The Southwest: America's NAFTA crossroads

Thanks to the North American Free Trade Agreement, the U.S. Southwest has become a hot spot for companies that distribute products throughout North America.

By Toby B Gooley -- Logistics Management, 10/1/1998

he Southwest is a land of contrasts. Dry Sonoran desert in the southern part of the region is juxtaposed with snow-capped mountains in the north. Bustling, fast growing cities like Dallas, Phoenix, and Las Vegas are surrounded by vast, empty spaces. And high-tech industry exists side by side with cattle ranches and mining operations.

One could say that there's something for everyone in the Southwest. Well-maintained and uncrowded highways, proximity to high-growth markets, favorable state tax climates, and plenty of room for expansion are among the factors that are attracting businesses to the Southwest.

Another big draw for many companies seeking to locate a distribution facility is the Southwest's close historical ties with Mexico. The vast majority of trade between Mexico and the United States and Canada passes through California, Arizona, New Mexico, and Texas. As North American trade continues to grow under the North American Free Trade Agreement (NAFTA), the Southwest will continue to increase in importance as a distribution location.

Proximity to Markets

Although the Southwest may be best known for its wide-open spaces, it also boasts some of the country's fastest-growing cities. The Dallas-Fort Worth area; Phoenix and Tucson, Ariz.; Denver, Colo.; and Las Vegas all are attracting new residents at a rapid clip. Las Vegas, for example, is gaining about 5,000 people each month, says John Boyd, president of industrial location consultants The Boyd Co.

These cities and the fast-growing suburbs that are spreading around them are prime consumer markets in themselves. But Boyd says companies that site distribution centers in the Southwest find that it's an excellent location from which to serve the West's biggest market: California. With 54 percent of the entire population of the 13 Western states, California is the sixth-largest economy in the world, he reports. But the state's maze of regulations, natural disasters, unpredictable weather, traffic congestion, and high costs make it a very difficult place to do business. "California is important for many reasons, so companies want to serve it and serve it well," Boyd says, "but they don't want to locate there."

The ideal solution for many companies is to locate distribution centers in nearby states where they can serve both California and local markets. Phoenix; Albuquerque, N.M.; Salt Lake City, Utah; Reno, Nev.; and Dallas all are viable options. Perhaps no Southwestern city, though, has been as successful in attracting distribution facilities as Las Vegas, Nev., and surrounding Clark County. Located less than 300 miles from Los Angeles and Phoenix, and just a day's drive from San Francisco, San Diego, Salt Lake City, and Tucson, Clark County has actively promoted itself as the place to be for companies that want a single location from which to serve the Western United States. Among the many well-known companies that have opened major distribution centers in the Las Vegas area in recent years are:

* TJMaxx (1 million square feet);

* Levi Strauss (780,000 square feet);

* Potlatch Corp. (400,000 square feet);

* Rite-Aid Pharmacies (270,000 square feet);

* OfficeMax (250,000 square feet);

* Ocean Spray (200,000 square feet); and

* Lechter's (200,000 square feet).

Yet that doesn't mean that California has lost its luster. Despite its drawbacks--and Southern Nevada's benefits--Southern California still exerts a powerful draw for some companies that are seeking distribution sites, insists Tim Keith, Dallas-based regional vice president for Meridian Industrial Trust of San Francisco, a real estate-management firm that specializes in warehouse/distribution and light industrial properties.

"You are much closer to consumer markets there. That's why over the last three years, the Ontario-Inland Empire area [in Southern California] has emerged as a major distribution center," he notes. Also working in its favor are lower land costs than in Los Angeles and good highway access to consumer markets in Los Angeles and San Diego, he adds. Demand is growing in that part of California, Keith says; his company recently announced that it had fully leased the 600,000-plus square-foot Meridian Distribution Center in Mira Loma, Calif., just 30 days after completion.

For companies that want proximity to Mexico's growing consumer and industrial markets, the Southwest is the logical choice. Mexico's most important manufacturing locations, such as Hermosillo and Monterrey, are just hours away from cities like San Antonio and Tucson. Tijuana's enormous maquiladora assembly-plant operations are an hour's drive from downtown San Diego. And Texas, with its excellent highway, rail, and ocean shipping connections, is heavily promoting itself as a prime location for all kinds of companies doing business with Mexico. "We are just 8 to 10 hours from Monterrey, when you factor in the border-crossing time," says Jose E. Martinez, president and CEO of Free Trade Alliance San Antonio, an economic-development organization in that city. That's important to U.S. companies that sell to or buy from Mexican businesses, he says. "Monterrey has just 5 percent of Mexico's total population, but [workers there] produce more than 20 percent of Mexico's gross national product. Seventy percent of that manufacturing is for export, most of it to the United States," he reports.

Physical Infrastructure

Population centers in the Southwest are so widely separated that highways literally have become the region's lifeline. Although the highway network is not as dense in the Southwest as it is in some other parts of the country, it is well maintained and designed for truck traffic.

Interstate 15, often referred to as the "Canamex" trade corridor, connects Salt Lake City, Las Vegas, Los Angeles, and San Diego with extensions into Tijuana and Calgary. Another major north-south trade route is I-25, which runs from Denver to El Paso, Texas; it connects with Mexico's Highway 45, which runs through Chihuahua and on into Mexico City. I-29 from Winnipeg connects in St. Louis with I-35, often called the "NAFTA Highway" because it passes through Dallas and San Antonio on its way to Laredo, the busiest by far of all the U.S.-Mexico border crossings. From there, it is a short hop to Monterrey and a long day's drive to Mexico City. Running like crosswise threads through these international trade corridors are Interstates 40 and 70, which connect Southern California with Midwest and East Coast markets.

Railroads also play a vital transportation role in the Southwest, where agriculture, chemical production, and mining are big business. The region not only offers service by Class 1 railroads like Burlington Northern Santa Fe and Union Pacific, but it also boasts numerous short-line and regional railroads. These carriers often specialize in certain commodities, such as livestock, minerals, or chemicals. All rail service to and from Mexico, moreover, passes through the four border states--California, Arizona, New Mexico, and Texas--to connect with Mexico's newly privatized regional railroads. From the Texas and California borders, rail lines fan out to connect Mexico with the U.S. West Coast, Midwest, and Canadian markets.

Shippers that use airports like Sky Harbor in Phoenix and McCarran in Las Vegas benefit from their good weather, frequent regional and national service offerings, and reliable schedules. Denver's new international airport is underutilized, but its modern and efficient cargo facilities gradually will attract more business, says John Boyd. Private all-cargo airports, such as Alliance Airport in Fort Worth, offer excellent service dedicated to the needs of shippers, not passengers. Dallas/Fort Worth and Los Angeles, meanwhile, are the region's international service hubs, but both frequently suffer from congestion. Still, shipment volumes are growing steadily, and both airports are adding major new services and cargo-handling facilities. In June, for example, Latin American specialist Challenge Air Cargo announced that it would establish a second hub at Dallas/Fort Worth International Airport. Challenge will serve nine South American cities from a new, 205,000-square-foot aircargo facility that includes 40,000 square feet of refrigerated storage.

Thanks to the Southwest's rapid population growth, trade development under NAFTA, and excellent transportation infrastructure, there is no shortage of building space that is suitable for warehousing and distribution facilities. Both speculative and on-demand construction is booming in the region, and demand for such properties will remain high, says Keith of Meridian Industrial Trust.

In addition to building-to-suit, developers also are meeting soaring demand for distribution space by renovating existing space. One example is Kelly Air Force Base outside of San Antonio, Texas. Kelly will close as an Air Force Logistics Center in 2001, but it already has started its new life as a private-sector multimodal distribution and logistics center. With its quick access to major north-south highways and 4.4 million square feet of warehouse and distribution space--some of which boasts direct access to aircraft runways and rail lines--Kelly's redevelopment has attracted several large companies to date. Among the current tenants are Ryder Integrated Logistics, W.W. Rowland Trucking, Boeing Co., and Pratt & Whitney. "We have elected to define our niche in logistics," says Martinez. "We think we have a crown jewel in Kelly Air Force Base."

Economic and Tax Considerations

Finding the often substantial acreage required for distribution centers at reasonable cost can be difficult in some parts of the country, but land availability in the Southwest generally is not a problem. Even growing, sprawling cities like Phoenix and Dallas have room to spare, and although land prices have risen in the last 10 years, the cost per acre is low compared to East and West Coast markets, says Boyd.

Transportation costs also are reasonable, in part because so much freight moves by longhaul trucking and rail between widely separated consumer markets. In addition, big markets like Las Vegas and Phoenix have plenty of backhaul opportunities, further reducing transportation costs for savvy shippers. Trucking deregulation, including the long-awaited deregulation of intrastate transportation in Texas, has made regional freight rates even more attractive by introducing more competition and new services, says Keith.

Like their counterparts in other regions of the country, the Southwestern states offer numerous job-creation incentives to entice companies to locate or expand their facilities there. Even though unemployment is low--the Phoenix and Tucson metro areas, for example, claim unemployment rates of just 2.5 percent and 2.8 percent, respectively--population growth is high enough to create constant demand for jobs. These states also are anxious to boost employment in rural and inner-city areas, which can be economically depressed even as the cities' economies are booming. For example, New Mexico, which has only eight communities with populations greater than 20,000, promotes job creation by paying 50 percent of job training costs (65 percent in rural areas) to companies that meet certain criteria.

Tax incentives for relocations and expansions abound in the Southwest. In addition to job training benefits, most states also give companies a break in such areas as taxes on property, gross receipts, reinvestments, research-and-development costs, and telecommunications. Texas, for example, has a high inventory tax, but in order to attract distribution businesses, many communities are offering inventory-tax exemptions for goods that leave the state within 179 days, says Keith.

The all-time tax-incentive champion, though, may be Nevada. "The business climate in Nevada is unique in terms of taxation issues that affect distribution centers," says Boyd. "There's no inventory tax, no corporate income tax, no personal income tax, no franchise tax, no admission [business registration] tax, [and] no inheritance or gift tax. The gaming and hospitality industry lifts the tax burden on other sectors, both corporate and personal," he explains.

Look to the Future

The Southwest is unique in its geography, its history, and its bicultural population. Its favorable climate, business environment, and the availability of room to grow continue to make it one of the most attractive regions of the country for business development. Texas and Arizona, in fact, lead the country when it comes to job creation.

Each state and metropolitan area has its own individual characteristics--and these should be taken into account when choosing a location for a distribution facility, advises Boyd. Dallas, for example, has excellent financial and investment support services, transportation connections, and congestion management. Salt Lake City is uncrowded now, but it may experience congestion and transportation problems as it prepares for the Winter Olympics. Phoenix's costs have been rising, but it still is a bargain compared to many other areas of the country. And Denver's development as a high-tech center has attracted a workforce that is highly skilled and motivated. Add in quality-of-life issues and the region's close cultural ties with Mexico, and it's no wonder the Southwest comes up a winner in the race to attract new business.

Editor's Note: The state of Nevada offers a free business location guide to interested companies. An order form can be found on the state's Web site (www.state.nv.us).