Although some demand can be attributed to structural factors, real estate markets in all major port gateways are seeing either rising or peak-level growth rates in leasing activity, while vacancy rates are at historic lows.
Both imports and exports have been growing as the U.S. and world economies continue to expand. Along with the higher volumes comes increased need for infrastructure of all sorts, including industrial real estate structures such as distribution centers, transload facilities, warehouses and e-commerce fulfillment centers. As recent research from JLL has shown in its annual Seaport Report, real estate markets in all major port gateways are seeing either rising or peak-level growth rates in leasing activity, while vacancy rates are at historic lows. Some of that growing demand, however, can be attributed to structural factors.
Port container volumes and vacancy rates are negatively correlated, and even more so for import volumes. As import shipments grow, there is need for more room to engage in cross-docking and storage activities. Until very recently, most of this correlation was only evident in the larger port gateways, but the trend has now begun to expand to other regions as well. This has even instigated development of new inland logistics hubs such as in Kansas City and inland intermodal ports such as Cordele in Georgia.
The growing size of ocean vessels is also driving demand for industrial real estate near ports. As ocean carriers began ordering larger vessels, port authorities had already begun the process of dredging navigation channels, raising bridges for air draft clearance, and strengthening quay walls to support the larger ship-to-shore gantry cranes they were ordering, as well as investing in intermodal rail service enhancements.
Roadways, however, simply have not kept pace. Road conditions across the U.S. are suboptimal to say the least, and as a result, the majority of funding has been earmarked for maintenance and repair, as opposed to capacity increases. At-grade road and rail crossings, for example, have only been improved to support growing port volumes in a select few places.
Importers and exporters are feeling the impact of congestion in port gateways and are resorting to a number of strategies to offset the impacts. Some of these strategies include revising their port selections so as to increase the number of gateways that they use. Many importers are also resorting to increasing the share of their containers that they transload near ports. This increases their ability to return chassis and containers within the free time they have been allowed.
E-commerce competes on the basis of short order-to- delivery times. Consumers are increasingly shifting to shopping and buying goods online, and in order to be competitive, it is often necessary to deliver the goods within hours of an online order. To offer competitive e-commerce retail across the country, sellers must hold more inventory in more places. This is particularly evident in U.S. macroeconomic data, which shows that the inventory-to-sales ratio has been rising for about 5 years now. Holding more inventory, which uses a company’s capital, has not been particularly expensive because interest rates dropped to historical lows and stayed there. However, the Federal Reserve began increasing interest rates in 2016 and continues to do so, meaning that companies are now coming under pressure to reduce inventories.
To reduce the amount of inventory held inland, a company needs more storage space near the port and increased transload capacity. Holding inventory near the import source— i.e. the port gateway—also allows companies to load domestic containers with goods needed for strategic restocking at various locations around the U.S. The main reason for doing this is that while predicting overall sales of goods over a period of time is subject to error, forecasts for sales by region are subject to even greater uncertainty.
Consider a simple example like lawn furniture. If it is a very hot summer, people in northern states are likely to spend more time outdoors than usual, which increases the demand for lawn furniture. Meanwhile, the hot summer discourages people who live in southern states from spending too much time outdoors. While overall lawn furniture sales forecasts may be very accurate, forecasts for where the sales will occur are dependent on variables like the weather, which cannot be reliably predicted over more than a week.
By holding more inventory near the port gateways, inventory-holding, transportation and logistics costs can also be reduced. Goods can be dispatched from the port areas to the various regional distribution centers around the country for the purpose of strategic stock replenishment. And given recent intermodal rail capacity investments and the growing number of inland hubs and ports, it may even be possible to reduce dependency on trucks and avoid chronic driver shortages. Holding the stock near the port, as opposed to in a regional distribution center, may also help sellers to avoid having to ship a product a second time, from a low demand region to a high demand location.
Lastly, as mentioned above, larger facilities near port gateways would allow importers to reduce the time they must hold the equipment provided by ocean carriers and chassis lessors.
Improved rail connections to regional inland hubs allow cargo owners to expedite the movement of goods still in ocean containers directly to inland locations, and exporters are benefitting from this option. Refrigerated goods are currently being transloaded from domestic containers to international marine containers in places like Kansas City. The imported containers may have been used for other refrigerated types of food or as a non-operating reefer—i.e. as a dry container. These containers can travel on double-stacked intermodal trains to a range of ports and be directly delivered to container terminals in a range of locations, thus avoiding the need to find space near port gateways.
With all these trends in mind, it is not so surprising to see demand for industrial real estate near port gateways and inland hubs and ports continue to increase.
Kemmsies is managing director, economist and chief strategist for JLL Ports, Airports and Global Infrastructure. He can be reached by email at walter.kemmsies@am.jll.com.