Logistics and Manufacturing Site Selection: Robert Hess Trends, Perspectives and Predictions Executive Managing Director, Consulting 773-957-1439 [email protected]

About Us

Who We Are Newmark Grubb Knight Frank’s Global Reach

Comprehensive Services

 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

TENANT REPRESENTATION SERVICES

 Strategic Planning  Lease Acquisitions  Lease Dispositions  Program and Project Management

 Property and/or facility manager for approximately

508 million square feet

 Comprehensive real estate solutions through an extensive global platform

 Leasing Advisory Services

of integrated services

OWNER REPRESENTATION SERVICES

 Investment Sales and

Capital Markets  Property Management  Project and Construction Management  Valuation and Advisory

 Global Account Management

GLOBAL CORPORATE SERVICES

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

3

Integrated Services Approach Demand for 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

Supply of Space

4

Strategic Consulting Services             

    

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

    

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

GLOBAL

ENTERPRISE OPTIMIZATION ASSET

STRATEGY

Human Capital Operations

INFORMATION MANAGEMENT

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

     

Technology Real Estate

WORKPLACE STRATEGY & TECHNOLOGY

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.

OPERATIONAL EXCELLENCE

BEYOND REAL ESTATE

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

5

Global Corporate Services Clients (Corporate Strategy and Planning)

Real Estate Portfolio Management

Strategic Planning

Global Portfolio Strategy

Confidential Location Strategy

Portfolio Strategy

Global 687 Locations

Austin, TX

Global Assets

South Central U.S..

New York, NY

Projects Chaungzhao and Doce

Headquarters & Manufacturing Strategy

Real Estate Portfolio Management

Distribution Center Expansion

High Tech Industrial Site Selection Expansions

Occupancy Planning & Project Management

Hickory, NC NY vs China

National 28 Locations

Northern, NJ Memphis, TN

Taiwan Europe

Atlanta , GA

6

Global Corporate Services Client (Technology Process Improvement)

Business Process Harmonization Store Development Pipeline

Business Intelligence Dashboards

Needs Assessment Business Case Business Process

Needs Assessment Functional Requirements

Needs Assessment System Analysis

Store Development Life Cycle Functional Design

Business Intelligence Dashboards Business Process

London, UK

Houston, TX

Detroit, MI

New York, NY

New York, NY

New York, NY

New York, NY

Benchmark Needs Assessment Strategic Roadmap System Selection

Business Case Benchmark

Master Data Strategy Asset Operations Strategic Roadmap Benchmark

Benchmark Business Process Master Data Strategic Roadmap

TCO Analysis Master Data Strategy

Gulf Region Site Consolidation Mid-Atlantic Location Strategy

Benchmarks System Selection Business Case

New York, NY

Fayetteville, NC

Oyster Bay, NY

Toulouse, FR

London, UK

Midland, MI

Oak Ridge, TN

7

Notable Midwest and Illinois Site Selection Projects Who

What

Where

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.

Leading manufacturer of architectural lighting, expand its headquarters and manufacturing on Chicago’s Southwest Side, retaining 400 jobs and adding 50 fulltime 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.

8

Distribution Network Location Optimization – What Do You Know!

Distribution Center Model – Optimal Location Population modeled as Demand

1 DC – Indianapolis

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

2 DC – Cincy & Long Beach

3 DC – Long Beach, Nashville & Philly

6 DC – Long Beach, Philly, Joliet- 7 DC – Long Beach, Philly, JolietIL, Dallas-TX, Savannah-GA & IL, Dallas-TX, Chattanooga-TN, Portland-OR Portland-OR & Tampa-FL

Source : Precision Distribution Consulting (PDC)

10

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

8 DC – Long Beach, Edison-NJ, Davenport-IA, Dallas-TX, Chattanooga-TN, Portland-OR, Tampa-FL & Toledo-OH

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

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!

Total Cost Range of Optimal Values

On-time delivery Fixed Cost

Inventory Carrying Cost

Annual Cost

Order lead time

Delivery frequency Fill rate

Transfer Freight

Order completeness Store Freight

Damage-free receipt Reliability

Few

Number Of Facilities

Many

11

 Agility

Supply Chain Logistics and Manufacturing Site Selection Trends

Supply Chain Networks 2025: Integrated and Collaborative Models • 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.

2025+

2015

13

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! 14

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.

15

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 instore 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.

16

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? 17

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.

18

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

19

Supply Chain Focus on “Total Landed Costs” − Raw material

− Brokerage and logistics fees

− Semi-finished sourcing

− Complete shipping costs

− Manufacturing

− Taxes, Duties & Tariffs

− Transportation

− Insurance

(Sea, Ground, Rail, Air) − Inventory holding costs − Incremental management & overhead

− Currency conversion − Crating costs − Handling fees

Transforming what gets done where ! 20

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

21

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 backoffice 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.

22

Of Special Note: Chicago Metro Warehousing and Logistics Employment 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 Occupation

Chicago

Indianapolis

Milwaukee

Minneapolis

St. Louis

Detroit

Cleveland

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

23

Columbus Cincinnati

Availability of Skilled Labor for Manufacturing – A Crisis? 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. “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.

24

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

25

2015 State Business Climate Index 2015 State Business Climate Index Ranks and Component Tax Ranks

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

State

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

BUSINESS CLIMATE (ATTRACTION/RETENTION POLICIES)

INFRASTRUCTURE

TAXES AND REGULATORY POLICIES

TALENT/SKILLED WORKFORCE

RIGHT TO WORK STATE

26

Incentives: Not Competitive (Do We Care?) Illinois halts economic incentives for businesses

E. Jason Wambsgans, Chicago Tribune

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

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.

synonyms:shock, stun, astound, dumbfound, overwhelm, stagger, amaze, astonish, take aback, take someone's breath away; 27

Will County Value Proposition

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

Will County Transportation Network (Existing & Planned)

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

29

Will County Specializes in Logistics Transportation & Warehousing Employment Growing Faster than Overall Economy Total Employment (All Sectors)

Transportation & Warehousing Employment

% Transportation & Warehousing

3.2%

Will County

184,034

13,143

7%

Transportation & Warehousing employment growth rate in Will County (2014)

Lake County (IL)

290,009

4,972

2%

Kane County

174,606

3,299

2%

DuPage County

549,921

23,179

4%

2.5%

5%

Overall Will County employment growth rate (2014)

Metro CHI Total

3,792,941

179,729

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

30

vs.

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

Lake County (IL)

Inventory (SF)

17,830,433

Inventory (SF)

79,996,484

Vacancy Rate

8.8%

Vacancy Rate

8.4%

Avg Asking Rent ($/SF/Yr)

$4.44 NNN

Avg Asking Rent ($/SF/Yr)

$5.13 NNN

Proposed SF

3,843,937

Proposed SF

0

DuPage County

Kane County Inventory (SF)

67,337,105

Inventory (SF)

174,485,595

Vacancy Rate

7.7%

Vacancy Rate

6.0%

Avg Asking Rent ($/SF/Yr)

$4.44 NNN

Avg Asking Rent ($/SF/Yr)

$5.61 NNN

Proposed SF

6,070,341

Proposed SF

6,028,271

Will County Inventory (SF)

116,932,074

Vacancy Rate

11.0%

Avg Asking Rent ($/SF/Yr)

$3.96 NNN

Proposed SF

42,366,195

Source: NGKF; CoStar, Inc. 31

Most Construction Activity in Metro Chicago Will County Market Bolstered by Availability and Quality of Newer Space Will County Ongoing & Recently Completed (2Q15) Industrial Construction by Type

Metro Chicago Ongoing & Recently Completed (2Q15) Industrial Construction by County Kane 5%

Other 4% Speculative 3,470,000 SF

Lake, IL 7% Will 39%

Kenosha 8%

42%

Total Ongoing & Recently Completed Construction 21,409,000 SF

58%

DuPage 15% Build-to-Suit 4,811,000 SF Cook 22% Source: NGKF 32

Millions

Strongest Demand in the Regional Market Will County is Five Year Net Absorption Leader for Logistics-Related Real Estate SF 7 Total Net Absorption 2010-YTD 2015

6 5

Will County

16,073,000 SF

4

DuPage County

10,615,000 SF

3

Kane County

5,624,000 SF

Lake County (IL)

3,112,000 SF

McHenry County

22,306 SF

2 1 0

Metro Chicago (1) (2) 2010

2011 Will

DuPage

2012 Lake

2013 McHenry

2014 Kane

Source: NGKF 33

YTD 2015

62,055,000 SF

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

Company

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

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

Source: NGKF; CoStar, Inc. 34

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

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

35

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

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

Opportunity for Will County Source: US Bureau of Labor Statistics

36

$13/hour Proposed minimum wage in Chicago by 2019

$14/hour Metro Chicago median wage for all Transportation and Material Moving occupations (2014)

Conclusions

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 38