Seaports Safe Harbors for U.S. Industrial Real Estate Sector

top 10 U.S. Seaport markets.
Interactive market tours for the top 10 U.S. Seaport markets. (Graphic: Jones Lang LaSalle)

Competition for market share of inbound shipping remains fierce among U.S. ports, especially as the east coast gears up for an expanded Panama Canal and trade flows continue to shift among developed and emerging countries, according to Jones Lang LaSalle’s fourth annual seaport report. As reported in the firm’s earlier studies, commercial real estate surrounding major U.S. seaports continues to outperform the broader industrial market.

The report, which analyzes the health of major domestic container seaports and their surrounding real estate, also reveals that:

  • Exports are creating inland development opportunities: U.S. exports are now creating back-haul opportunities and are driving new connections between domestic maritime ports, inland destinations and their surrounding distribution real estate markets.
  • Investment is pouring into ports: At least $13 billion of public investment is earmarked for port development in the next decade.
  • Limited options are available for large space users: Only 20 blocks of space are available for users requiring 250,000 SF within five miles of a major U.S. port

“Developers, investment interests and supply chain executives remain optimistic about our nation’s seaports,” said John Carver, Head of Jones Lang LaSalle’s Ports Airports and Global Infrastructure (PAGI) group. “Influenced by an evolving maritime logistics industry, global and trade transformations such as the extension of the Panama Canal and growth of U.S. exports, they see a bright long-term future. Capital is being poured into seaport infrastructure from both the private and public sectors, responding to increased demand for port-centric warehouse and distribution space.”

What’s Happening in Panama?

Time for an upgrade
The canal has lost considerable market share to alternate trade routes in years past, stemming from its outdated infrastructure incapable of accommodating modern shipping vessels. Namely, post-Panamax and super-post-Panamax ships that each have a carrying capacity of about 4,848 and 8,600 TEUs, respectively. This reality is in addition to a global logistics environment characterized by rising fuel costs, expedited time-to-market deliveries and the one goal shared by all shipping lines: maximizing service levels, while mitigating costs. As a result, trade routes are integral.

The canal’s existing configuration has caused heightened wait times that have forced carriers to bid for transit slots at auction. Upon completion, the third lane/locks will be able to accommodate post- and new-Panamax ships—far more fuel efficient than smaller, older vessels—to pass through and minimize old wait times. Larger economies of scale and speed equate to reduced shipping costs. Shipping lines that call on the passage will enjoy a cost savings of 7 to 17 percent if they switch to post-Panamax vessels, as estimated by the Panama Canal Authority (ACP).

Transshipment hub for the western hemisphere
Moreover, due to its ideal location, Panama acts as a transshipment hub for smaller ports that lack the capacity and infrastructure required to handle larger vessels. Existing terminals would face serious capacity constraints if cargo throughput were to exponentially grow tomorrow. This is especially true on the Atlantic side. To cater to anticipated TEU volumes, the Panamanian government has encouraged new infrastructure projects at the terminals. One such development is the Panama Colon Container Port, which will have a 2.25 million TEU capacity upon build-out. With a slated completion date of the first quarter of 2015, Colon will become one of the top 12 transshipment terminals in the world and the second largest on the Atlantic side of the Panama Canal.

A temporary reprieve
Plans to revitalize the Panama Canal were first announced in 2006, with a scheduled completion date of 2014; this has since been revised to 2015. The expansion project aims to create a new third lane of traffic, which will allow the transit of longer and wider ships, and consists of deepening and widening canal entrances while constructing new lock sets on the Pacific and Atlantic sides. An additional undertaking involves the widening and deepening of existing navigational channels in Gatun Lake and the deepening of Culebra Cut. Most dredging has been completed, while significant work remains on building the locks themselves. Upon completion, the canal will be able to accommodate new-Panamax container vessels whose load capacity totals 12,600 TEUs.

Revitalization of the canal and its subsequent delay offers a temporary reprieve for several U.S. East Coast Seaports, many of which are racing to complete modernization projects of their own to become post-Panamax supply chain contenders as ships from, say, China, transit Panama. Many of these modernization projects are, in turn, running behind schedule as U.S. seaport competition only intensifies to vie for Panama-based traffic to come.

The Port Index: Changes at the Top

Success for some ports is detailed in the Jones Lang LaSalle Port Index, which ranks ports on terminal operating and real estate market factors.* This year’s Index, for the first time in its four year history, has rated the Port of New York and New Jersey at the top of the list, followed closely by the ports of Los Angeles and Long Beach.

“These three major seaports profit from several factors: first, they support vast local population centers; second, infill vacancy around the ports themselves remains tight and new development is prized; and lastly they are connected to less land-constrained, adjacent markets that facilitate ‘big-box’ logistics space,” said Aaron Ahlburn, Head of Industrial Research for Jones Lang LaSalle Americas.

Graphic: Jones Lang LaSalle

Ports like Seattle, with strong demographics and a sizeable consumer base within a 24-hour trucking window have remained high on the Index. Similarly, others that are competitive shipping destinations, such as Houston, Miami and Baltimore, are moving to re-establish more solid industrial leasing and investment conditions. Ports that may not benefit from immediate large populations such as Hampton Roads, Jacksonville, Savannah and Charleston remain important throughput hubs to move goods and materials into other parts of the country.

East Coast ports such as Savannah, Charleston, Jacksonville and Baltimore have higher vacancy rates in their surrounding port markets, but have experienced the fastest growth in occupancy over the last 18 months. “We expect development to remain cautious as these markets continue to strengthen over the coming quarters,” said Ahlburn.

Many port markets that experienced significant ‘big box’ development prior to the downturn have not yet been able to burn off their excess construction. Houston, Charleston, Savannah and Jacksonville all have double-digit vacancy rates.

But there are fewer than 10 existing warehouse or distribution facilities of more than 500,000 square feet within a 15-mile radius surrounding the major seaports, according to the report, and fewer than 60 blocks greater than 250,000 square feet. For large users in markets such as Southern California or the Northeast, that means transporting cargo to inland destinations (inland ports) or bidding against other tenants for space.

“This not only provides opportunities to develop smaller distribution centers or redevelop old or obsolete product, but also to evaluate supply chain requirements, adapt potential transportation routes, and assess competitive drayage options,” concluded Carver.

*The index is based on 25 measurable performance metrics divided into two major categories: terminal operating factors and the corresponding real estate market factors. The resulting index score is then a combination of the performance indicators, providing a subjective measure of a port’s value to Jones Lang LaSalle clients and its customers.