Imports are driving distribution hubs North.

If the 20th Century was famous for spawning the Industrial Revolution, then perhaps the new millennium marked the birth of the evolution. Today's demand for industrial space, coupled with numerous transportation, technological, and socioeconomic factors, has prompted change. In the industrial real estate segment, logistical and location strategies are being redefined -- especially when it comes to setting up the most cost-effective warehousing facilities and distribution networks to move products throughout the Western United States.

Recently, businesses throughout the nation learned just how important the Southern California ports are to the economy. During the 11-day closure, it is estimated that businesses lost approximately $22 billion with a ripple effect felt from California to New York and every state in between. According to a recent study by the Los Angeles Economic Development Corporation (LAEDC), "LA's local ports and trade corridors deliver more than $196 billion annually or $537 million per day of products and commodities in every part of the county." The report detailed the top 10 states that benefit from Southern California ports annually are California ($93B), New York ($16B), Illinois ($12B), Texas ($11.8B), New Jersey ($10.7B), Tennessee ($4.7B), Michigan ($3.6B), Georgia ($3.5B), Arizona ($3.3B), and Missouri ($3.1B).

The ports will continue to be a lifeline for the US economy. "All indicators point to continued double digit annual growth in imports at the Ports of Long Beach and Los Angeles," said Jon De Cesare, principal, West Coast Logistics Consulting.

To build a speed efficient and cost effective logistics model of moving goods from the Ports of Los Angeles and Long Beach throughout California and North America via ground and rail transportation, a new trend has emerged that is affecting real estate decisions. Leading retailing and wholesalers are consolidating multiple small warehouses into three or four mega-facilities in optimal locations to create a network to serve the entire continent.

In recent years Kern County has seen this trend make a major impact with major players consolidating operations into larger, state-of-the-art facilities, serving Western North America. IKEA, Wal-Mart, Target, Sears, Daisytek, Nestle, and CARQUEST have all located distribution centers in Kern County, with the average facility size more than one million square feet.

Traditionally, these retailers would look to locate in Los Angeles -- near the Ports in Los Angeles County. But with land becoming increasingly scarce, and continuing population growth, industrial space within the Los Angeles County boarders comes at a premium. This may have local real estate owners smiling, but with lack of industrial space and high overhead costs many companies have started targeting areas outside of the L.A. Basin for expanding warehouse and distribution operations. This includes places like Kern County where land costs can range from 30 to 50 percent less than properties inside the L.A. County. boarders. While inbound transportation rates out of the Ports may increase by going North, the lower land, labor, development costs, and in many cases the outbound transportation costs more than make up for it.

From a logistics standpoint, Interstate 5 boasts positive traffic patterns, which enable TL (truck-load) and LTL (less-than-truckload) deliveries to be carried out more efficiently. With more than 60,000 vehicles traveling along 1-5 through Tejon Ranch each day, distribution centers that locate at the Tejon Industrial Complex have access to the 11 Western States within 36 hours.

"In the past 5 years, Kern County has taken major steps to diversify its economy with more manufacturing and distribution companies. This transition is very similar to what occurred in the Inland Empire 20 years ago," said Patrick Collins, executive director, Kern Economic Development Corporation.

Adding to the dynamics of logistics and commerce, the population of Southern California is expected to grow by 7 million people over the next 20 years, adding 2.8 million new jobs to the employment base.

"Population and job growth brings with it a tremendous demand for new real estate," said John DeGrinis, senior vice president, Colliers Seeley. "We're forecasting that an additional 300 million square feet of industrial space will be needed to accommodate this growth."

The fact that major retailers have set their sites on Southern California expansion should come as no surprise. One of the most recent retailers to migrate north of Los Angeles is IKEA, the world's largest home furnishings company. The Sweden-based retailer teamed up with Tejon Ranch Company in January 2002 when it opened its 1.7 million-square-foot distribution facility at the 350-acre Tejon Industrial Complex, located just 20 minutes north of Los Angeles County.

"By locating at the population center of California, we save time and money in our distribution business and offer our co-workers an outstanding quality of life in Kern County," said Mike McDonald, president of IKEA Property, Inc.

While the move North is primarily due to lack of expansion opportunities in Los Angeles, affordable and available labor, favorable housing costs, and the transportation network brings companies to Kern County over other California alternatives. According to the Department of Human Services and Employers Training Resource, businesses can save on average $3.43 per labor hour compared to other California alternatives. This can mean $2.2 million annual savings when employing 250 workers. And the people of Kern County are looking for work.

"When Petro Travel Plaza opened in 1999, we only had 205 job openings. From the 1,800 applications we received we interviewed 800 people and hired 235. This is truly a testament to a motivated workforce with a very strong work ethic," said Keith Kirkpatrick, vice president of operations for Petro Travel Plaza, a 51-acre travel center that opened in June 1999 at the Tejon Industrial Complex.

With the continuing demand and evolution to larger industrial buildings, it all comes down to logistics, labor, location and lifestyle. The right combination of these ingredients makes for smart, long-term decisions that save time and money in the supply chain that make a major impact to a company's profitability and/or savings for the consumer.

Barry Hibbard is Director of Real Estate with the Tejon Ranch Company.