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John McCloud is editor of Net Lease forum, from which this article is excerpted.

Lombard, IL—Logistics costs rising at unprecedented rates could have profound effects on the warehouse/distribution sector, spurring both in-house and third-party distribution managers to rethink every aspect of the logistics chain from where and how goods are stored to where and how they are delivered. Those are among the conclusions of the 2006 State of Logistics Report from the Council of Supply Chain Management Professionals here.

The report’s author, economist Rosalyn A. Wilson, says logistics expenditures jumped to 9.5% of US GDP last year, significantly higher from the 8.6% to 8.8% average in previous years. Estimated logistics costs for 2005 totaled $1.18 trillion, up $156 billion from the ‘04 figure and the largest year-to-year change in the report’s 17-year history. The dramatic rise is prompting logistics and distribution companies to find as many ways as possible to reduce costs to keep themselves afloat. One of the report’s most interesting findings is that ’05 trucking and rail costs soared 33% and 14%, respectively, while inland and coastal water shipping rates stayed flat. The difference could boost interest in internal water transport, ultimately increasing the value of properties with access to rivers, canals and coastal waterways.

The report also notes that escalating international trade is increasing pressure on international points of entry, creating freight bottlenecks at ports, airports and Mexican border crossings. Wilson says growing traffic at major seaports–last year, 800 ships made 22,000 calls at the nation’s 145 ports–has not only slowed loading and unloading of cargo, but generated severe road and railroad congestion in the surrounding markets. She warns that the larger vessels now being added to shipping fleets will make the situation even worse and predicts few regions will be able to make infrastructure improvements fast enough to handle the change.

Because storage represents a comparatively small percentage of overall logistics and distribution costs, last year’s 5% rise in warehouse rents and purchase prices had minimal impact on logistics and distribution decisions. The more important issue, says Wilson, is locating facilities to minimize transportation time and cost. Locations that offer multiple alternatives will be favored, particularly if they allow quick shifting among air, rail, truck or water transport in case any one of those modes becomes tied up for whatever reason, including congestion, labor issues and natural disaster.

Security issues will also have an impact on industrial real estate decisions, Wilson says. In 2005, more than 11 million containers were imported into the US. The number will jump to 13 million containers in ’07. Improved inspection to detect weapons and illegal goods will require rethinking both how to handle cargo at points of entry and how to store them for distribution. Future buildings will need to enable periodic inspection at various distribution points and include not just better security monitoring systems installed before completion but options to upgrade security systems after completion.

In Wilson’s view, the only way to avoid serious problems is for both governments and affected industries to adopt a total system approach that fosters connections between all modes of transportation and redundancies that allow burdens to be shifted from one mode of transportation to another as contingencies require. She says greater flexibility, including greater structural flexibility, will be needed to keep the economy flowing.

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