Background Research Material for Freight Facility Location Selection: A Guide for Public Officials (NCFRP Report 13) (2011)

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41 Key Criteria and Data Requirements for Facility Location Decisions 6.1 Overview Companies and carriers both work through various categories of objective and subjective data as they make location decisions for freight facilities. Whether the facility is to be a retail distribution center, a railroad intermodal facility, or an intermediate logistics center for a manufacturer, the data are similar. The fundamental objective is to arrange the supply chain or service network that is able to deliver competitive performance at the lowest cost, and individual facilities are system components designed for this larger purpose. The importance of specific items will differ, but each new location decision usually involves an examination of issues such as:  Ability to access key markets  Interaction with the transportation network  Modal choice  Labor and workforce  Total cost environment  Utilities  Availability of suitable facilities  Permitting and regulation  Tax environment  Public assistance and incentives  Climate and natural hazards In addition to the criteria gathered for each candidate site, several outside factors influence how decisions are made. These include:  Who within the organization has responsibility for choosing facility locations and how that individual’s performance is measured.  The reliance on and sophistication of network computer models.  The dynamic nature of the global supply chain, especially as regards to favored sources of origin and production.  Fuel costs and the resulting choices for transportation mode.  Congestion and capacity issues within key transportation nodes. This chapter will first examine the key criteria used in the location selection process and then discuss several of the key outside factors that currently impact location decisions for freight facilities. As with the previous section, the data gathered on key criteria and dynamics was gained through interviews with corporate executives within freight-intensive businesses (such as manufacturing and retailers) as well as with freight carriers, location consultants, and real estate professionals. A full list of interviewees may be found in Appendix B. 6.2 Ability to Access Key Markets or Customers Freight facilities exist solely to facilitate the processing and movement of goods from an origin to a destination. The point of origin may be a source for raw materials, a manufacturing plant, or an intermediate

42 point. The destination may be the ultimate consumer or a staging station along the way. Regardless, freight facilities typically chose locations which allow them to most directly and efficiently access these origin and destination points. Access is expected to accomplish two things: 1) perform delivery service with speed and precision that matches or exceeds the competitive standards in the market; and 2) establish a set of logistics costs that will prove as low as possible within the delivery standards. Implicit in the location decision is a service performance threshold that the facility is designed to meet (e.g., containers handled per hour, inbound truck shipment capacity per day). As an example, retail distribution networks are often founded on a concept of overlapping circles each with a radius of 500-miles. Beginning with the factory, this builds a supply chain which allows for a one-day drive to the regional distribution center, then the local distribution center, and finally to stores (which are located in major consumption areas). The ability to service a particular customer within a one-day drive is a common service expectation and location consideration. This consideration requires both physical proximity to the customer and a location within the transportation network which permits ready movement to the customer’s facilities. (Indeed, the location of a freight facility can in some cases be directly specified by the customer.) For a city terminal operated for pickup and delivery by a truck fleet, the customer proximity requirement is substantially shorter and the density of customers in the region is greater. In these cases, the number of customers that can be reached within fixed time schedules affects the quality of service and the necessary investment in trucks as well as terminals. These facilities are situated to minimize total miles within a few hour service radius. Intermodal facilities and freight rail terminals also locate themselves proximate to major consumption zones, but due to their size and need for access to multiple customers, tend to locate at the outskirts of major metropolitan areas. Additionally, these facilities need to be located at points where they can generate large loads of freight which need to be shipped long distances. For example, a freight rail terminal can require almost 100,000 carloads of freight per year moving from one point to one other point up to 2,000 miles to be financially feasible. Intermodal facilities servicing containers and truck trailers have similar requirements. In such cases, the carrier will attempt to locate near a market that either generates this volume or where they can collect freight from a short distance to create the volume required to support feasibility. Sources for market data include the US Census, the US Department of Commerce (Bureau of Economic Analysis, International Trade Administration), US Bureau of Labor Statistics, and commercial software and data packages such as Nielsen Claritas, who build projections and analyses from publicly available data. Companies also rely on internal data about their customers and business trends. 6.3 Interaction with Transportation Network In addition to proximity and access to customers and markets, the facility needs to have an efficient interface with the transportation network. The nature of this interface depends on the facility type and the markets to be served, and may require access to more than one mode of transportation. At the time they are seeking sites, companies normally have a modal plan in place consistent with their performance and cost requirements, and they are thus looking for locations that will help them execute it. Communities which tend to attract freight facilities have a logical connection with points of production or port of entry; proximity to consumer markets; and the infrastructure to allow an efficient means of connecting the two. Specifically, freight facilities locate near key interface points on and between transportation channels. This includes:

43  Areas or sites on major highways  Areas where multiple interstate highways converge  Railroad terminals at the edges of their network or at key consumption markets  Major sea and airports These are site-level considerations in addition to those at the market-level. A site might be set in precisely the right position in the transportation network, but site or community issues can prevent the effective use of the site. Considerations by mode will vary widely depending on the type of company and the good being shipped, but can include a few modal considerations. Road and Truck Full-load and long-haul trucking requires quick access to major highways. Additional time on local roads, with delays due to local congestion and traffic lights adds to logistics costs, conflict with the public sector, and operational difficulties. A site within ¼ mile of a highway and no traffic lights will represent a significant annual logistics cost savings when compared to a site two miles from a highway. Companies also consider whether the roads they will use have tolls. Tolls represent additional cost both in terms of direct fees and lost time on the road and can be significant in overall cost of operations. Parcel, less-than-load, and many private carriers view access to the local road network as more critical because of their requirement to make multiple stops in relatively short sequence. Even in these cases, however, the less impeded the access to a major artery and the faster its connection to the metropolitan highway network, the better. Rail Companies shipping bulk products, or large amounts of goods over longer distances may choose to do so via rail. Increasingly, this also includes products that are shipped via intermodal container. The use of rail varies regionally as the viable rail shipping distance is somewhat shorter in the eastern United States than in the west, due to fewer miles between cities and fewer options for carriers to relegate capacity to higher revenue, long haul freight. The unit of production in railroading is the train, so access to Class I carriage is frequently a matter of assembling trainload volumes. This can be accomplished by very large shippers (like an ocean carrier or a coal-fired utility), or by consolidation at an intermodal or transfer terminal, or by a short line railroad combining the traffic of many shippers. Rail access also looks for aligning shipments in such a way that the equipment is efficiently used for all legs of transit. For example, a company shipping consumer goods to the Pacific Northwest may attempt to ship 60 foot boxcars together with a lumber company, reload these cars with paper at the destination to ship this back to the original site. Rail is also a natural solution in supply chains that combine a west coast port of entry and east coast consumption zones. Access to the rail network is concentrated at terminal facilities. Terminal facilities themselves locate at key origin and destination points for freight and are constructed with the capabilities to move bulk freight, intermodal containers, liquids, or other materials between mainline rail and either other forms of transportation or shunted to the user.

44 These terminals are designed to allow for the most efficient interface with mainline rail. Class I railroads plan for their trains to run on mainline rail at operating speeds. Slowing and accelerating sidings are constructed at key interchange points and allow for trains to enter or leave the mainline without disrupting the efficiency of the mainline. Such a facility might require a minimum volume of 150,000-200,000 individual freight or container movements to approach financial and operating feasibility. As a result, railroads attempt to encourage the co- location of rail-based freight users at these interchange points to both maximize the efficiency of these interchanges and also to generate critical freight mass. Additionally, railroads have very specific criteria for new facilities coming online for how the tracks are laid out. Class I long-haul railroads will typically only deliver and pick up cars, leaving switching to be done by either a switching railroad or by the user. Water High bulk goods, liquids, and containers moving internationally require water access. In these cases, the port – the interface between water and any overland transportation network – must provide the infrastructure to load and unload shipping and have the ability to transfer freight to other modes of transport. Additionally, the facility will likely require space for sorting, storing and assembling shipments, and may also require customs and safety screening for international shipments. Air Freight carriers’ requirements for air transportation increase for high-value, quick response, low bulk items. This is the case for medical devices, some biotech products, electronics, and similar items. A secondary consideration can be back-up access to high speed transportation, for companies carrying very low inventories. More broadly, air freight also an important role for freight forwarders as their cargo is subject to a wide variety of time requirements. Interestingly, many freight users will include proximity to a hub airport as an evaluation criterion for freight facilities which will not themselves be shipping anything by air. In these cases, the cause may be accommodation of company management or partners who wish to visit the facility and will require means of accessing the region through commercial air travel. In many cases, there may not be specific discussions with the airports during the site selection, but the company may investigate the carriers using the airport and examine how active the facilities are. Third-Party Shippers Instead of co-locating or locating near specific freight infrastructure, some freight businesses will rely upon and perhaps locate near third-party shippers or third-party logistics companies (3PL’s). This is the case for large retailers who will ship most of their own merchandise through their distribution centers but who will rely upon FedEx or UPS to ship small packages such as jewelry directly from central distribution to the stores. 6.4 Labor and Workforce While each facility type has different requirements, labor skills, costs, and the overall workforce environment play a key role in location selection for freight facilities.

45 At the most basic level, labor and workforce correspond to the availability of suitable personnel to be able to staff a facility. However, freight facilities can require a wide variety of talents depending upon the exact nature of the facility. Skills required may include forklift operators, assemblers, truck drivers, machinists, mechanics, technicians, material handling specialists, and engineers in addition to unskilled labor. In evaluating locations, companies often examine data from the US Bureau of Labor Statistics and Bureau of Economic Analysis regarding overall employment for a region or community first. This information indicates the overall labor market health of the community and may also give indications as to the general level of labor costs as well as data on occupations and industry-specific information. Companies also request this data and local salary surveys directly from local economic development agencies. Lastly, companies will also speak directly with peer companies in the local market to determine their experiences with labor in the region. They will attempt to discover local salary trends, best practices for attracting and retaining key talent, and determine unionization trends. Companies will also examine the education infrastructure of the area. This is both to determine the base educational attainment of the population and also to ascertain the availability of follow-on training programs to fill specific requirements. Educational attainment data is typically available through the US Census and updates are performed by private data suppliers. The company will collect data on educational institutions from the Internet or from published sources. The company may also request specific education and training information from the local government or economic development agency. Union presence and activity can be a factor for site attractiveness, but may be viewed either positively or negatively. Some companies view the presence of a union as beneficial, as specific industries already expect to work with unionized labor, the union provides training and some support to the local labor force, and also acts as an easily identifiable party that can readily represent labor in negotiations. Other companies work actively to avoid unionization and will use their location as part of an overall strategy to lessen the risk of their becoming organized. Data on unionization trends is readily available from the National Labor Relations Board. 6.5 Total Cost Environment As noted in the chapter on the Location Process, companies will develop a set of relatively comprehensive cost models to estimate the relative costs of doing business in each candidate location or scenario. These are also used to evaluate the sensitivity of each scenario’s relative feasibility to changes in factors such as fuel costs, product mix, labor costs, tax exposure, product sourcing, or other key inputs. The total cost of doing business in each location not only provides information to be balanced against other operational factors, but also informs the incentive negotiation process with the local government or economic development agency. Examples of data sources for key cost assumptions are as follows:  Freight and logistics costs o Previous company performance o Freight carriers o Industry association data  Labor costs o Bureau of Labor Statistics

46 o Local salary and benefit surveys  Utilities o Local requests for information o Edison Institute for private electric utilities o Building Owners and Managers Association (BOMA) guide  Facilities Costs o Local brokerage firms o Building Owners and Managers Association (BOMA) guide o Marshall & Swift (construction costs)  Taxes o Professional accounting firm guides o Requests for information to local tax assessor office 6.6 Availability and Cost of Suitable Facilities Real estate availability and cost are typically not prime drivers for the location decision process, but an optimal facility in the right location can help enable selection decisions once the site satisfies other key strategic criteria. For example, the availability of well-planned warehouse space at a regional airport might allow for a faster decision, if that airport also has good highway and rail access and at a location which allows unimpeded service to consumption areas. Likewise, the lack of suitable facilities can impede progress or remove a community from consideration. This is also the case for a community who does not have land zoned for industrial or commercial uses near key infrastructure access points. Finally, it is common for carriers siting city terminals to limit their search to existing facilities because of the cost of new construction and community resistance. Properties of this sort may be handed from operator to operator as leases expire and lessors grow, consolidate, or fail. The freight user will investigate the availability of buildings of a particular size envelope, layout, ceiling height, number of loading docks, floor loading limits, utility feeds, refrigerated space, purchase, rent and operating costs, and other attributes depending upon their specific requirements. Alternatively, companies may search for land near specific transportation points or other partners. They will determine plot size, possible layouts, price, geology, soils, hydrology, and other requirements and seek parcels meeting these needs. Companies will also investigate the availability of nearby operations to support their own freight activities. Operations such as bulk and transload facilities allow for consolidation and access to modes of transportation such as rail and port where the single users’ activities are not sufficient to support service. Site availability will differ based on the type of freight logistics facility. For example, siting an inland port, integrated logistics center, or intermodal rail terminal will typically require larger sites than small to medium- sized distribution centers, warehouses, and city/hub terminals. Identifying and preserving large sites to meet these requirements can be a challenge in more fully developed, built-out urban areas. Interface points to the transportation network – rail terminals, intermodal facilities, ports and the like – are valuable in that they allow for flexibility in choice of how to move goods. Some companies acknowledged the discussion of integrated logistics centers as one real estate solution which allows communities to provide adequate land and facilities at a point which also concentrates freight movement away from other community activities (residential, recreational, retail, etc.).

47 Initial data on regional costs may be obtained through reports from national real estate service providers. The company will then seek market and building specifics either from their own real estate service firm or through the local economic development agency. 6.7 Utilities While electric, water and sewer capacity does not drive warehouse, distribution center, and intermodal facility location strategy as much as for other uses (e.g., data center and manufacturing), the company making the location decision will still wish to ensure that capacity exists, is reliable and is cost-effective. Power reliability can be as important as power cost. Some facilities, such as those using heavy lift capability or automated warehouses which are highly reliant on computerized machinery, will pay even more attention to the issue and may even use access to uninterrupted power as a gating issue in the site selection process. Note also that freight facilities often include assembly or light manufacturing operations in addition to freight movement. In these cases, the utility requirements of the ancillary functions may significantly impact location needs. Local utility availability and costs are usually determined through conversations with the local economic development agencies and utility providers. 6.8 Permitting and Regulation Local, state and federal permitting and regulations impact how a company can implement their plans for a particular site and can also impact their timeline.2 Fire codes, land use regulations, traffic regulations, zoning, and hours of operation regulations can all significantly impact the feasibility of a freight facility location. The interpretation of codes and regulations by officials such as fire marshals can have a decisive effect on the ability of a facility to function as planned. Ideally, a community positioning itself for freight uses will have developed land use, transportation and zoning plans which explicitly permit and support these facilities and which allow for round-the clock operation. This also means that such plans will have been developed in such a way that freight uses are not in conflict with other community uses and residential neighborhoods. This can be a particular challenge when freight facilities are established at the edges of towns and the neighboring communities have differing views on which uses ought to be provided for. Experience with a similar facility type in the community and an existing permitting process can be seen as a location positive. For example, a community which already houses a bulk terminal will be familiar with the impacts that these might have upon the community and will have a clear process in place for permitting additional facilities using bulk freight. Other communities who do not have this experience might exhibit confusion and delay in responding to the company’s permit applications. Communities and regions can also help significantly in the process by proactively managing the interaction with the broader public. Government and appointed officials can work with local interests to keep everyone coordinated. For example, they can ameliorate community concerns first by acknowledging impacts on local traffic, then also educating the public on the benefits that development will bring to the community at large, 2 If a freight facility and related infrastructure investment is large enough, it could trigger a formal environmental review process such as an Environmental Impact Statement (EIS) or Environmental Review (EA). This is more common for intermodal rail terminals, inland ports, and other large-scale freight facilities.

48 and demonstrating how the community will work with the new company to reduce the impact on residents to the extent possible. Companies also view a community or region’s willingness to provide a clear permitting and regulatory path as an amenity or incentive. By providing the company with a reliable picture of what obligations the company needs to meet, which permits it needs to obtain, and a clear timeframe for when these hurdles may be met, the company can more clearly budget when the facility will be able to enter the supply chain and generate returns on investment. 6.9 Tax Environment Income, sales, real estate, and property taxes can all significantly affect the cost environment for freight facilities. Chief among these is property taxes. Real estate taxes can be high on urban facilities on land which might otherwise be used for high-density development. Over time, higher real estate property taxes may drive these parcels into non-freight development and freight facilities will relocate to the urban fringe. Personal property taxes can also be a concern. At least one interviewee spoke of an experience where inventory in one location was taxed as personal property. The company responded to this challenge by removing all inventory from the facility and essentially decommissioning it approximately one week before the community’s annual tax assessment day. Inventory was then returned to the facility several days after the assessment was completed. The interviewee asserted that had the company been aware of the issue beforehand, this facility would not have been located where it was. 6.10 Public Sector Assistance and Incentives Public sector assistance in the forms of tax credits, grants, low-cost loans, training programs, utility discounts, and infrastructure development can address specific location shortcomings and are often used to close the gap between a location and its competition. Broadly, incentives do not drive location decisions at the strategic level. Companies understand that incentives usually do not substantially impact the overall feasibility of a site, nor can they ameliorate serious community shortcomings. In short, they rarely make a “bad” location into a “good” one. Therefore, incentives are not a first or second order decision factor, but may be a decision maker once the list is reduced to 2-3 candidate sites. Companies and location consultants have a wide range of perspectives regarding the role and use of public incentives. Some companies view the incentives process as asking the community for handouts and are not willing to ask for any assistance beyond that available as-of-right. Others view them as a critical partnership between company and community to reduce the one-time and operating costs of freight facilities to the point where success may be gained for both sides. As mentioned in the previous chapter, specific incentive programs can include:  Tax concessions or exemptions  Loans and loan guarantees  Employee tax credits  Wage subsidies  Land subsidies or grants  Cash grants  Property tax abatements  Utility rate reductions

49  Infrastructure grants  Enterprise Zones  Foreign Trade Zones (FTZ)  Tax Increment Financing (TIF)  Inventory tax reduction  Expedited permitting and approvals Overall, freight users prefer to work with communities that understand the competitive landscape that freight users operate in. In these cases, communities come to the table with an understanding of the company’s goals, how the company and community’s goals align, and suggest proposals to help reduce initial investment costs and barriers for long-term benefits to the company and community. Companies begin discussions with government and economic development at various levels depending on the stage of the location process. The more certain the company is with regards to where they wish to be, the more likely it is that they will directly contact the local level first (county, city, other) and encourage them to draw on higher level services to pull the team together. If the search is regional, then the company may decide instead to speak with state or regional economic development officials. Freight companies and carriers alike also expressed that local strategies of building speculative infrastructure, public terminals, and warehouses cannot work without an understanding of how these directly address operating economics and forecasted market demand. Freight location decisions rarely respond to a “build it and they will come” approach on the part of the public sector. Rather, successful freight facilities are often driven by partnerships with and commitments from railroads, truck companies, etc. A common form of commitment for freight facilities is public funding and construction of connecting infrastructure such as local access roads, water/sewer, or rail spurs. As an example, Massachusetts strongly favors this form of incentive as it produces a tangible and lasting infrastructure benefit even if the private sector venture is unsuccessful. Other incentives which the public sector may offer to freight facilities include acting as a clearinghouse for information on back-haul and other freight-leveling opportunities. Some companies expressed that it would be helpful for them to be able to obtain information on local freight movement the same way they can for electric, utilities, workforce, and soils. By coordinating this information, the community can ensure that local carriers and freight users run closer to capacity on a more regular basis, providing a strategic advantage. Communities can also provide tangible incentives without subsidy by shortening or expediting the permitting timeframe. Communities that understand the company’s process and drivers can smooth the permitting process and provide clarity in terms of expectations for the company and the regulatory agencies, resulting in a better defined process and a shorter time to implementation. Through this approach, communities can present this confidence as a strategic advantage of the location. 6.11 Climate and Natural Hazards In order to understand business interruption risks, companies will collect data on the region’s climate, natural hazards, and historic information on how these have impacted business closures in past years. No area is without some form of natural hazard risk, and companies will compile data on excessive heat, cold, rain, snowfall, earthquake, wildfire, tornado, hurricane, or other relevant data to develop appropriate mitigation (and recovery) plans.

50 Data on climate and natural hazards is available from the National Oceanic and Atmospheric Administration (NOAA) and the National Weather Service in addition to other providers.

51 Table 6-1: Site Selection Criteria by Facility Type Location Criteria Type of Logistics Facility Distribution Center Port Intermodal Terminal Transload Terminal ILC Hub Terminal City Terminal Ability to Access Key Markets or Customers Interaction with Transportation Network Labor and Workforce Total Cost Environment Availability and Cost of Suitable Facilities Utilities Permitting and Regulation Tax Environment Public Sector Assistance and Incentives Climate and Natural Hazards Key Priority of Criteria: Primary Factor Important Factor Lesser Factor