U.S. Ports - Preparing for Global Demand
A thriving container-shipping industry means increased logistical challenges for major American seaports.
Brian Knowles, Principal, Industrial Services, The Staubach Company (Aug/Sep 06)
Every day dawns with a new discussion on globalization and how the United States must prepare for the immense market that is today's global economy. How will we compete? What are our pressure points for success? How are we prepared to meet this global invasion?

Unless you have been stuck in a shipping container in one of our many U.S. port districts, it's easy to see and hear the growing demands on our logistics infrastructure to support the increasing volume of imports. Globalization requires significantly increased coordination of road, rail, and sea transport. At recent industrial real estate conferences throughout the United States where national and regional developers share their experiences, ports were the topic of conversation in every group breakout session or sidebar. Whether it was security, channel depth, TEU (twenty-foot equivalent units, a standard measurement for shipping containers) capacity, on-dock or near-dock intermodal facilities, operational issues, or real estate, it was all port-related.

Today, most goods spend some time in a container as they are moved around the world. The container-shipping industry is booming, especially inbound from Asia. Giant container ports such as Hong Kong, Singapore, and Los Angeles/Long Beach have flourished thanks to rapid-loading equipment. In addition, container ships are getting larger, currently handling up to 10,000 TEUs. To put this figure in perspective, each 10,000-TEU ship will generate approximately 5,000 truck trips with each hauling a 40-foot container, assuming no dockside rail facilities. Larger container ships will cause greater peak demand for truck and rail access on already congested access routes from the ports.

Since the ports will always be our main point of entry for global goods, our ability to offload, stage, store and ship is pivotal. Every U.S. port is either re-evaluating its operational effectiveness, developing a master planning for expansion, improving infrastructure, or marketing itself as an alternative point of entry into the U.S. marketplace. As they plan for the future, a number of the largest U.S. ports are facing a shortage of developable land. Barriers include environmental concerns and other land uses that compete for the geographically desirable property adjacent to these busy waterways.

Southern California
The Ports of Los Angeles and Long Beach share the San Pedro Bay in Southern California and are the number one- and two-ranked container ports in the United States, respectively. They handled a combined 14.2 million TEUs in 2005. This figure is projected to increase to 35 million TEUs by 2020, placing further pressure on a transportation network that already faces severe congestion.

With a total inventory of more than 1.3 billion square feet, the Southern California industrial market is the largest and most active in the nation. Los Angeles County has recorded some of the lowest warehouse vacancy rates in the nation, as a result of the growing trade imbalance with Asia. The ports of Southern California handle approximately 40 percent of the container volume in the country, creating a strong demand for both distribution buildings and land to handle the volume. Brownfield development, along with the redevelopment of functionally obsolete industrial and manufacturing facilities, has gained momentum as industrial land values near the port have exceeded $30 per square foot.

Developers in the Inland Empire area of Southern California completed more than 18 million square feet of warehouse/distribution space in 2005, increasing the existing inventory to approximately 325 million square feet. The lack of available land and the doubling of land prices in the Western Inland Empire have pushed warehouse development farther east and north, away from the ports. However, as transportation costs continue to increase and account for a larger share of the overall distribution model, companies are forced to reconsider this expansion away from the Los Angeles/Long Beach port area and the 20 million residents of Southern California.

New York/New Jersey
The Ports of New York and New Jersey (NY/NJ) are the third-most active in the United States. For the last several years, when importers lacked sufficient warehouse space within the port district, they found themselves setting up shop 30 miles south at the Exit 8A interchange of the New Jersey Turnpike. With 55 million square feet of mostly modern Class A warehouse space and growing, the Exit 8A interchange solution became home to many well known retail and consumer product-based companies.

A major pressure point for the NY/NJ ports has been container storage and the lack of available staging and warehouse area within the local confides of a fully developed sub-market. To help mitigate this backlog, the Port Authority has instituted increased "demurrage fees," which commence within 24 hours of the container touching the port soil. Along with escalating fuel costs, security delays and the need to offsite these containers quickly, companies are looking for opportunities within close proximity to port operations that also offer ample container/trailer storage. In developed markets like NY/NJ port area, this has become a major issue.

Recognizing corporate America's need to cut supply chain costs, developers and investors are investing in any property to prepare and get in front of this current and growing market demand. For example, at Exit 12 of the New Jersey Turnpike - 20 miles closer to the ports than Exit 8A - Prologis, Panattoni, and the Morris Companies all have different projects that involve remediation and major infrastructure investments. Even with the additional capital costs to bring these infill properties to market, the developers' confidence seems to lie in the continued "tsunami" of imports.

The Southeast
Port diversification continues to push container traffic to alternative East Coast Ports, such as Charleston and Savannah. These ports rank among the top 10 container ports in the United States. This year alone, Charleston is expanding its bulk warehouse space by 1.3 million square feet. Additionally, the port offers several land sites consisting of at least 50 acres, which are ideal for future development of distribution facilities. The main Charleston port operations lie along the Cooper River and offer modern container-handling equipment and facilities. The port is seeking to add three new berths and a 280-acre marine terminal at the former Charleston Naval Base.

The Port of Savannah is the first major container terminal for ships utilizing the Panama Canal for Eastern Seaboard access from Asia. As a gateway to the huge "inland port" of Atlanta, the Port of Savannah offers plenty of land for expansion. Target Corporation is scheduled to complete a 2.1 million-square-foot warehouse next year at the Savannah River International Trade Park, approximately four miles from the Garden City Terminal. Target will be joining Home Depot, Wal-Mart, and Pier 1 Imports, all of which have chosen Savannah as a strategic location for future growth.

Competition for port-adjacent property will be provided by the six Class I railroads currently operating in the United States. Intermodal terminals have been one of the fastest-growing segments of the railroad system, serving both the trucking and shipping industries. The railroads help to relieve pressure on the nation's highways, which reduces transit times and overall inventory costs.

The railroads have been beneficiaries of the record-high import volumes. Combined, they hauled more freight in 2005 than ever before. While speed and service levels have been widely reported problems as the railroads operate at near capacity, rail companies are attacking these issues with an aggressive capital spending program of approximately $8 billion. The railroads' ability to increase capacity and improve service levels, combined with near-dock intermodal facilities and inland ports, will greatly assist the existing constraints on the overall transportation network.

Carriers and shippers are all concerned about inland transportation costs, which can account for up to 50 percent of the overall cost to move product from a factory in Asia to a store shelf in the United States. Thus, many ports are actively pursuing rail expansion and improvement programs that will help speed the flow of containers through the struggling U.S. transportation system.

With supply-chain issues and their effect on the bottom line reaching the executive suite, the metrics for corporate America may not be how much per square foot, but rather how much can be saved by being more logistically efficient within the supply chain. Speed to market pressures have not abated.

Brian Knowles and Timothy P. O'Rourke are members of the Logistics Practice Group for The Staubach Company, a market-leading global real estate advisory firm. Mr. Knowles works out of the company's Murray Hill, New Jersey, office; Mr. O'Rourke is located in Los Angeles. Both can be reached via the company's website at www.staubach.com.