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Seaports Coping With Rising Trade Volumes, Tight Real Estate Markets

In order to address the challenges of big-ship congestion, U.S. seaports are turning to rail, barges, and off-terminal facilities.

Q3 2019
Three years after it opened, the expanded Panama Canal continues to reshape U.S. seaport real estate and its infrastructure. During the same timeframe, cargo ships have grown larger to meet ever-growing consumer demand and seaports in the U.S. are getting busier. To try and ease congestion, they are adopting new strategies. And while all this is unfolding, vacancy rates in warehouse space near the ports have reached historic lows and rents have climbed by more than 25 percent since 2010, according to JLL’s 2019 Port, Airport and Global Infrastructure (PAGI) Report.

Also, trade agreements have enabled manufacturers to expand abroad, creating better-paying jobs around the world. As a result, the global middle class has grown from 1.8 billion people in 2010 and could rise to 3.8 billion by 2020, according to the Organization for Economic Co-operation and Development (OECD)/Brookings Institute. This growth means increased purchasing power, a surge in demand for consumer goods, and ultimately an uptick in trade.

And more trade means shipping companies are deploying large container vessels filled to capacity, creating economies of scale that reduce the cost per container. Since the third set of locks in the Panama Canal opened in 2016, currently capable of handling 14,000 TEUs (twenty-foot-equivalent units), ocean carriers have grown to carry as much as 25,000 TEUs in cargo on other trade routes.

But carriers are also becoming more focused on issues beyond each port’s capacity to accommodate large container ships. They are also analyzing the cost of industrial warehouse space; the availability and cost of labor; the location transportation nodes near the seaports; and the time and cost to reach the destination from each port.

Fuel regulations will likely further drive demand for big ships — those able to carry 14,000 TEUs or more. By January 1, 2020, the United Nations International Maritime Organization will require all oceangoing vessels to use low-sulfur fuel, which currently is 35 to 40 percent more expensive than the high-sulfur fuel that container ships typically use — and prices are expected to rise. Ocean carriers are likely to shift freight volumes to larger ships to spread the higher fuel costs among more containers.

New Approaches to Congestion and Transportation Concerns
While growing trade volume is good news, megaships are creating congestion around U.S. ports and making it difficult for container terminal operators to move goods in and out of their facilities. Ocean carriers are seeking to call at more ports, too, especially those that are capable of handling large vessels and are less congested than the major ports.

Shippers have traditionally relied upon long-haul truckers to transport goods from seaports to distant inland points. However, the U.S. trucking industry is facing a shortage of 50,000 long-haul truck drivers, according to American Trucking Research Institute. One reason is age. With the average age of drivers at around 50, many are nearing retirement, and the industry has struggled to recruit younger drivers who don’t want to spend days away from home.

Bigger ships mean growing property demand and climbing rents at U.S. seaports. To help alleviate the long-haul driver shortage, some ports are developing rail-served inland ports. According to JLL research, inland hubs in such markets as Atlanta, Chicago, Dallas, eastern and central Pennsylvania, and Kansas City have benefited from direct express rail service from major seaports. Atlanta, Chicago, and Dallas, for example, have seen industrial property inventory grow between 3 and 12 percent in the past five years from their rail connections and inland hubs.

Another emerging alternative to trains and trucks are “short sea” strategies, in which containers are hauled on barges or smaller vessels to inland ports. Virginia Port Authority, for instance, launched a container-on-barge operation between its terminals in Norfolk on the coast and its inland Port of Richmond facility on the James River, and is slated to increase frequency and number of locations served. Empty containers are currently being barged from Memphis to New Orleans, where they are loaded with agricultural goods and petrochemical resins/plastics for export. As these volumes and practices increase, economies of scale will improve.

Rising Volumes at East Coast Seaports
As JLL research previously anticipated, the expanded Panama Canal has brought increased shipping traffic to East Coast seaports with the capacity to accommodate today’s megaships bringing goods from Asia. TEU volumes in East Coast ports have increased by a whopping 46.8 percent since 2008, leading to tight industrial real estate markets around these logistics gateways. West Coast ports — particularly the Port of Oakland, Calif., have also seen growth, albeit at a slower rate of 18.4 percent. But rents in the port have increased by nearly 101 percent since 2010 — more than at any other seaport market.

Given the rise of e-commerce and that two-thirds of the U.S. population lives east of the Mississippi River, demand for industrial real estate will likely continue around key Eastern seaports. In New Jersey, for instance, rents have increased by 17 percent year-over-year and vacancy remains at a record low of less than 3 percent.

Strong Demand for Port Facilities
Diverse tenants are driving demand for warehouse, cold storage, and transloading space close to the ports. In Baltimore, e-commerce distributors, third-party logistics companies, and food and beverage companies continue to seek big-box space. Houston’s port activity is largely driven by petrochemicals and the downstream energy industry. Demand in Oakland is coming from logistics and distribution, along with food and beverage industries. Retailers like Article and Home Depot have led seaport leasing demand in New Jersey, while e-commerce demand has kept Los Angeles port real estate vacancy below 2 percent for more than five years in a row.

Another emerging alternative to trains and trucks are “short sea” strategies, in which containers are hauled on barges or smaller vessels to inland ports. As industrial property demand near major ports continues to grow, speculative developments are commanding the highest industrial property rents in most markets. Vacant land parcels are scarce near the ports, driving up land prices and pushing development of offsite transload and storage facilities to neighboring submarkets.

In the Southeastern markets, Jacksonville saw nearly 3.5 million square feet of new space delivered from 2016 to 2017, and 10 new projects totaling 2.4 million square feet are under construction for a total of nearly seven million square feet of new product hitting the market in the past two years. In Savannah, Ga., nearly 86 percent of new developments are pre-leased. Similar to Jacksonville, the Savannah market has close to 6.7 million square feet under construction, and 4.2 million square feet of new supply was added at the start of 2019.

The Question Mark of Tariffs and Trade
The question is, will tariffs and trade disputes ultimately disrupt the volume of shipping and industrial real estate activity? Already, tariffs have increased the cost of many raw materials, creating concerns for supply chain managers. Also, the U.S. trade deficit has increased to nearly $600 billion annually, despite the country becoming a net exporter of oil and natural gas for the first time in 50 years.

So far, the impact of uncertain trade policy on the industrial real estate sector has been minimal. Trade and political turbulence could cause a slowdown in decision-making, but JLL research indicates substantial pent-up demand for industrial real estate. However, it’s in the best interest of all parties to resolve differences, remove tariffs, and conclude trade agreement negotiations so that everyone can get back to the business of international trade. We will be watching developments closely over the coming months.

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