Energy element Featured

7:00pm EDT November 25, 2008

Surging energy costs are directly impacting the real estate market. From the locations of manufacturing plants and distribution centers to zoning density regulations to the dwindling land values in outlying areas, the rise in fuel costs is influencing real estate’s fundamental underpinnings.

Higher energy costs are also having an impact on overseas shipping, as there is now an effort to get goods from the Far East closer to the end user.

“Instead of unloading in Los Angeles or Long Beach, some ships are going through the Panama Canal to the East Coast,” says Keith Zeff, director of research for Colliers Turley Martin Tucker. “By getting the goods closer by ship to the end user, there are less transportation costs by truck or other less efficient means.”

Smart Business spoke with Zeff about how rising energy costs are affecting development density, mass transit and transportation logistics.

What impact do higher energy costs have on development density?

The higher the density, the greater possibility there is to have a shorter commuting distance. Municipalities are relooking at zoning density and use mixtures because they want to intensify density in some close-in areas where travel distances are shorter and public transportation options are more plentiful.

The interesting fact about zoning is that it was created about 100 years ago in the United States to separate land uses so people didn’t have to have their house next to a smelly manufacturing plant. Little by little we’ve reversed that trend. For one thing, there are fewer manufacturing plants. And the ones that are around tend not to be smelly — they produce goods that don’t take a lot of the energy used in the past.

Also, people want to be closer to grocery stores, which used to be separated by zoning categories. Mixed use has become a popular phenomenon and has impacted shopping center designs. In fact ‘lifestyle centers’ is a shopping center category that has increased in the past five years. These are all issues largely related to energy use and how people plan their days between their work schedules, their consumer needs and home life.

How are exurbs (commuter towns) affected?

Land brokers have found it very difficult to sell residential land in the exurbs. Part of this is due to the housing crisis. Another factor is the increased interest in coming closer in than the outlying areas. There was a saying in residential sales that went, ‘Drive until you qualify,’ which means people would go farther and farther out until they could qualify for the loans of the houses they wanted to buy. This trend, however, is reversing because the energy costs offset the savings of the lower-priced housing. Outlying locations are definitely not as popular as before.

In what ways is mass transit impacted?

Most urban systems have seen ridership increase. There is also a trend towards development around transit stations. Transit oriented development is a concept the Urban Land Institute has been talking about for a long time, but now it is come to pass that land around the transit stations has become more valuable and higher-density development is a good use of that land.

The issue is coordinating the land use decisions with the transportation system decisions. In some cities, like Toronto, the same governing body that lays out the transit system makes zoning decisions. I visited Toronto over 25 years ago and you could tell from an aerial photograph where the transit stations were because the buildings were higher and denser around the transit stations. A high-density transportation system supports higher-density development and the higher-density development helps support the transportation system. It’s a mutually beneficial arrangement when those two things can be coordinated.

How are energy costs affecting transportation logistics and where distribution facilities are located?

People have cited this as going in two different directions. On one hand, some people are saying that because of transportation costs they need to have the distribution centers closer to the end user. Backers of this argument say it’s best to have smaller distribution centers with more of them scattered around. Others say the opposite: because of deficiencies it’s best to have larger distribution centers. This can be justified by having the distribution centers run by a third-party logistics company that can realize savings by combining shipments of goods from multiple manufacturers.

Will the location of manufacturing facilities be influenced by transportation costs?

It already is. There have been some overseas manufacturing facilities that are now being questioned because of the distance goods must be shipped. In fact, even across borders, like Mexico, many manufacturers opened facilities to take advantage of lower labor costs. But given the distances the goods must travel from the manufacturing plant to the distribution center to the end user, the higher shipping costs may offset the savings from the lower labor costs.

KEITH ZEFF is director of research for Colliers Turley Martin Tucker. Reach him at kzeff@ctmt.com or (314) 746-0353.