Warehousing market begins to improve around U.S. ports
By Eric Kulisch
Warehouse vacancy rates in major U.S. port districts have stabilized this year as demand for freight distribution services returns, further signaling the economy is improving.
Lagging industrial real estate markets in the nation's interior are poised to rebound too, according to a recent report by Jones Lang LaSalle.
Demand for warehouse and distribution space remains low by normal standards, but leasing activity has picked up in many parts of the country. During the recession industrial vacancy rates at the top 13 port markets increased to 9 percent from 7.4 percent, but vacancies in these areas were well below the U.S. national average of 10.6 percent.
So far this year, port-area property owners have whittled 2 million square feet off the 5.9 million square feet of excess space that existed at the end of 2009, with new warehouse construction at a standstill until more inventory is burned off, the commercial real estate services and investment firm said.
Average rents declined 7.1 percent last year, with the largest losses in the 10 percent to 11 percent range in areas around Los Angeles and Long Beach, Calif., and Charleston, S.C.
The real estate market around ports is directly tied to the level of import and export activity. Those three ports, along with Norfolk, Va., and Tacoma, Wash., posted the highest year-over-year losses in container volumes in 2009.
The real estate market typically starts to grow 12 months after TEU volumes start to increase, said John R. Carver, executive vice president of Jones Lang LaSalle's port, airport and global infrastructure group, in an interview at a logistics conference in Atlanta. Ports began to experience higher volumes at the beginning of the year, meaning the warehousing sector should start to recover faster in early 2011.
As economic engines and bellwethers for the rest of the economy, international gateways tend to experience recovery in industrial property markets ahead of inland locations, according to the report. Industrial lease rates for port markets fell about 15 percent to 20 percent during the last four years compared to 30 percent to 50 percent in inland markets.
'We still have a lot of vacancies to absorb, but there's been lots of improvement since last year,' Carver said.
Savannah, among major seaports, was hurt the worst by the recession from a real estate standpoint. It has the highest vacancy rate in the nation at 17.6 percent, down from 35 percent at the end of 2009. The economic slump, combined with large doses of speculative building, drove up warehouse vacancies from 11.1 percent in the third quarter of 2007. The Georgia state port has delivered an average of 1.5 million square feet of new space each of the past three years, contributing to a 10 percent annual inventory increase. Jones Lang LaSalle said future development around the nation's fourth-largest container port would eventually slow as land becomes scarce.
Vacancy rates are very low for mega-ports Los Angeles (6.8 percent) and Long Beach (6.4 percent) compared to the rest of the nation. The Southern California port complex is also ranked first in Jones Lang LaSalle's new port index, which is designed to measure the desirability of major U.S. ports for industrial developers and tenants on factors besides TEU volumes. The new index uses planned infrastructure investment, land value-to-lease ratio, vacancy rates, labor costs, and on-dock or near-dock rail connectivity.
Savannah is ranked third in the port index. After a decade as the nation's fastest growing port, Savannah is still considered to have a bright future because of strong container growth in the first half of the year, new traffic expected with the widening of the Panama Canal, a harbor deepening program and other expansion activity.
Carver predicted that industrial real estate will become the next target of major investors looking to deploy significant sums of cash parked in safe instruments during the recession. Private equity and other investment funds that previously were attracted to retail, hotels and other high-end commercial properties are beginning to more seriously consider industrial development.
'Industrial real estate is being looked at a lot more favorably than in the past because it has a longer life span, less obsolescence, lower management expenses and is easier to exit,' Carver said. Office buildings usually require a substantial amount of capital reinvestment for remodeling and rebranding every five to 10 years to keep them fresh and attract new tenants. Class A industrial buildings are good for 20 to 30 years before they need updating.
Investment activity won't begin, however, until logistics companies fill existing space under contract and most of the vacant property cycles through.
Less risky build-to-suit development is taking the place of speculative development that fueled the over building last decade.
'A lot of big real estate industrial trusts are being told to decrease their inventory before they start building' and look for more investment capital, he said.
Real estate developers are using this year to position themselves for new projects by seeking options on developable land, getting foreign trade zone permits, going through the time-consuming entitlement process to clarify property development rights, lining up funding, applying for government grants, raising awareness for new developments and getting build-to-suit pre-commitments.
'Developers are quietly getting ready so when the market turns they'll have a foot in the door and will be ready to go,' Carver said. By the middle of next year 'I think we'll start to see some new development occurring because there's a lot of capital interest in investing in this type of product.'
Special purpose facilities, such as cold storage and green technology manufacturing plants, will be in more demand than traditional warehouses when development starts up again. And nobody will consider building a project without a tenant arranged in advance until at least 2012, he added.