Emerging Logistics Hot Spot

Source: DC Velocity

By:  Susan K. Lacefield

As delivery windows get tighter and transportation costs soar, it becomes increasingly important to maintain a distribution center or warehouse close to your customers. For this reason, more and more companies are finding it necessary to establish a distribution center in the densely populated Northeast.

For the past year, DC Velocity has been looking at logistics hubs or "clusters"—those cities or regions that attract both logistics service providers and the logistics operations of manufacturers, retailers, and distributors. The past two articles have focused on emerging logistics hubs, locations that are growing in importance but may not be as well known as, say, Memphis, Tenn.; California's Inland Empire; or Columbus, Ohio. Identifying emerging logistics hubs for the Northeast region, however, is problematic. After all, the Northeast has been a center of logistics and trade for centuries.

Despite the long history, two areas in particular are showing significant growth in logistics-related development, and any company evaluating distribution and logistics facilities in the Northeast should consider them: Central New Jersey and Pennsylvania's Lehigh Valley.

New Jersey suffers from a bit of an image problem. Known for high labor costs, red tape, and an unfavorable tax climate, New Jersey has a reputation for being unfriendly to business. CNBC's 2013 list of the most business-friendly states, for example, ranked New Jersey an unimpressive 42nd.

But Tracye McDaniel, president and CEO of the nonprofit economic development corporation Choose New Jersey, argues that when you consider New Jersey, you have to think about the total value proposition, which includes its location, infrastructure, and people.

It's hard to deny that Central New Jersey is, in McDaniel's words, "perfectly located." New Jersey is within a day's drive of more than 130 million consumers with a total disposable income of $3 trillion.

The central part of the state also provides easy access to all the major modes of transportation: road, rail, air, and ocean. Major highways include I-95, I-76, I-78, and I-80. The Port of New York & New Jersey is the largest port on the East Coast of North America and the third-largest in the nation, behind only Los Angeles and Long Beach, Calif. Newark Airport is the nation's 14th busiest airport, handling 80,000 tons of cargo a year. The state also has 1,000 miles of rail freight lines.

Significant investments continue to be made in that infrastructure, particularly at the ports. For example, the Port of New York & New Jersey is in the midst of a major redevelopment effort to deepen the harbor, improve terminals, and strengthen inland access. A case in point is the $600 million ExpressRail System program, which has created dedicated rail facilities, additional support track, and rail yards for each of the port's major container terminals. An additional $1.3 billion is being spent to raise the Bayonne Bridge, which connects Bayonne, N.J., to Staten Island. Raising the bridge to 215 feet over the high-tide level from 155 feet will allow larger containerships to reach Port Newark and Port Elizabeth. Additionally, a new breakbulk facility, the Port of Paulsboro, is under construction on the Delaware River.

The state also has a readily available, highly skilled work force, according to McDaniel. To make it easier for companies to find qualified logistics and distribution professionals, the state has created a Transportation, Logistics, and Distribution Talent Network to address workforce needs and connect potential employers and employees.

For these reasons, many Fortune 500 companies, such as Home Depot, Barnes & Noble, and Toys R Us, have distribution facilities in the state. And more are coming, says McDaniel. For example, Amazon.com announced that it is building a 1 million-square-foot DC in Robbinsville, N.J. Industrial real estate company Prologis is building a 900,000-square-foot distribution center in Jersey City, which will be shared by online grocer Peapod and Imperial Bag and Paper Co. Subaru has begun construction on a 526,050-square-foot parts distribution center and training facility in Florence, N.J. In total, there are between 1,800 and 1,900 distribution centers in Central New Jersey, according to McDaniel.

Finally, McDaniel stresses the progress that Gov. Chris Christie and the current legislature have made to make the state more welcoming to business. As examples she cites the recently passed Economic Opportunity Act, which overhauls the state's incentive program, and the establishment of the Red Tape Review Commission, which works to reduce cumbersome regulations and make them less costly for business.

Located 80 miles from New York City and 60 miles from Philadelphia, Pennsylvania's Lehigh Valley sits at a sweet spot in the Northeast Corridor. "From this location, companies can reach 65 percent of the customers in the U.S. in a day's drive out and back," says Don Cunningham, CEO of the Lehigh Valley Economic Development Corp. (LVED). "And for the most part, we offer a lower-cost alternative [to] the larger metropolitan areas of North Jersey and New York."

Indeed, this section of Eastern Pennsylvania offers labor rates and land taxes that are lower than the more urban areas of the Eastern Seaboard. Additionally, transportation costs are quite favorable, as the area has strong rail service and a good road network, including I-78, which provides a direct route into New York City, Newark, and the surrounding ports. The area also has more land available than the congested regions around the major metropolitan areas and the ports.

All of these factors have contributed to an explosion in DC growth in the region during the past 15 years. According to LVED, the Lehigh Valley has gone from having 16 million square feet of total distribution space in 1997-1998 to the current total of 41 million square feet. Companies with distribution centers in the region include BMW, Amazon, and Walgreens. Additionally, National Freight Industries (NFI) is constructing a 980,000-square-foot warehousing and distribution facility that it will operate on behalf of Ocean Spray.

Interest in the region is still flourishing, as evidenced by an industrial vacancy rate of just 6 percent and the fact that real estate firm Liberty Property Trust recently spent $60 million on spec for a 1.2 million-square-foot warehouse. Development is not limited to distribution. According to Cunningham, more and more companies are also moving their production facilities into the region to take advantage of cost efficiencies from producing and distributing from the same spot.

That development will not be slowing anytime soon. "We expect to remain hot for several years," says Jarrett Witt, vice president of economic development for LVED. "The issue becomes when and if the region runs out of the land desired by larger distributors."

In fact, Witt and Cunningham say the region's biggest competition is not New Jersey, New York, or Maryland but other, more rural areas of Pennsylvania where land is still plentiful and prices are lower.

Where the Lehigh Valley has an advantage over these rural areas in South and Central Pennsylvania is its labor pool. "Our work force is bigger and better qualified," says Cunningham.

Due to the area's roots in heavy manufacturing—Bethlehem Steel was located there and Mack Trucks still operates a plant there—the community colleges in the Lehigh Valley have strong vocational and technical training programs. In addition, Lehigh University, located in South Bethlehem, has a well-known supply chain management program at both the graduate and undergraduate level.