This year, Jones Lang LaSalle published its second annual Ports Airports and Global Infrastructure (PAGI) report at a time when optimism was reemerging in the industry. The report examines the real estate landscape near the most significant U.S. seaports and airports. It found that as global trade rebounded, U.S. ports sought to expand capacity to meet anticipated demand. They began to focus on capital development and investment to meet future infrastructure requirements and compete on the world stage.
But between 2007 and 2009, the nation's top 13 ports experienced an 18.5 percent decline in total throughput volumes as domestic and foreign consumption waned. Since trans-Pacific, U.S.-bound trade from Asia started to recover in the second half of 2009, there has been a positive effect, particularly on West Coast ports, where traffic has increased by 14.8 percent year-over-year.
We devised the inaugural Jones Lang LaSalle Port Index - which rates U.S. port markets on performance and impact on the surrounding real estate economy - to analyze exactly how our domestic ports are faring. Ports are judged on their land value-to-lease rate ratio, local vacancy rates, labor costs, on- or near-dock service by railroads, and planned infrastructure investment. Unsurprisingly, Los Angeles/Long Beach, the largest seaport complex in the United States, tops the Index, followed by New York/New Jersey and Savannah, which have all performed above the national average and have committed to substantial infrastructure investment in recent years.
John Carver discusses recovery in the U.S. industrial real estate sector. Click here for an additional interactive map.
Investing in the Future
U.S. ports have invested more than $34 billion in capital projects to enhance their facilities in the last 50 years, according to the American Association of Port Authorities. By our estimates, the top 13 ports alone will pour nearly a quarter of that amount, roughly $8.5 billion, into container terminal and harbor dredging projects in the next five years. This ratio demonstrates the major efforts to ensure that U.S. ports remain competitive and efficient in the fight for global market share.
Increasing interdependence between global economies, the need for infrastructure improvements, leaner supply chains, and the rapid movement of goods will pressure U.S. ports to secure long-term capital access to financing from the public and private sectors.
Additionally, U.S. ports are anticipating the expansion of the Panama Canal and the long-term rise in cargo and freight traffic. They are attempting to move ahead with aggressive infrastructure investments, concession agreements, and capital improvement plans that will help capture or increase market share and compete with foreign ports. The Los Angeles/Long Beach port has broken ground on a $40 million harbor dredging project, which will deepen the main channel to 76 feet to accommodate deep draft, post-Panamax ships holding more than 14,000 twenty-foot equivalent units (TEUs).
Meanwhile, foreign nations are raising their game through capital investment. Port operators in greater China and the Middle East went on a global buying spree from 2006 to 2007 to gain control of global shipping routes and direct access to raw materials. Stringent U.S. foreign direct investment regulations have prevented the same influx of capital into U.S. ports from foreign investors. As a result, many U.S. ports have leaned on private domestic investment and public-private partnerships to support the multimillion-dollar projects necessary to maintain long-term economic competitiveness.
But China and the Middle East aren't the only regions pouring capital into their ports. The Brazilian government initiated the $526 billion PAC-2 program. Southeast Asia is also increasing infrastructure expenditures, with an expected $32 billion to be spent between 2010 and 2014, according to a KPMG study. While the world's ports are preparing for consumer demand and a cargo growth explosion, world container port handling is expected to grow 6 percent annually starting next year, according to a report by Drewry Shipping Consultants.
Seaports and Real Estate
Despite growth plans and global trade optimism, the economic meltdown has diminished warehouse and distribution space demand around U.S. ports to critically low levels. From 2009 to 2010, average vacancy rates escalated by 1.6 percentage points to 9 percent as tenants shed excess space, consolidated operations, or ceased business altogether. Still, the figure remains below the U.S. national average vacancy rate for industrial real estate of 10.4 percent.
For the second consecutive year, net absorption increased by a negative 2 million square feet for a total negative 3.9 million square feet in 2010. Despite some inventory replenishment, demand has yet to return to most major port markets, and asking rents declined by an average 7.1 percent, with the largest losses in the markets surrounding the ports of Los Angeles, Long Beach, and Charleston. These ports, along with Virginia and Tacoma, posted the highest year-over-year losses from 2008 in total container volumes, demonstrating the correlation between port through-traffic and industrial real estate vacancy rates.
But there are some encouraging long-term opportunities on the horizon, especially for leasing and investment near ports for the heavy-hitting East and West Coast ports, along with the emerging ports of Gulfport, Mississippi; Mobile, Alabama; and Port Manatee, Florida on the Gulf Coast, and Philadelphia on the East. Ports with multimodal capabilities and proximity to large regional population bases, such as Hampton Roads and Savannah, will be in a strong position to grow as trade rebounds.
The Story with Airports
We found a similar story with airports, as real estate around the country's airports was affected by recent economic shockwaves. Global air freight traffic grew at the slowest rate in nearly a year in September, expanding 14.8 percent over last year, but falling 2.1 percent from August. September marked the second straight month-to-month decline in overall air freight traffic, leaving air freight volume 6 percent below the 2010 peak set in May, the International Air Transport Association said. The PAGI report found that as the recession abated, the air cargo industry experienced some improvement in volumes, driven mainly by inventory restocking. But this has yet to result in any push to absorb space surrounding airports.
It's not a secret that diminished global cargo volumes negatively affect the demand for logistics and warehouse space around airports. In fact, average vacancy rates at top U.S. airports are up an aggregate of 80 basis points year-over-year, keeping 2010 net absorption in negative territory. But this year has shown improvement, and we expect the market to be ready to take off again by late 2011.
Top U.S. Airport Markets
Some airport markets, such as JFK in New York and Newark in New Jersey, have remained buoyant due to their proximity to dense populations and low vacancy rates. JFK has the lowest vacancy rate at 3.3 percent, but is the smallest market surveyed considering its constrained location along the water. Anchorage, with a 4.5 percent vacancy rate; LAX with 5.5 percent; and Newark, with 7.8 percent are also dominant. JFK records the highest asking rents, starting at $13.30 per square foot (psf), Anchorage at $11.28 psf, and LAX at $10.59 psf.
Memphis is the world's leading airport in terms of metric tons of container traffic, according to the Airports Council International. The Asian airports of Hong Kong; Shanghai; and Incheon, South Korea follow.
The real estate surrounding Memphis airport remains flat, with relatively unchanged vacancy rates of 15 percent and low rental rates starting at $2.18 psf. While Memphis is the world's leading cargo airport, it was negatively affected by the fall in cargo traffic. However, with cargo volumes healthier than in previous quarters, heavy investment in intermodals, and some strong recent leasing activity, the industrial real estate market surrounding the airport is expected to continue to rebound in the next three to six months.
Meanwhile, the Dallas/Forth Worth airport has experienced an industrial vacancy increase, with current figures at 19.4 percent. This is the highest rate of the 11 markets Jones Lang LaSalle analyzed. and is attributed to an abundance of new development rather than a lack of industrial real estate demand.
As with seaports, the most successful airports in the future will likely expand to include multimodal capabilities and partner to create new development that integrates logistics or improves distribution functionality. Vacancy levels have crested in most major U.S. airport industrial markets, but real growth may not be realized until late 2011 if consumer demand falters and air cargo numbers continue to drop. Recent terror attempts on cargo planes will likely result in tighter security restrictions that may temporarily slow cargo volume levels. Regardless, 2010 has been a positive year that greatly improved from 2009. More indicators point towards long-term optimism, even if the short-term outlook is unstable. We expect 2011 to mark a turnaround in the industrial and logistics real estate markets around our major cargo hubs.