Logistics and Manufacturing Site Selection: Trends, Perspectives and Predictions Robert Hess

Executive Managing Director, Consulting 773-957-1439 rhess@ngkf.com

About Us

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Who We Are

Newmark Grubb Knight Frank’s Global Reach

One of the world’s leading real estate service firms

Global revenues exceeding $1.88 billion

More than 370 offices in established and emerging property markets, with a global staff of more than 12,800

Property and/or facility manager for approximately 508 million square feet

Comprehensive real estate solutions through an extensive global platform of integrated services

Comprehensive Services

Strategic Planning Lease Acquisitions Lease Dispositions Program and Project Management

TENANT REPRESENTATION SERVICES

Leasing Advisory Services Investment Sales and

Capital Markets Property Management Project and Construction Management Valuation and Advisory

OWNER REPRESENTATION SERVICES

Global Account Management Strategic Consulting Services Global Program Management Facilities Management Lease Administration

GLOBAL CORPORATE SERVICES

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Integrated Services Approach

Demand for Space

Supply of Space

Management Consultants

Incentives Specialists

Industrial Engineers

Lean Consultants

Master Architects

Workplace Strategists

Decision Scientists

Location Strategists Real Estate Advisors

Financial Consultants

Occupancy and Space Planners

Lease Administrators

Facilities Managers

Project Managers

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Strategic Portfolio Planning Global Market Access Location Strategy/Site Selection Labor Market Analysis Economic Development Economic Incentives

Enterprise Asset Management Consolidation/RelocationFeasibility Investment Strategies Transaction Sciences Capital Planning / Budgeting Condition Assessments Energy Optimization

Master Data Strategy BIM Strategy CRE Data Management Technology Assessment Systems Selection

Occupancy Analysis & Modeling Mobility Strategy Facility Master Planning Workplace Standards Workplace Visualization

Business Needs Assessment Functional / Financial / TCO Benchmarking Strategic Roadmap Development Workflow / Business Process Optimization CRE Organizational Design Change Management

Human Capital

Operations

Technology

Real Estate

GLOBAL ENTERPRISE

OPTIMIZATION

ASSET STRATEGY

INFORMATION MANAGEMENT

WORKPLACE STRATEGY & TECHNOLOGY

BEYOND REAL ESTATE

OPERATIONAL EXCELLENCE

GCS Consulting has over 75 consultants in one centralized organization with diverse backgrounds ranging from Management Consulting to Industrial Engineering to Architecture to Information Management, with specialties in all asset types and global geographic experience.

Strategic Consulting Services

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Projects Chaungzhao and Doce

Headquarters & Manufacturing

Strategy

Hickory, NC NY vs China

Real Estate Portfolio Management

National 28 Locations

Distribution Center Expansion

Northern, NJ Memphis, TN

High Tech Industrial Site Selection Expansions

Taiwan Europe

Occupancy Planning & Project Management

Atlanta , GA

Real Estate Portfolio Management

Global

687 Locations

Strategic Planning

Austin, TX

Global Portfolio Strategy

Global Assets

Confidential Location Strategy

South Central U.S..

Portfolio Strategy

New York, NY

Global Corporate Services Clients (Corporate Strategy and Planning)

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Business Process Harmonization

Store Development Pipeline

London, UK

Business Intelligence Dashboards

Houston, TX

Needs Assessment Business Case

Business Process

Detroit, MI

Needs Assessment Functional

Requirements

New York, NY

Needs Assessment System Analysis

New York, NY

Store Development Life Cycle

Functional Design

New York, NY

Business Intelligence Dashboards

Business Process

New York, NY

Benchmark Needs Assessment Strategic Roadmap System Selection

New York, NY

Business Case Benchmark

Fayetteville, NC

Master Data Strategy Asset Operations

Strategic Roadmap Benchmark

Oyster Bay, NY

Benchmark Business Process

Master Data Strategic Roadmap

Toulouse, FR

TCO Analysis Master Data Strategy

London, UK

Gulf Region Site Consolidation

Mid-Atlantic Location Strategy

Midland, MI

Benchmarks System Selection

Business Case

Oak Ridge, TN

Global Corporate Services Client (Technology Process Improvement)

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Notable Midwest and Illinois Site Selection Projects

Suburban Lake County LED Luminaries Lighting Equipment manufacturer and assembly expansion strategy. A planned $23MM investment with retention of 250 jobs and creation of 350 new jobs; planned BTS 325,000 sq ft facility on 15 acres; current IL operations old and obsolete

Left Gurnee, IL for Kenosha, WI. Massive WI incentive package of $12.25MM in cash and $11MM in tax credits; Walker driven.

Who Where What

Leading manufacturer of architectural lighting, expand its headquarters and manufacturing on Chicago’s Southwest Side, retaining 400 jobs and adding 50 full-time jobs. Proposed $45 million investment; spend at least $6.1 million to acquire surrounding parcels and expand to approx. 500,000 sq. ft. on its existing site

Evaluated several out of state options. Local search for sites with focus on employee retention of skilled labor. Announced stay option with $2.5 million Ito $3.2 million IL EDGE program.

Siting and development of a 4th 400mm Fab advanced manufacturing campus in the United States; The facility will cost roughly $15.3 billion to build, employ 1,600 direct employees and a similar number of contractors, and require an extraordinary support infrastructure of utilities, including 1000 MW of electricity.

Austin, TX current campus. National search, finalists were Upstate NY; Columbus, OH and Phoenix, AZ. Illinois eliminated from consideration; average incentive packages ranged from $700 million to $2 billion.

Distribution Network Location Optimization – What Do You Know!

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Distribution Center Model – Optimal Location Population modeled as Demand

Source : Precision Distribution Consulting (PDC)

1 DC – Indianapolis 2 DC – Cincy & Long Beach 3 DC – Long Beach, Nashville & Philly

4 DC – Long Beach, Philly, Hoover-AL & Joliet-IL

5 DC – Long Beach, Philly, Joliet-IL, Dallas-TX and Savannah-GA

6 DC – Long Beach, Philly, Joliet-IL, Dallas-TX, Savannah-GA &

Portland-OR

7 DC – Long Beach, Philly, Joliet-IL, Dallas-TX, Chattanooga-TN,

Portland-OR & Tampa-FL

8 DC – Long Beach, Edison-NJ, Davenport-IA, Dallas-TX,

Chattanooga-TN, Portland-OR, Tampa-FL & Toledo-OH

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The optimal distribution location strategy is always based on the best combination of cost and service performance….the issue is what impacts cost and performance in 2015 and beyond!

Order lead time

On-time delivery

Delivery frequency

Fill rate

Order completeness

Damage-free receipt

Reliability

Agility

Range of Optimal Values

Annual Cost

Transfer Freight

Fixed Cost

Store Freight

Number Of Facilities Few Many

Total Cost

Inventory Carrying Cost

Supply Chain Network Design – Optimal Location Total Cost and Performance Curve

Supply Chain Logistics and Manufacturing Site Selection Trends

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Supply Chain Networks 2025: Integrated and Collaborative Models

2015 2025+

• Information Sharing: Information Transparency will be the key to improving on-shelf availability (OSA).

• Collaboration Warehousing: Both retailers and manufacturers must be part of a collaborative warehouse concept. Collaborative warehousing should improve capacity utilization, transportation optimization and the carbon effect across their supply chain and espcially within urban areas.

• Collaborative Distribution: Collaborative models for urban distribution and rural areas that streamline inventory sharing.

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What does this Mean Within the Supply Chain Network?

• Manufacturers: have a collaborative warehouse, possibly run by a logistics service provider. In this example four manufacturers share a warehouse.

• Retailers: do not have their individual distribution centers anymore; products will be cross-docked by either a city hub for urban areas, or by a regional consolidation center for non-urban stores.

• City hub/regional consolidation center: will be shared and goes to the stores of the different retailers. Full truckloads will be realized more easily. May even be collaborative use of retailers stores for customer pickup.

Coopetition as well as collaboration!

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What’s Driving this Trend?

• Demographics and Psychographics: Pervasive migration of population from rural areas to urban and metropolitan corridors; millennials drive to live in urban cores (brain drain) and even baby boomers and retirees less inclined to live and retire in small towns.

• On Shelf Availability: The rise of Omni Channeling creates a need for improved OSA putting an

emphasis on automated back fill systems and rapid replenishment.

• Warehouse Crunch - Warehouse vacancy rates have plunged to the low single digits at some ports, and the crunch could worsen.

• Sustainability Push: Over the long-term, fuel and energy costs will continue to rise as fossil fuels continue to decline. Companies will look to warehouse automation and more efficient transportation methods, whilst developers and warehouse operators will be encouraged to consider solar panels, LED lighting, wind turbines and the use of waste product for energy production.

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A Word on Omni-Channels

Definition: “Omni-Channeling...... a multichannel approach to sales that seeks to provide the customer with a seamless shopping experience whether the customer is shopping online from a desktop or mobile device, by telephone or in a bricks and mortar store.”

Implication: E-commerce retailers are grappling with a massive paradigm shift driven by the demands of consumers empowered by robust new digital tools. At the same time, the "Amazon effect" has consumers expecting to receive almost any order within two days of purchase—particularly from pure-play e-tailers.

Evidence: The A. T. Kearney report claims that only 35% of shopping takes place in-store without an online component to the buyer’s journey and 10% of shopping takes place online without an in-store component. This means that 55% of shopping has some combination of the brick & mortar and online.

DC Site Selection: If retailers operating both brick-and-mortar stores and e-commerce websites don't evaluate their full supply chain to determine how to use every part of it as a fulfillment point, they could end up building a new distribution center every 18 months to two years," warns Piyush Sampat, principal and retail supply chain practice lead for management consulting firm Deloitte Consulting.

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How does this Impact Real Estate?

• Larger Warehouses: With the consolidation into multi-brand warehouses, the need for small and medium warehouses will decrease.

• Green Field Development : With a new distribution and warehousing model comes the need for new facility build outs to incorporate the cutting edge technology and a process flow for today’s needs.

• Urban Adjacent Distribution Hubs: With the increased need for rapid replenishment, the need for urban warehouse hubs will grow. Will County is extremely well positioned to be that hub for Greater Chicago (More Later on This).

Economic Development Groups: What are you doing to attract cutting edge Collaborative Warehouse

3PLs who handle the match making across manufacturers?

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Is Your Supply Chain Prepared to React to Global Risk Factors?

Example : Tianjin Explosions • Size: 3rd largest port in the world by cargo volume, and 10th largest in the world by container traffic. • Industries: Key global industries including electronics, aviation & aerospace, automotive,

petrochemicals and biotech. • Damage: Extensive damage to road and railway and IT infrastructure. • Responsibility: Numerous western-owned businesses in China have also been found to be at fault.

Some suggest that the Chinese location was chosen specifically to circumvent more stringent regulations.

• Compliance: As Tianjin officials clamp down on compliance, process and cost implications will ensue.

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Best In Class: Global Supply Chain Risk Management (SCRM)

• Crisis Playbook: A plan of action for a break in any of a company’s major supply chain components.

• Insurance: Insurance against business interruption losses and any pre-paid goods not yet in

house.

• SCRM System: allow companies to literally map and monitor the most critical component sources of their most important products.

• Focus on Supply Chain Resilience: Achieved by increased visibility, proactive analytics, real-time disruption monitoring, and response automation.

• Focus on resilient Product Design: Achieved through "risk optimized" component, supplier and manufacturing choices

• Better site selection: Due diligence is back! Do your homework on the area; instill confidence and certainty

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−Raw material −Semi-finished sourcing −Manufacturing −Transportation (Sea, Ground, Rail, Air)

−Inventory holding costs −Incremental management & overhead

−Brokerage and logistics fees −Complete shipping costs −Taxes, Duties & Tariffs −Insurance −Currency conversion −Crating costs −Handling fees

Transforming what gets done where !

Supply Chain Focus on “Total Landed Costs”

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Critical Location Factors for Manufacturing Site Selection

The factors that are expected to most drive manufacturing location project growth in the US are access to the US market, availability of skills/talent, relatively low energy costs, and lower total overall operating costs.

Source: Site Selectors Guild, 2015 Annual Conference, Puerto Rico

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Noteworthy Trends Driving Site Selection

• Wage Inflation: Communities across the U.S. will be faced with mounting wage inflation. Expect to see wages for highly demanded occupations such as technology, advanced manufacturing and back-office workers to increase.

• Transportation Infrastructure Challenges: – Cities across the U.S. are facing some serious infrastructure challenges due to the amount of growth and new development spurred by the recovering economy. The transportation infrastructure is highly strained and that will impact distribution channels as well as employee commute patterns.

• Minimum Wage Increases: Minimum wages are a hot topic at both the city and state level. Twenty states increased their minimum wage in 2015 while cities like Seattle, Louisville and Chicago have taken the initiative local. Look for lower wage employers such as call centers, distribution centers and low-end manufacturing plants to exit these locations for alternative lower-cost locations.

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Of Special Note: Chicago Metro Warehousing and Logistics Employment

Occupation Chicago Indianapolis Milwaukee Minneapolis St. Louis Detroit Cleveland Columbus Cincinnati

Transportation, Storage, and Distribution Managers 3,970 1,240 560 1,740 1,020 960 1,170 1,110 1,270

First-Line Supervisors of Helpers Laborers and Material Movers Hand 5,620 1,980 1,180 2,080 1,310 2,120 1,110 1,490 1,370

First-Line Supervisors of Transportation and Material-Moving Machine and Vehicle Operators

4,070 1,930 890 2,020 1,500 1,880 1,250 1,380 1,870

Heavy and Tractor-Trailer Truck Drivers 38,040 14,800 8,910 17,270 15,950 20,010 9,070 11,090 11,470

Light Truck or Delivery Services Drivers 25,760 6,470 5,070 8,000 6,540 12,780 5,360 5,290 6,020

Industrial Truck and Tractor Operators 22,320 7,610 2,340 6,240 4,580 NA 3,260 4,640 5,210

Laborers and Freight Stock and Material Movers Hand 108,440 28,370 17,450 22,710 20,240 28,290 19,210 22,980 18,440

Source: Bureau of Labor Statistics

The Greater Chicago metropolitan area does a horrible job at promoting their critical mass in transportation and logistics workforce availability as a whole.” Bob Hess, Newmakr Grubb Knight Frank

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Availability of Skilled Labor for Manufacturing – A Crisis?

“Middle-Skill” Jobs Across the U.S., by 2017, an estimated 2.5 million new so-called “middle-skill” jobs — ones that require some training but not a bachelor’s degree — will be added to the U.S. workforce, accounting for nearly 40 percent of all job growth, according to a recent USA Today analysis. The jobs typically pay from $13 to $20 an hour in all sorts of areas of what used to be known as blue-collar endeavors.

Critical Site Selection Factor #1: Availability of Skilled Labor

Manufacturing Roles With a Future

Manufacturers Can’t Find the Talent They Need As US manufacturing technology has advanced, workers have struggled to keep pace with the changes. The National Association of Manufacturers (NAM) recently reported that over 80% of manufacturers are having difficulty finding qualified talent to fill their employment needs. This labor shortage is exacerbated by the retirement of Baby Boomers. NAM cites this as the country's most business-critical issue facing manufacturing today.

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A different kind of worker is needed…

Old World New World

Learning one or two specific technical roles Mechanical reasoning, logic trouble shooting, and spatial visualization

Physical strength and flexibility Personal flexibility, communication, and cooperation

Ability to follow fixed, unchanging procedures Initiative, persistence, and independence

General attention to production and safety procedures

Attention to detail, self-control, and dependability

Following orders Making independent decisions

Operating, maintaining, designing mechanical machinery

Operating computers or computerized machinery and using computers for a wide range of critical functions

Degrees Desired: H.S. Grad and Vo Tech Certificates

Degrees Desired: STEM (2 and 4 Year College)

Source: Pearson TalentLens and NGKF Research

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2015 State Business Climate Index

State Overall Corporate Tax

Ind. Income

tax Sales Tax

Unemployment Insurance

Tax

Property tax

Illinois 31 47 11 34 38 44

Indiana 8 22 10 10 7 5

Wisconsin 43 33 43 14 27 31

Minnesota 47 44 46 37 29 34

Missouri 17 4 29 29 12 7

Michigan 13 10 14 7 47 27

Ohio 44 26 47 32 5 20

Kentucky 26 29 30 11 45 17

Kansas 22 38 18 30 9 28

Texas 10 39 6 36 15 36

2015 State Business Climate Index Ranks and Component Tax Ranks

Source: Tax Foundation Note: A rank of 1 is more favorable for business than a rank of 50.

Will Illinois make a good location for a Midwest manufacturing and distribution centers?

MARKET ACCESS/LOCATION

INFRASTRUCTURE

TALENT/SKILLED WORKFORCE

TAXES AND REGULATORY POLICIES

RIGHT TO WORK STATE

BUSINESS CLIMATE (ATTRACTION/RETENTION POLICIES)

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Incentives: Not Competitive (Do We Care?)

E. Jason Wambsgans, Chicago Tribune

Gov. Bruce Rauner holds a press conference outside his office at the State Capitol in Springfield, Sunday, May 31, 2015. Rauner suspended future economic incentives used to attract and retain businesses.

Illinois halts economic incentives for businesses

per·plex pərˈpleks/ verb past tense: perplexed; past participle: perplexed

synonyms:shock, stun, astound, dumbfound, overwhelm, stagger, amaze, astonish, take aback, take someone's breath away;

Will County Value Proposition

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Competitive Advantage from Road/Rail Network and Intermodal Facilities Transportation Employment Follows Key Infrastructure

Source: Will County Center for Economic Development, US Bureau of Labor Statistics, NGKF

Will County Transportation Network (Existing & Planned) Greater Chicago Transportation Employment

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Will County Specializes in Logistics Transportation & Warehousing Employment Growing Faster than Overall Economy

Total Employment (All Sectors)

Transportation & Warehousing Employment

% Transportation & Warehousing

Will County 184,034 13,143 7%

Lake County (IL) 290,009 4,972 2%

Kane County 174,606 3,299 2%

DuPage County 549,921 23,179 4%

Metro CHI Total 3,792,941 179,729 5%

Source: NGKF; US Bureau of Labor Statistics (Transportation & Warehousing = NAICS 48-49)

3.2% Transportation & Warehousing employment growth rate in Will

County (2014)

2.5% Overall Will County employment

growth rate (2014)

vs.

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A Large Market that is Well Positioned for Future Growth Price Advantage Coupled with Largest Shovel Ready Pipeline in Region

Will County Inventory (SF) 116,932,074 Vacancy Rate 11.0%

Avg Asking Rent ($/SF/Yr) $3.96 NNN

Proposed SF 42,366,195

McHenry County Inventory (SF) 17,830,433 Vacancy Rate 8.8%

Avg Asking Rent ($/SF/Yr) $4.44 NNN

Proposed SF 0

DuPage County Inventory (SF) 174,485,595 Vacancy Rate 6.0%

Avg Asking Rent ($/SF/Yr) $5.61 NNN

Proposed SF 6,028,271

Lake County (IL) Inventory (SF) 79,996,484 Vacancy Rate 8.4%

Avg Asking Rent ($/SF/Yr) $5.13 NNN

Proposed SF 3,843,937

Source: NGKF; CoStar, Inc.

Kane County Inventory (SF) 67,337,105 Vacancy Rate 7.7%

Avg Asking Rent ($/SF/Yr) $4.44 NNN

Proposed SF 6,070,341

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Most Construction Activity in Metro Chicago Will County Market Bolstered by Availability and Quality of Newer Space

Source: NGKF

Will 39%

Cook 22%

DuPage 15%

Kenosha 8%

Lake, IL 7%

Kane 5%

Other 4%

Metro Chicago Ongoing & Recently Completed (2Q15) Industrial Construction by County

Total Ongoing & Recently Completed

Construction 21,409,000 SF

Build-to-Suit 4,811,000 SF

42%

58%

Speculative 3,470,000 SF

Will County Ongoing & Recently Completed (2Q15) Industrial Construction by Type

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(2)

(1)

0

1

2

3

4

5

6

7

2010 2011 2012 2013 2014 YTD 2015

Mill

ions

Will DuPage Lake McHenry Kane

Strongest Demand in the Regional Market Will County is Five Year Net Absorption Leader for Logistics-Related Real Estate

Source: NGKF

Total Net Absorption 2010-YTD 2015

Will County 16,073,000 SF

DuPage County 10,615,000 SF

Kane County 5,624,000 SF

Lake County (IL) 3,112,000 SF

McHenry County 22,306 SF

Metro Chicago 62,055,000 SF

SF

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Major Logistics Operations Continue to Locate in Will County Top 10 Warehouse and Distribution Center Locations/Announcements Since 2010

85

Number of new major logistics locations (100,000

SF+) in last 5 years

30M

Total SF occupied by major logistics tenants (larger than 100,000 SF) in last 5 years

Source: NGKF; CoStar, Inc.

Company Square Feet Location Year

Michelin 1,700,000 Wilmington 2014

Home Depot 1,618,000 Joliet 2013

Saddle Creek Logistics Services 1,115,000 Elwood 2015

Pactiv Corporation 899,000 Romeoville 2013

Diageo North America, Inc. 800,000 Bolingbrook 2010

Whirlpool 752,000 Joliet 2015

Bob’s Discount Furniture 752,000 Shorewood 2014

Ferrara Candy Company 747,000 Bolingbrook 2013

PAE 723,000 Romeoville 2015

Georgia Pacific 697,000 University Park 2011

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Logistics Support Comprises a Large and Growing Portion of the Market Not Just the Largest Occupiers Driving Market Expansion

35%

Percentage of Transportation & Warehousing employment

dedicated to support services

336

Number of establishments dedicated to Transportation &

Warehousing support services

Source: US Bureau of Labor Statistics

Greater Chicago Transportation Support Employment

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Labor Cost Advantage for Lower-Skilled Logistics Worker Chicago’s Minimum Wage Increase puts City at a Site Selection Disadvantage

Occupation Description Metro Chicago Median Hourly Rate

Machine Feeders and Offbearers $11.55

Freight Stock and Material Movers $11.29

Transportation Attendants $10.60

Packers and Package Handlers $9.66

Cleaners of Vehicles and Equipment $9.44

$13/hour

Proposed minimum wage in Chicago by 2019

Transportation/Logistics Sector Median Hourly Wage for Lower-Skilled Occupations

Source: US Bureau of Labor Statistics

$14/hour Metro Chicago median wage for all Transportation and Material

Moving occupations (2014)

Opportunity for Will County

Conclusions

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So What Should be Will County’s Focus?

• Go after the matchmaker in the supply chain collaboration relationship.

• Round tables with local industries and employers about global supply chain risk and Omni-channeling.

• Will County site selection advantages: labor availability and cost, access to Chicago market, existing/planned infrastructure, cost/quality/availability of space, growing agglomeration effect

• Focus on attracting/retaining small to medium sized transport “support services” companies as much as the higher profile “big wins”

• Future opportunity to attract businesses out of Chicago given lower cost labor advantage and increasing minimum wage requirements in city

• Support efforts to make Illinois more competitive on the global stage

In Today’s Economy: Do Fewer Thing’s Better, Provide Deeper and Better Business Intelligence and Make it Sticky