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Black Creek Research

The Path of Goods Movement: The Evolution of the Demand for Industrial Real Estate

JULY 2017

Executive SummaryDistribution warehouses link product manufacturers with consumers by providing essential storage and repackaging space for products of all types. Depending on their origination — domestic or international, a local or distant market — products and their parts may have spent time in multiple distribution warehouses before they make their way to the consumer. In fact, according to the Council of Supply Chain Management Professionals, the typical consumer product and its parts are stored in four or more distribution warehouses from point of manufacture to point of retail consumption.

Identifying the best locations for warehouses is accomplished by identifying where goods move from or to and the best point where they need to be transferred or switched. We identify these points using the “Path of Goods Movement” concept I developed in the early 1990s and thus locate the national distribution warehouse markets.

Distribution Warehouse DemandThe largest demand for distribution warehouses is driven by the movement of freight into and out of the United States. Ocean movements of freight as shown in Exhibit 1 are measured by “twenty-foot equivalent units” or TEUs. A TEU is the 20-foot long metal container loaded onto a ship. It is one-half the size of a normal freight truck on the highway — thus, two TEUs equal one normal tractor trailer truck on the highway. Ocean freight is very significant in Southern California with the closest ports to Asia, and in New York where the United States is most densely populated. All import containers must be opened and inspected by customs before items are shipped to their final manufacturing or retail destination.

Exhibit 1 Ocean Movements

Source: U.S. Department of Transportation, Maritime Administration, U.S. Waterborne Container Trade by U.S. Customs Ports, 2015, based on data provided by Port Import / Export Reporting Service as of March 25, 2016.

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Additionally, according to U.S. waterborne trade, more goods are being imported and exported. As shown in Exhibit 2, imports and exports have increased approximately 1.3 times from 2009 to 2015. As Exhibit 3 demonstrates, waterborne freight has increased even more significantly in certain U.S. customs ports.

Exhibit 2 U.S. Waterborne Foreign Trade

Source: U.S. Department of Transportation, Maritime Administration, U.S. Waterborne Container Trade by U.S. Customs Ports, 2015, based on data provided by Port Import / Export Reporting Service as of March 25, 2016.

Exhibit 3 U.S. Waterborne Foreign Container Trade by U.S. Customs Ports (TEUs)

Customs Port 2009 2015Increase / Decrease

Customs Port 2009 2015Increase / Decrease

Jacksonville, FL 1,505,694 5,479,957 3.6x Freeport, TX 521,131 661,931 1.3x

Port Hueneme, CA 168,649 526,912 3.1x Long Beach, CA 27,051,784 35,613,882 1.3x

Mobile, AL 852,391 1,956,130 2.3x Miami, FL 4,991,934 6,641,486 1.3x

New Orleans, LA 2,824,692 4,794,563 1.7x New York, NY 28,837,913 36,728,899 1.3x

Charleston, SC 8,192,745 12,848,420 1.6x Wilmington, DE 1,354,676 1,821,914 1.3x

West Palm Beach, FL 884,945 1,372,871 1.6x Wilmington, NC 1,558,498 2,002,633 1.3x

Chester, PA 604,537 908,225 1.5x San Diego, CA 460,398 549,083 1.2x

Houston, TX 12,444,245 18,366,611 1.5x Oakland, CA 12,315,190 13,569,118 1.1x

Philadelphia, PA 2,024,517 3,121,107 1.5x Los Angeles, CA 37,351,580 38,750,065 1.0x

Port Everglades, FL 4,284,324 6,238,309 1.5x Tampa, FL 336,410 337,579 1.0x

Tacoma, WA 7,428,348 11,179,669 1.5x San Juan, PR 2,005,160 1,655,611 0.8x

Baltimore, MD 4,240,713 6,008,065 1.4x Seattle, WA 9,113,852 7,677,055 0.8x

Boston, MA 1,186,376 1,709,542 1.4x Gulfport, MS 1,325,619 943,999 0.7x

Norfolk, VA 11,898,367 16,771,788 1.4x Portland, OR 1,527,402 163,726 0.1x

Savannah, GA 16,685,066 23,711,106 1.4x Anchorage, AK 279,043 18,860 0.07x

Source: U.S. Department of Transportation, Maritime Administration, U.S. Waterborne Container Trade by U.S. Customs Ports, 2015, based on data provided by Port Import / Export Reporting Service as of March 25, 2016.

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The second Path of Goods Movement comes from goods being shipped by trucks from ports, U.S. suppliers to U.S. manufacturers and from ports and manufacturers to U.S. retailers. Each state tracks movements across their highways by weight stations at their borders. Exhibit 4 shows the major goods movements across U.S. highways, with the wider lines indicating more freight movement.

Exhibit 4 Truck Movements

Source: Federal Highway Administration, March 2017.

Next, we look at the shipment of goods by train (a more cost-effective method over land) to understand the routes of the largest shipments. Again, the wider lines in Exhibit 5 indicate a greater amount of freight being shipped.

Exhibit 5 Train / Intermodal Movements

Source: Association of American Railroads, 2016.

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We then look at the amount of occupied warehouse space per person in the United States. Note that the average has risen from more than 47 square feet per person in 1981 to more than 60 square feet per person today. We believe this increase is attributable to three factors:

1. Increased consumer purchases2. Increased product selection (it’s not just Coke® and Pepsi® like when I was a child, but a dozen or more flavors of these

products, as well as diet and caffeine-free varieties)3. More goods being ordered online that must be shipped quickly from a warehouse location

Exhibit 6 Warehouse Square Feet Per Person

Source: CoStar Portfolio Strategy, May 2017.

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Finding the Path of Goods MovementNow that we know the U.S. warehouse space average is more than 60 square feet per person, we can analyze individual cities. The cities shown on the map below in Exhibit 7 that have occupied warehouse stock “per capita” of less than 60 square feet store items for use and consumption by the local population, thus demonstrating their demand is very local in nature. Cities on the map that are above 60 square feet help supply the nation, and demand for warehouse space in these locations may grow faster than the local population alone requires.

Exhibit 7 Occupied Warehouse Stock Per Capita 2016

Source: CoStar Portfolio Strategy, May 2017.

When we overlay ocean, truck and train freight movements on the city warehouse data, we find that those cities with the higher 60 square feet occupied warehouse stock per capita numbers are on the Path of Goods Movement and therefore deemed national warehouse markets versus local warehouse markets.

Exhibit 8 Higher Occupied Warehouse Square Feet Per Person Markets Are on the

Path of Goods Movement

Sources: CoStar Portfolio Strategy, May 2017; U.S. Department of Transportation, Maritime Administration, U.S. Waterborne Container Trade by U.S. Customs Ports, 2015, based on data provided by Port Import / Export Reporting Service as of March 25, 2016; Federal Highway Administration, March 2017; Association of American Railroads, 2016.

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We added the major manufacturing locations in the United States on the Path of Goods Movement as parts are stored near the manufacturer these days for “just-in-time” inventory control.

Exhibit 9 Top 20 Manufacturing MSAs by Manufacturing Employment

Source: U.S. Bureau of Labor Statistics, 2014.

We also identified the largest population cities where finished goods are purchased on the Path of Goods Movement.

Exhibit 10 Use Locations = Top 20 Population Centers

Source: World Population Overview, 2017.

Our results concluded that locations near major manufacturing and population centers have the highest occupied warehouse per capita numbers — thus confirming that the Path of Goods Movement still exists.

Exhibit 11 Top 20 Manufacturing MSAs & Top 20 Population Centers

Source: CoStar Portfolio Strategy, May 2017; World Population Review, 2017; U.S. Bureau of Labor and Statistics, 2014.

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Since the occupied warehouse stock per person in the United States has risen to 60 square feet per person, Exhibit 12 shows that there are 27 metro areas on the Path of Goods Movement that have occupied stock at or above 60 square feet per person. We continue to believe that these National Warehouse Markets should have higher and more stable demand long-term and provide solid investment potential.

Exhibit 12 National Warehouse Markets on the Path of Goods Movement

No. MarketsSquare Feet Per Person

No. MarketsSquare Feet Per Person

1. Memphis, TN 147 15. St. Louis, MO 70

2. Columbus, OH 109 16. Los Angeles, CA 69

3. Kansas City, MO 107 17. Miami, FL 69

4. Inland Empire, CA 107 18. Hartford, CT 66

5. Cleveland, OH 106 19. Portland, OR 66

6. Indianapolis, IN 102 20. Charlotte, NC 65

7. Cincinnati, OH 102 21. Minneapolis, MN 64

8. Milwaukee, WI 87 22. Houston, TX 64

9. Chicago, IL 86 23. Oklahoma City, OK 63

10. Salt Lake City, UT 86 24. Jacksonville, FL 62

11. Atlanta, GA 85 25. Northern New Jersey 62

12. Detroit, MI 82 26. East Bay, CA 61

13. Dallas-Fort Worth, TX 80 27. Richmond, VA 61

14. Nashville, TN 76

Source: CoStar Portfolio Strategy, May 2017.

More than 70% of the U.S. gross domestic product (GDP) is made up of consumers’ use of goods. The chart below in Exhibit 13 shows that growth of warehouse space is highly correlated with GDP growth. If you believe that the U.S. GDP may continue to grow in the future, there is a high probability that the demand for warehouse space should increase as well.

Exhibit 13 GDP & Warehouse Growth

Source: CoStar Portfolio Strategy; U.S. Bureau of Labor Statistics, July 2017.

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We can also confirm the higher demand for the national warehouse markets that are on the Path of Goods Movement by showing their higher occupancy levels than local warehouse markets shown in Exhibit 14. This may indicate that storing goods on the Path of Goods Movement is more efficient than storing goods in other warehouse markets as freight logistics have improved over time.

Exhibit 14 Warehouse Occupied Stock Comparison

Source: CoStar Portfolio Strategy, May 2017.

Next, in Exhibit 15, we confirm that U.S. industrial business loans have increased by more than 100% since mid-year 2010 when the recession ended by monitoring the growth in outstanding commercial and industrial business loans. Note the annual spikes each year!

Exhibit 15 Total Value Commercial & Industrial Business Loans

(All Commercial Banks, Not Seasonally Adjusted)

Source: Federal Reserve Bank of St. Louis, April 2017.

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Finally, we confirm that warehouse space is being used by looking at the increasing occupancies and rents that have been occurring since 2010 and are forecast to remain historically high in the future.

Exhibit 16 Distribution Warehouse Occupancy Cycle and Rent Growth

Industrial

Source: CoStar Property Strategy, November 2017.

ConclusionOur analysis shows that the demand for distribution warehouses has grown with population growth, GDP growth and international trade growth. In addition, the occupied warehouse square foot per person has continued to grow in the United States as people consume more goods with more varieties and choices. National warehouse markets have been more stable as their space demand has grown faster. They have had consistently higher occupancies than local warehouse markets — as they are on the Path of Goods Movement, which we believe is good place to focus high-quality industrial real estate investments.

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Important Disclosures and CertificationsI, Glenn R. Mueller, Ph.D. certify that the opinions and forecasts expressed in this research report accurately reflect my personal views about the subjects discussed herein; and I, Glenn R. Mueller, certify that no part of my compensation from any source was, is, or may be directly or indirectly related to the content of this research report.

The views expressed in this commentary are the personal views of Glenn R. Mueller and do not necessarily reflect the views of Black Creek Group itself. The views expressed reflect the current views of Mr. Mueller as of the date hereof and neither Mr. Mueller nor Black Creek Group undertakes to advise you of any changes in the views expressed herein.

The information contained in this report: (i) has been prepared or received from sources believed to be reliable but is not guaranteed; (ii) is not a complete summary or statement of all available data; (iii) does not constitute investment advice and is not an offer or recommendation to buy or sell any particular securities; and (iv) is not an offer to buy or sell any securities in the markets or sectors discussed in the report. The main purpose of this report is to provide a broad overview of the real estate market in general.

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The opinions and forecasts expressed in this report are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Any opinions or forecasts in this report are not guarantees of how markets, sectors or individual securities or issuers may perform in the future, and the actual future performance of such markets, sectors or individual securities or issuers may differ. Further, any forecasts in this report have not been based on information received directly from issuers of securities in the sectors or markets discussed in the report. Black Creek Group, LLC disclaims any and all liability relating to this report, including, without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, this report.

Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one’s investment and tax advisors. Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.

Dr. Mueller serves as a Real Estate Investment Strategist with Black Creek Group. In this role, he provides investment advice to certain affiliates of Black Creek Group regarding the real estate market and the various sectors within that market. Mr. Mueller’s compensation from Black Creek Group and its affiliates is not based on the performance of any investment advisory client, offering or product of Black Creek Group or its affiliates.

Black Creek Group is a real estate investment management company that focuses on creating institutional-quality real estate financial products for individual and institutional investors. Certain affiliates of Black Creek Group also provide investment management services and advice to various investment companies, real estate investment trusts and other advisory clients about the real estate markets and sectors, including specific securities within these markets and sectors.

Dr. Mueller may from time to time have personal investments in real estate, in securities of issuers in the markets or sectors discussed in this report, or in investment companies or other investment vehicles that invest in real estate and the real estate securities markets (including investment companies and other investment vehicles for which an affiliate of Black Creek Group may serve as investment adviser). Real estate investments purchased or sold based on the information in this report could directly benefit Dr. Mueller by increasing the value of his personal investments.

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