Commentary: Inside Out Growth

As the U.S. begins to emerge from four years of economic downturn, there is a view that seaports aren’t as exciting as they used to be. Following the 2008 financial crisis, container growth projections across the board have been ratcheted down from the high- to the mid- single digits; virtually no one is expecting a repeat of the 13 percent U.S. container import growth seen in 2003 or the 12 percent seen in 2007, according to data from PIERS, a sister company of The Journal of Commerce.

This reflects any number of new normal realities: expectations for continued sluggishness in U.S. growth, intensifying port competition, near-sourcing of some production to Mexico and Central America, and the China manufacturing engine that largely created the hoopla in the first place unclear as to its direction.

Such a view, for example, has led to criticism of the billions being spent in a frenzy of competition by ports on the East Coast to prepare for a Panama Canal expansion that will surely bring larger ships but not necessarily more cargo.

Yet there is a counterpoint to this story line, not a repudiation, but a view that even amid an environment of more modest expectations, ports are still prime growth generators within the nation’s economy. The vantage point is from real estate, and it goes like this: As of today, industrial properties, which used to be factories but are now mostly distribution centers of various types, are leading all types of commercial real estate in metrics such as vacancy rates, rent trends and time on market, and port properties specifically are leading the industrial category, said John Carver, head of Jones Lang LaSalle’s Ports Airports and Global Infrastructure group.

Thus, industrial vacancy rates are showing strength if not tightness in a number of key port markets such as Los Angeles, 7.1 percent; Long Beach, 6.7 percent; New York-New Jersey, 7.6 percent; and Houston, 3 percent. Why the strength in port real estate versus other sectors? It’s not that all port industrial markets are tight or heading there. Markets considered overbuilt in recent years, such as Savannah and Charleston, continue to have ample space (with 17.9 percent and 12.9 percent vacancy rates, respectively) while momentum has slowed this year near the ports of Los Angeles and Long Beach, although “Jacksonville, Miami, Seattle and Tacoma have swung significantly into landlord-favorable territory,” Jones Lang LaSalle said in its recently issued 2012 Seaport Outlook report.

Given that they are a nexus of economic activity, ports are for industrial real estate what lakefront property is to residential areas — the first to rebound after a downturn, Carver said.

“Business flows from all directions into a port system and then fans out from there. Because of that, we find a larger concentration of real estate demand” around ports. “Industrial real estate pricing tends to radiate out from the ports just like residential property does away from the ocean, lakes, rivers, etc., and buyers have to venture farther and farther out to find the lower price points.

Thus, when the market stalls as it did in 2008, and when it begins to heat up again, it doesn’t pick up in the heartland where it left off, rather it begins to ‘blip’ out once again from the historically higher-end locations.”

Evidence of a port-property-led recovery can be seen in the first speculative buildings since 2008 put up in central Pennsylvania, considered an “inland port” region connected to New York-New Jersey and in the Inland Empire east of Los Angeles. This needs to be seen in context; speculative industrial development is not being seen in Atlanta, Chicago, Kansas City and Dallas, Carver said.

But the location of these first speculative developments inland from the ports is noteworthy; it underscores the point that sites adjacent to ports are limited in size and number, forcing shippers and third-party logistics providers to look inland and resulting in what Carver says will be an increasing trend toward inland ports connected to seaports.

“Many cities have built up around their ports, leaving less developable land for large-footprint warehouses or distribution centers,” the JLL report said. “Large blocks of space are disappearing from port markets. A mere nine spaces can house a tenant of greater than 500,000 square feet within 15 miles of any major seaport. Only 20 blocks are available for tenants needing at least 250,000 square feet within five miles of a major port.”

That means the future is bright for inland ports, where Carver believes every major port gateway will have one or two corresponding inland ports where containers will move to by truck or increasingly rail from the seaport. “The development interests are looking to position themselves adjacent to the growing intermodal system.”  

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him at twitter.com/PeterTirschwell.

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