The Logistical Choice

Central Valley sees an upswing in industrial tenants

Back Article Feb 1, 2011 By Matt Perry

While the economy strangles commercial real estate throughout California, the greater Stockton area linking Interstate 5 and Interstate 580 is blossoming with industrial logistics centers that warehouse commercial goods for distribution throughout Northern California and the western region.

By offering space for expansion and the easy-on-easy-off access critical to timely trucking, Stockton and satellite cities — Tracy, Lathrop and Patterson — are reaping the upside of cheap rents, swelling activity at the Port of Oakland, mounting highway congestion and stricter regulations for long-haul trucking.

In the past five years, major retail names such as Sears, Crate and Barrel, Home Depot and General Mills established logistics centers in the greater Stockton area to move closer to the Bay Area and within reasonable proximity to Southern California and the Pacific Northwest markets. Last month, â?¨automotive-systems manufacturer Aff- inia Group Inc. opened a new distribution facility in Patterson. And hardware supply company W.W. Grainger Inc. is currently constructing an 828,000-square-foot â?¨facility in Patterson as well.

A rebounding economy is expected to enhance development in the region. Best Buy Co. Inc. is negotiating a lease in Tracy for 400,000 square feet of warehouse and distribution space.

Typically, merchandise is imported from Asia through the Port of Oakland and trucked to these logistics centers. It’s parceled out to company warehouses closer to end markets. From there, goods are delivered to retail outlets.

Doug Norton, senior vice president for CB Richard Ellis Inc., says the Interstate 80 corridor between Sacramento and San Francisco is one of the busiest in the nation. This heavy traffic has forced companies to seek alternate routes to the Bay Area.

The I-5 and I-580 interchange in Stockton, which is connected by Interstate 205, has thus proven a gold mine for logistics centers.

“The area is centrally located to allow for one-day transportation to several major population centers in the Central Valley, Bay Area and Northern California,” says Matt Cologna, senior vice president for Grubb & Ellis Co. “It is all about, ‘How do we get our goods to the most people in the shortest distance and amount of time?’”

Trucking regulations also prevent drivers from spending excessive time behind the wheel. Federal laws largely limit truckers to 11- or 14-hour shifts, with additional weekly restrictions.

Because of this, Gold River-based developer Gerry Kamilos says three counties — Sacramento, San Joaquin and Stanislaus — have become known as “the sweet spot” for logistics in the north-south delivery network.

“You can serve the entire West Coast within the federal limits,” Kamilos says.

Essential to the West Coast distribution of goods are two major ports: the Port of Oakland, which serves Northern California, and the adjoining ports of Los Angeles and Long Beach, which serve Southern California.

With Los Angeles and Long Beach as the first stop for Asian goods, 14 million container shipments land in the Southland per year, and distributors are looking to ease the congestion by unloading further north in Oakland, which saw 2.14 million container shipments last year through November.

In response to overcrowding, J.C. Penney Co. opened a 2007 logistics center in Lathrop totaling 436,000 square feet. “The L.A. [and] Long Beach ports were facing capacity issues,” says company spokesman Tim Lyons, “and the Port of Oakland was seen as the best option for diverting some of our import shipments from Asia and speeding up the flow of merchandise.”

Traffic at the Port of Oakland has increased 8 percent the past year. It exports more agricultural products than any other port in the United States and is the fifth-busiest in the country.

In years past, distributors had pursued warehousing space in Nevada, lured there by low wages, cheap gas and minimal business taxes. Shipments would be trucked from the Port of Oakland all the way up I-80 to Reno or Sparks. There, they’d be sorted then shipped back to California.

“In many cases this was driven by the California inventory tax and its nonbusiness regulatory climate,” says Tim Feemster, director of the global logistics division for Grubb & Ellis Co. “The low cost of transportation allowed companies to do this. Today, with more imported goods and higher fuel, California is back in the picture and more cost-efficient than Nevada for California markets.”

This twist in the economic climate puts Stockton at an advantage. The area is situated near rail and water connections, says Mike Locke, former chief executive of the San Joaquin Partnership, whose goal is to attract and retain businesses. Besides the Port of Stockton, the area is home to two important rail connectors: the Union Pacific Railroad Co.’s and Burlington Northern Santa Fe Railway Co.’s.

Locke, who recently took a position as Stockton’s deputy city manager, says the region reaches more than 16 million Northern California consumers. It provides distributors the shortest travel distance to San Francisco, he says, and “some of these companies have as much as 70 percent of their commodities going back into the Bay Area.”

Locke says new distribution methods have changed modern shipping.

“There is very little actual warehousing happening today,” he says.

The ultimate goal, Locke says, is to move products in and out of distribution within 72 hours. He points to Costco and Walmart as two retailers with model logistics operations “who move product very rapidly” and reap the economic rewards.

The soft real estate market is helping San Joaquin to land such tenants.

“Companies are taking advantage of the depressed market to secure significant cost savings on rent,” Cologna says. “Even if they have to pay more in rent, the savings by locating in the right area will more than offset those costs, and construction costs won’t get much lower than they are today.”

Denver-based ProLogis is a developer of distribution facilities in the region. Several local developers also operate industrial properties, including Buzz Oates Management Services, Mark III Property Management and the Panattoni Development Co.

Despite the move of some companies back to California, Nevada continues to promote its low-tax structure to seduce industrial clients. In the Reno area, retailers such as Amazon.com, Walmart, PetSmart and Urban Outfitters benefit from Nevada’s lack of inventory, franchise or corporate income tax.

Northern Nevada has seen increased business for Internet-based distribution centers, says Paul Kinne, business development manager for the Economic Development Authority of Western Nevada. He says the area is only a day’s drive from critical markets such as San Francisco, Los Angeles and Las Vegas.

“We’ve continued to land regional warehouse distribution centers,” Kinne says. “The velocity (just) hasn’t been as intense as it was before the recession.”

Lyons of J.C. Penney outlined a popular corporate strategy. Its Lathrop facility serves West Coast retailers while “our facility in the Reno area services direct to the customer.”

With logistics centers veering from Nevada, Sacramento has also experienced a renewed interest. “We have definitely seen that phenomenon,” says Barbara Hayes, president and CEO of the Sacramento Area Commerce and Trade Organization. Hayes says the trend coincided with the spike in gas prices. At that time, “we saw consumer products manufacturers show up on our radar,” she adds.

Hayes says the organization’s database of prospects for logistics or distribution facilities now includes three consumer goods manufacturers: two in food and one in electronics. All would be build-to-suit properties, putting local contractors to work.

In general, however, the greater Stockton area is garnering much of the new industrial space.  

“Sacramento does not have the same intermodal network and connectivity, is generally more expensive and logistically does not allow for the same drive times for certain marketplaces that need to be reached,” Cologna says.

There are only 30,000 square feet of industrial space under development in the Sacramento region, according to CB Richard Ellis.

As highway traffic becomes more congested, transportation officials are seeking alternative ways to ease road congestion. One solution is to increase barge service from Oakland to the ports of West Sacramento and Stockton.

A $30 million federal grant shared between the three ports will make improvements to allow container shipments via barge. Currently, the Port of West Sacramento and Port of Stockton are limited to bulk shipments rather than containers.

Mike Luken, Port of West Sacramento manager, estimates there are 1.5 million containers a year shipped by highway from the Port of Oakland to the Central Valley. He expects barge service between Oakland and West Sacramento to reduce that number when it becomes operational in 2012.

Union Pacific is also making investments to increase the flow of merchandise from the Port of Oakland. Norton says the railroad is increasing the height of the Donner Pass tunnel to allow double-height stacking of containers. 

In the future, Kamilos says logistics centers and industrial space will continue to flourish in Northern California.

“We have this relationship with Asia that is really going to be the focus of economic growth in the world and will be the catalyst of economic growth in the United States,” Kamilos says.

In 10 years China’s international trade figures will inflate to half of U.S. totals, Kamilos estimates.

Kamilos is betting on trade growth as he promotes his stalled West Park project in Crows Landing, which would turn a former U.S. Navy base into a 4,800-acre business and airpark serviced by rail from the Port of Oakland.

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