies increasing their online presence across the region either to test local markets or complement existing stores, same-day order fulfillment has made it necessary to locate distribution centers close to consumers. This has redefined the way logistics and local strategies are applied to gain maximum advantage in tier I and tier II markets in China and India. With internet penetration still far below that of advanced economies (above 70% in Japan and Korea), there is a wider opportunity for growth in e-commerce and logistics in most Asian markets. The shift to inland manufacturing bases and increasing investments in transport infrastructure, along with more efficient supply chain strategies and sophisticated logistic networks, are likely to push the warehouse/big box space demand significantly upwards in key regional hubs such as Chongqing, Chengdu and Wuhan in China. In India, primary hubs such as New Delhi, Mumbai, Chennai and Nagpur dominate the market, while emerging regional hubs such as Ludhiana, Ahmedabad and Kanpur continue to grow at a rapid rate. Strong domestic consumption throughout the region has fueled the growth of 3PLs and warehousing demand in regional hubs such as Singapore, Hong Kong, Manila and Shanghai. Even though demand for industrial and warehouse space in Hong Kong has remained relatively stable, supply has become extremely limited due to industrial revitalization and redevelopment. While leasing activity from 3PL companies has been largely driven by retailers, including e-commerce businesses, nontraditional occupiers such as data centers and self-storage operators are also active. Demand from contract logistics companies and manufacturers remains robust in countries such as Indonesia, Cambodia and Vietnam. However, market activity has slowed in Thailand and Malaysia due to rising capital values and operational costs. 23
  • 26. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE CONCLUSION NEW OPPORTUNITIES IN LOW-COST LOCATIONS B2C E-COMMERCE SHARE IN ASIA-PACIFIC, 2010-2012   REAL ESTATE IMPACTS 2010 2011 2012 Japan 50.6% 44.4% 37.7% China** 14.1% 21.8% 31.7% Australia 14.2% 12.7% 10.6% South Korea 7.3% 7.0% 6.2% India 3.5% 3.9% 4.1% Indonesia 1.4% 1.7% 1.9% Others 8.8% 8.6% 7.8% * Includes travel, event tickets and digital downloads ** Excludes Hong Kong Source: eMarketer, July 2012 INTRA-REGIONAL GROWTH ALTERS TRADE NETWORKS The growing complexity and integration of intra-regional trade channels have boosted demand for industrial space across most regional hubs. Emerging markets such as Vietnam, the Philippines, Myanmar and Indonesia have moved up the value chain with a solid economic performance and changes in manufacturing supply chains over the last couple of years, thus creating new trade networks both within and outside the region. According to the WTO, intra-Asia trade is expected to grow at an annual rate of 10%, which is significantly higher than the 6% forecast for Asia’s trade with the rest of the world. Continued growth in China and India has not only strengthened the existing trade networks, but also opened up new opportunities to reshape existing routes. According to the WTO, intra-Asia trade is expected to grow at an annual rate of 10%, which is significantly higher than the 6% forecast for Asia’s trade with the rest of the world. Sustained growth in intra-regional trade will continue to reshape the regional trade landscape, opening new opportunities for business expansion and relocation across various markets, which bodes well for logistics and 3PL companies. Rapid growth in ASEAN (Association of Southeast Asian Nations) countries is largely related to companies trying to grab new, large cost-effective opportunities to increase their penetration in the regional market and raise their market share. Dachser (U.S.) has been rapidly expanding in China and also entered the Vietnamese market and Malaysia, a strategic location in terms of international and intra-Asian freight services.As companies try to reorganize their supply chains and operations into regional hubs to gain an edge in scale and cost competitiveness, the centre of gravity of several industries is moving south. Growing costs in China add another dimension to this migration. Low-skill manufacturing jobs in the clothing industry are quickly moving to Bangladesh, Cambodia, India and Pakistan. Retail and low-cost technology manufacturing is relocating to Vietnam and Thailand. Growth in specialized functions in these markets has already altered some of the trade routes within the region. Further growth and integration of these markets point towards more efficient and flexible supply chains across industries. NEW TRADE LINKS AND BUDDING MIDDLE CLASS Growing trade links within the region, supported by increased consumption from a budding middle class, have helped several Southeast Asian economies withstand recent external global pressures. In spite of lower-than-average returns from financial markets and historically low interest rates in these economies, ongoing investments in infrastructure, machinery, plant equipment and technology have showed positive signs of renewed growth. According to the Centre for Economics and Business Research in London, investments in Indonesia,Vietnam and Malaysia are expected to grow at annual rate of 7% to 9% through 2014. Government investments in infrastructure have also been growing in Indonesia and Vietnam to encourage large-scale FDI activity. A low interest-rate environment is likely to continue into 2013 and that could also stimulate the regional domestic demand and investments. FOREIGN DIRECT INVESTMENT OPENS DOORS China outshone the United States as the biggest recipient of global foreign direct investments in the first half of 2012 (source: UNCTAD). Major Asian economies such as Hong Kong, Singapore, Japan and Korea accounted for nearly 85% of this activity. Investments in India, as of the third quarter of 2012, declined to $14.8 billion, indicating a 27% drop on an annual basis.The impact of liberalized investment regulations introduced in 2012 to the retail, power and aviation sectors have yet to materialize. Sustained economic growth, an expanding manufacturing base and strong domestic consumption are some of the key drivers behind 24
  • 27. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation rapid growth in foreign investments in Southeast Asian markets such as Vietnam, Philippines and Indonesia. At around 8%, ASEAN’s share in global FDI inflows was almost equal to China’s in 2012. Large-scale availability of low-cost opportunities, an abundance of natural resources, infrastructure growth and efforts to promote industrial sector and manufacturing growth could radically alter supply chains and trade networks in these markets over the next few years. Changing Supply drivers Changing dynamics drains Quality Supply Asian economies are more integrated and interconnected than ever before. The rising middle class with its dramatically increasing consumer appetite has posed a major challenge to logistics companies and manufacturers, which are scrambling to expand or reshape trade routes and add new links to supply chains. The related explosion of e-commerce in China and India is causing the supply of high-quality logistics and warehousing space to fall short in prime locations of major markets including Shanghai, Beijing, Guangzhou, Mumbai and New Delhi. High capital values, intense competition, scarcity of land and regulatory measures restrict the supply in core areas of Shanghai, where tenants are mandated to locate in peripheral areas. Other major Chinese markets such as Guangzhou, Shenzhen, Tianjin and Qingdao are also seeing a growing scarcity of modern space and steady increase in costs. As a result, foreign manufacturers and large-scale e-commerce logistics companies are exploring options such as relocating part of their operations to low-cost markets, built-to-suit construction, redevelopment of old industrial properties and self-managing opportunities. REAL ESTATE IMPACTS CONCLUSION Asia’s Exploding Middle Class Sustained economic growth, rapid urbanization and strong service-sector growth in the last decade have created a burgeoning middle class across major Asian economies such as China, India, Indonesia, Philippines and Vietnam. This emerging class, defined by the Asian Development Bank “as a population with per-capita consumption between USD $2-$20 per day (2008) in purchasing power parity terms,” has nearly tripled over the last 20 years. Nearly 15% of India’s population is now considered middle class and it is growing by about 13% each year. By 2015, more than one-fifth of India’s population will fall under this category. In Indonesia, the middle class has grown by more than 50% over the last decade. Nearly 40% of the population (about 500 million people) was termed middle class in China as of 2010 and the number is expected to grow by more than 50% (about 300 million) by 2020. Nearly half of the population could well be considered middle class in China by 2015. In Philippines, nearly 25 million people joined these ranks in the last two decades. This explosive growth has had a noticeable impact on domestic demand, consumer markets and supply chains in the last few years. Sales of consumer durables and affordable goods have increased substantially, driving tremendous growth in manufacturing and service sectors. Intra-regional trade has already surpassed exports to western economies and is still growing at a healthy rate of 10% per year. As companies continue to relocate within the region to reduce costs or move closer to emerging domestic consumer markets, Asia’s economic landscape will continue to evolve and play a leading role in transforming global trade. 25
  • 28. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation With average rents, abundant land supply and improving infrastructure, Hanoi in Vietnam and Manila in the Philippines present attractive options to large-scale manufacturers looking to relocate from other countries due to rising labor and operational costs. Anticipated supply growth in these markets is supported by speculative demand from international logistics and warehousing companies, as well as from pharma, auto, aerospace and electronics manufacturers from Mainland China, Korea, Taiwan, Japan and Malaysia. With sustained economic growth, these emerging new hubs also present numerous opportunities for companies to expand their scale and penetration in the region. China: High-Quality Assets and Lower-Cost Markets Last year, the Chinese government moved to accelerate the development of strategic emerging industries in such sectors as energy saving, next-generation information technology, biotechnology, alternative energy, new energy vehicles and advanced equipment manufacturing. This will involve building a modern industrial system and transforming traditional industrial, logistics and warehousing space into high-quality, technology-based assets. In key regional hubs such as Shanghai and Beijing, traditional manufacturing assets are increasingly being replaced by value-added, high-tech industrial space. With the growing scarcity of land, strong competition for space and rising costs, businesses with large-scale expansion and consolidation requirements may find it even more difficult to find the right space in these markets. Going forward, large companies are likely to explore the idea of buying existing industrial properties and renovating or rebuilding them to meet new requirements and higher standards. Alternatively, developing cities (tier II and tier III), especially those located in midor western parts of China, offer numerous options along with other benefits such as low labor costs, cheaper land and energy resources, and local government incentives. Greatly improved infrastructure is an asset to IT, automobile and large-scale manufacturing industries. REAL ESTATE IMPACTS CONCLUSION SEZs have helped improve the quality of infrastructure and generate large-scale employment opportunities in several tier I and tier II cities. However, due to recent economic strains and limited land availability, several sector-specific SEZ proposals were withdrawn and expansion plans put on hold in 2012. Meanwhile, demand for FTWZs has remained steady, due to the strong desire to be near major hubs such as New Delhi, Mumbai, Pune and Chennai. Proposed changes in foreign investment policies made last year augur well for the continued success of FTWZs. Regulatory Reforms Strengthen Regional ties Discussions are underway to form the Regional Comprehensive Economic Partnership (RCEP) between ASEAN countries and India, China, Japan, South Korea, Australia and New Zealand. The agreement would cover nearly 45% of the world’s population (accounting for nearly 40% of world trade) with much stronger trade links between16 Asia-Pacific economies. Implementation of FTA agreement in goods pushed trade between India and ASEAN countries up by nearly 41% in 2011-2012. FTA in services and investments, which was recently finalized, is expected to boost the trade further by 25% in the next three years. The government of India also announced several revisions pertaining to its foreign direct investments policy to boost the economy. Foreign investments in multi-brand retail are seen as a revolutionary turning point for the trade sector. As a result, strong growth in the logistics sector and warehousing space requirements in metropolitan areas is likely. Increasing investment in industrial parks is expected to boost the supply of large-scale, high-quality, value-added, technologyintensive logistics and warehousing space over the next two to three years. Growing investments in automobile manufacturing not only create a strong demand for logistics and warehouse space, but also increase the trade flows between major auto markets such as Japan and Korea. India’s Special Economic Zones Special Economic Zones (SEZs), offering monetary benefits in the form of tax incentives for investors, developers and occupiers, have been highly successful in attracting foreign investment into India. Free Trade Warehousing Zones (FTWZs) are a special category of SEZs designated for operations related to trade and warehousing. As of 2012, there were 160 operational SEZs in the country, including multi-product, sector-specific zones such as IT, engineering, electronics, hardware, textile parks and so on. In 2012, these units accounted for more than 30% of all goods and services exported from the country. 26
  • 29. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation Most Dynamic Regional Markets Shanghai: Complex and Competitive Shanghai logistics and warehousing markets have grown increasingly complex and competitive over the past few years. With occupancy at more than 90%, the availability of logistics and warehouse space in the market was extremely tight in 2012. Scarcity of land parcels, restrictions on the supply of development sites, rising rental and capital values and growing competition for space are pushing large-scale manufacturers and major logistics companies to consider build-to-suit options and relocating to suburban or other low-cost markets such as Wuxi, Suzhou and Hangzhou. The growing demand from e-commerce, together with lack of supply, has doubled the occupancy costs for high-quality logistics space. Several upcoming markets have also witnessed rapid absorption rates, and it is anticipated that they will be fully leased by the time they hit the market in 2013-2014. Demand for logistics and warehouse space is likely to remain robust through 2013-2014 on the back of the rising middle class, strong domestic consumption levels and booming e-commerce industry. REAL ESTATE IMPACTS CONCLUSION Hong Kong: Strong Momentum Hong Kong is one of the largest, busiest shipping, freight-forwarding and logistics centers in the world. With high-quality logistics, warehouse space and infrastructure, it is one of the most important hubs next to Singapore and Shanghai for movement of goods across the region. Despite the recent cooling in most Asian economies and slowdown in Chinese manufacturing, the logistics and warehousing market in Hong Kong continues to perform well. It remained a landlord-favored market through 2012, with rising demand and restricted supply. 3PL, e-commerce companies, non-traditional occupiers such as data centers and self-storage operators have driven the momentum in Hong Kong since 2011. Large spaces, which are extremely limited in this market, are in great demand. Large-scale manufacturers and industrial occupiers are fiercely competing for such spaces despite a slowdown in trade and continued uncertainty in global markets. Going forward, the market is likely to remain tight in terms of space availability and demand could remain steady with an anticipated rebound in trade from China and other regional markets. 27
  • 30. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation REAL ESTATE IMPACTS CONCLUSION conclusion: winning real estate strategies SUPPLY CHAIN Challenges push new strategies in adapting to the new demand economy Dramatic shifts in demographics and in consumer expectations are impacting the supply chain from end to end, from raw material sourcing to the consumer’s front door. The movement of goods – transportation – connects these points. Transportation is being seriously challenged by issues such as driver shortages, volatile fuel costs and the growing customer demand for “faster, cheaper, better” good and services. Efficiency in transportation evolves at a glacial pace compared to the connected supply chain elements. To compete, companies will embrace fast-evolving technologies and continue sourcing low-cost raw materials and labour markets. The diversification of sources – near sourcing or right sourcing – to minimize the risks of supply chain disruption will become increasingly important. The effects on real estate include changing location strategies – where buildings are located – and increasing investments in reducing operating expenses. WINNING STRATEGY 1: Supply Chain Flexibility Diversity REGIONALIZATION The ongoing drive for improved performance standards will continue to impose new requirements on supply chains, especially in relation to the final step in the delivery pathway. Companies in sectors with high customer service demands are expanding their number of regional distribution centers and cross-dock facilities in order to reduce the overall distances to customer destinations. These facilities will be increasingly urban in order to satisfy the growing trend towards same-day fulfilment, bolstering demand around the edge of major cities for smaller, in-fill spaces located closer to consumers. This shift will likely benefit some of the better-positioned tier II markets as tier I markets become congested, new trade routes become viable and population grows. Of course, government regulations, openness to trade and political stability will continue to play a major role in location decision processes. As in the past, winning supply chain and real estate strategies will likely incorporate concepts from the largest companies and largest occupiers of space, where feasible; however, the pace of competitive change is now so great that a user of any size or scope would benefit from pursuing the following approaches. 28
  • 31. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation TECHNOLOGY In addition, with the growth in internet access and the market forces this creates, technological advances will increasingly drive business change. Leading logistics companies will embrace technology and develop new ways of using property. Urban Outfitters recently opened a 426,000-square-foot fulfilment center in Reno, NV, equipped with a $25-million materials handling system that includes three miles of conveyor belts, 11 miles of walkable pick face and more than 50 miles of electrical cabling. The system is capable of dispatching 4,300 parcels and sorting 9,000 individual items per hour. A package can be picked and packaged for shipping in as little as 18 minutes, and with expedited shipping, an item can be on a truck within two hours of a customer placing an online order. As more distribution centers are added to a supply chain network to provide faster service to smaller areas, each center will need to carry more inventory to avoid stock-outs. Space demands also continue to change. For example, an international shipping company may seek locations that can best take advantage of opposite commute patterns. Instead of sorting and dispatching five vans in the morning, it may use an expedited shuttle to move shipments to meet-points within the city since it can get that vehicle out faster and earlier in the morning. OUTSOURCING REAL ESTATE IMPACTS CONCLUSION WINNING STRATEGY 2: Automate or Die The pace of change and the stress on distribution and logistics that the new “demand economy” imposes on business will continue to encourage – force – supply chain leaders to lead with innovation. More and more, logistics will rely on improvements in the productivity of capital and less on the productivity of labor. The deployment of capital, either in distribution automation technologies such as automated sortation, or on order management technologies that translate internet orders to physical orders, is the new paradigm in fulfilment. The vast majority of distribution centers around the world are still considered ”manual” in that they do not utilize any advanced automated material handling systems. One of the main reasons for this is that companies traditionally require a payback of less than three years on capital equipment investment, making automation projects often difficult to justify. However, in some markets labor shortages and costs are making these investments an urgent necessity. In many Western European countries, for example, qualified seasonal warehouse labor is difficult to find. With the trend today towards more knowledge-based and service-based employment, industrial jobs are considered less desirable. A major source of supply chain flexibility is outsourcing. Third-party logistics companies, 3PLs, contribute capacity and expertise without significant fixed costs investments. While efficiencies may be gained from collaboration fostered by 3PLs, the structure of a 3PL relationship as it relates to real estate should be examined at the outset. In Mexico, 3PLs are growing, but like anywhere, a company needs to strongly consider controlling its own real estate. A large multi-national consumer products company took back control from the 3PL it was using in Mexico and realized significant savings. In Europe, companies want transparency related to 3PL use, and there is a mix of ownership arrangements. In India, where 3PLs are still growing and becoming more organized, some own the real estate and some do not. COLLABORATION Logistics operators will continue to seek new ways to lower costs, turning to innovative strategies such as collaboration. For example, retailers may work with suppliers in order to share vehicles, thus reducing the number of vehicles running empty. Collaboration has also taken the form of sharing space within the warehouse itself – although this may require both a change in warehouse design as well as a larger footprint should factors such as shared yards become more commonplace. Regardless, it is clear that cost reduction and technology will continue to drive location decisions and design parameters of new warehouses for the foreseeable future. In China, distribution centers near the bigger cities are starting to implement automation to handle high daily shipment requirements that can no longer be managed manually. Hospitals, for example, typically order goods in the morning to mid-afternoon and expect to receive them the next day. Hospital suppliers are then forced to process more than 50% of their orders in a few short hours every day to ensure they are ready for shipment before the parcel carrier’s early evening deadline. This peak labor requirement in the afternoon can be difficult to predict and manage without automation. 29
  • 32. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview E-COMMERCE Global transportation REAL ESTATE IMPACTS CONCLUSION WINNING STRATEGY 3: SUPPLY CHAIN SCALE AND SCOPE The required investments in technology and real estate will continue to put pressure on margins across all industries. In response, companies will seek greater amounts of leverage, via economies of scope and scale. one answer: automation PRODUCT TO PICKER OTHER NEW TECHNOLOGIES TO SUBSTITUTE FOR LABOR HOURS Carousel mini-load Scale will be attained primarily through consolidation.We expect to see continued consolidation in the logistics and distribution industries. By driving down the number of players who can afford to compete, will be significant in the 3PL and delivery industries.These participants will seek to leverage their facility and real estate platforms at the same time. Scale and scope can be attained with a broader global reach. Globalization of supply chains has been a cautious goal for the past two decades. Competing in the global arena is already driving companies to seek alternative, fuel-efficient modes of transportation and improved network efficiencies, with access to multimodal logistics hubs, along with low-cost labor and materials. Improved technologies help manage complexities, mitigate risk and allow for more flexibility and efficient inventory management. Scope leverage can be attained by vertical integration as well. Increasingly, we will see retailers, producers, shippers and logistics companies trying to extend their reach, extend their span of control and vertically integrate.Vertical integration promotes technology and process adjacency; more work will be done closer together.This is expected to drive greater demand for space. KIVA Vertical Lift Module Large occupiers are consolidating space and finding efficiencies both within their four walls and through collaboration where complementary supply chains exist. Illinois Tool Works Inc. (ITW) announced in December 2012 that it plans to consolidate 800 business units to 150 in the coming years. This is a similar strategy to the UK retailer, Marks and Spencer, who announced a plan to reduce 100 warehouses to just 4, with the acquisition of the newer buildings currently underway. According to the company, this will allow it to “balance the autonomy that enables innovation with the benefits of scaled resources.The consolidation will have various approaches applied based on geography and related market segmentation.Warehouse and shipping is likely going to change.” FINAL THOUGHTS Changing logistics priorities will challenge corporate supply chain and real estate executives to develop solutions that manage current demands and plan for the uncertainties and surprises of the future.An eye toward expansion, automation and collaboration will keep the landscape very competitive. Occupiers and investors will be challenged to remain poised to act on opportunities presented by an evolving landscape and at the same time keep pace with innovation in order to meet changing customer expectations. 30
  • 33. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION RESEARCH SERVICES Cushman Wakefield is known as a global industry knowledge leader. Through the delivery of timely, accurate, high-quality research reports on the leading trends, markets around the world, forecasts and business issues, we aim to assist our clients in making property decisions that meet their objectives and enhance their competitive position. Cushman Wakefield also provides customized studies to meet the specific information needs of owners, occupiers and investors. Published by Cushman Wakefield Research For more information, contact: CONTRIBUTORS AMERICAS EUROPE ASIA PACIFIC Maria T. Sicola Executive Managing Director, Research Americas +1 415 773 3542 maria.sicola@cushwake.com Barrie David Senior Research Consultant European Research Group +44 20 7152 5937 barrie.david@eur.cushwake.com Sigrid Zialcita Managing Director, Research Asia Pacific +65 6232 0875 sigrid.zialcita@ap.cushwake.com Tina Arambulo Managing Director, U.S. Industrial Research United States +1 310 525 1918 tina.arambulo@cushwake.com Erin Can Research Analyst European Research Group +44 20 7152 5206 erin.can@eur.cushwake.com Nagaraj Kapil Kanala Senior Manager, Research Asia Pacific +91 40 4040 5531 kapil.kanala@ap.cushwake.com ADDITIONAL CONTRIBUTORS Elizabeth King Forstneger Director Business Consulting United States +1 312 470 3836 elizabeth.forstneger@cushwake.com Jose Luis Rubi Manager, Research Mexico +52 55 8525 8058 joseluis.rubi@cushwake.com Stuart Barron National Research Director Canada +1 416 359 2652 stuart.barron@cushwake.com Andrea Arata Senior Analyst, Research United States +1 510 891-5830 andrea.arata@cushwake.com Tom Bonkenburg St. Onge Company +31 0 61 254 06 66 tbonkenburg@stonge.com Ken McCarthy Chief Economist United States +1 212 698 2502 ken.mccarthy@cushwake.com John Morris Industrial Services Lead Americas +1 847 518 3218 john.morris@cushwake.com 31
  • 34. the Changing World of Trade A Cushman Wakefield Research Publication Global Economic overview Global transportation E-COMMERCE REAL ESTATE IMPACTS CONCLUSION INDUSTRIAL MARKETS CONTACTS Clients are provided with comprehensive supply chain solutions that integrate real estate, supply chain management, and strategic business advice. We provide local, national and multinational corporations, developers and institutional owners with custom-tailored industrial real estate solutions that exceed business objectives. Our focus is on helping clients develop solutions that improve shareholder value, maximize cost savings, and enhance portfolio value. Our ability to effortlessly integrate with a client’s real estate department distinguishes us from all other companies in the field. Our industrial transaction professionals ascertain existing needs and anticipate future real estate needs to create the solutions that clients demand. All phases of negotiation are conducted with full knowledge of local, regional, and national data, trends, and statistics as supplied through our global operations. Our ability to incorporate key elements such as negotiating government incentive programs, identifying construction cost reductions through value engineering, and creating exit strategy opportunities when needed, allows our clients to recognize the full potential of their real estate assets. Our industrial brokerage professionals offer a comprehensive range of services including: • Acquisition and Disposition, • Lease and Sale Strategies That Incorporate Extensive Market Knowledge, Comprehensive Research • Incentive Based Negotiations • Build-to-Suit Analysis and Planning. For more information, contact: AMERICAS EUROPE ASIA PACIFIC John Morris Industrial Services Lead Americas +1 847 518 3218 john.morris@cushwake.com Steven Watt Head of Pan-European Industrial Logistics +33 5 59 63 44 38 steven.watt@eur.cushwake.com Peter Zhang Manager, Global Consulting Asia Pacific +86 212320 0873 peter.zhang@ap.cushwake.com Cushman Wakefield is the world’s largest privately-held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world’s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and assignments. Founded in 1917, it has 253 offices in 60 countries and nearly 15,000 employees. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $3.7 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete. Published by Corporate Communications. ©2013 Cushman Wakefield, Inc. All rights reserved. Cushman Wakefield, Inc. 1290 Avenue of the Americas New York, NY 10019-6178 32
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