Studying Seaports: Industrial investment opportunities exist near ports

The slowing global economy and the credit crisis has impacted the volume of goods and materials going in and out of U.S. seaports, pushing down demand for industrial property near these seaports. But, the widening of the Panama Canal and the predicted growth in imports and exports has compelled seaports on both U.S. coasts to expand and has encouraged industrial property investors to look for projects near these expanding seaports.

Dominant ports such as the Ports of Long Beach and Los Angeles in Southern California and the Ports of New York and New Jersey are expanding, along with smaller ports in Seattle and Tacoma, Wash., Jacksonville, Fla., Charleston, S.C. and Savannah, Ga. They're all trying to grab a piece of the ocean container trade from Asia, says Anthony Chiarello, a senior vice president with AMB Property Corp., a San Francisco-based REIT that owns and develops millions of square feet of industrial property near U.S. seaports.  

More than 95 percent of all goods entering the U.S. arrive by waterborne transportation. In 2007, U.S. seaports handled $3.95 trillion in international trade, with nearly 1.4 billion tons, valued at $1.4 trillion, in waterborne imports and exports alone, according to the U.S. Census Bureau. Last year, the United States spent $1.88 trillion on imports, much of it brought in via 46 million TEU of container capacity. (In the container shipping market, the volume of freight is typically measured in twenty-foot equivalent units (TEU), a unit of measurement equivalent to one 20-foot shipping container.)

The U.S. Department of Transportation projects that total freight moved through U.S. ports will increase by more than 50 percent from 2001 to 2020, and the volume of international container traffic will more than double. However, container traffic this year has decreased rather substantially, as the U.S. has sunk into a recession.

Boston-based research firm Global Insight forecasts a decline in U.S. containerized imports of 8.2 percent for 2008. Another firm, Piers Global Intelligence Solutions, predicts that container imports this year will drop to 17.6 million TEU compared with more than 19 million TEU in both 2006 and 2007. Next year, the firm forecasts another drop of 2.9 percent before a rebound of 6.2 percent in 2010 to 18.1 million TEU.

Specifically, U.S. imports from Asia have decreased. This region, often described as the world’s factory, manufactures everything from flat-screen TVs to toys. Although China is the center of the manufacturing boom, other countries throughout southeast Asia, Vietnam and Malaysia also export goods to the U.S. And, as U.S. consumption has decreased, so have imports, experts note.  As long as American consumers choose to save instead of spend, imports from Asia will likely be down.

America's weak economy isn't the only thing causing imports and exports at U.S. seaports to decrease. The credit crisis, which has brought Wall Street giants like AIG and Lehman Bros. to their knees, is also impacting foreign trade. There are widespread reports that banks across the world are refusing to honor letters of credit from other banks. A letter of credit is an I.O.U. between an importer and exporter, and is the lifeblood of international trade flow. Without letters of credit, full cargo ships are stranded at ports, unable to make the trip across the ocean. Exporters have been unable to arrange shipping without access to bank financing.

Awaiting the Panama Canal Expansion

Although current slowdown in container traffic is causing some stress for seaport operators and industrial property owners, both are looking toward the future and the expansion of the Panama Canal. The Canal is currently undergoing a $5.3 billion expansion so it can accommodate larger cargo ships. The ships, called Post Panamax vessels, are currently too large to pass through the Canal's two existing lock lanes. The expansion includes the addition of a third lock lane that will be completed in 2014, according to the Panama Canal Authority.

The Panama Canal expansion is expected to bring in even more container traffic to U.S. ports, especially emerging ports on the East Coast. Today, the Ports of Los Angeles and Long Beach (LA/LB) dominate container trade in the U.S. Together, the two ports, known as the San Pedro Port Complex, handle more than one-third of the U.S.'s container cargo and are world's fifth-busiest port complex with 15.7 million total TEU in 2007.

Container volume at the Ports of LA and LB is down so far this year. However, it's still robust enough to keep Watson Land Company's industrial property portfolio at 99 percent occupied, according Lance Ryan, vice president of marketing and leasing for the Carson, Calif.-based company, which owns about 10 million square feet of industrial space around the Southern California ports.

Watson Land also has another 1 million square feet of industrial space under development near the ports of LA and LB. "We have a long-term view of the marketplace and irrespective of current economic conditions, we know that LA and Long Beach will continue to be the port complex of choice for Asian trade," Ryan says.

That means that a number of national and local industrial developers and investors in addition to Watson Land are actively looking for land and existing properties near the San Pedro Port Complex. "LA and Long Beach are a key location for industrial developers and that will continue to be the case," says AMB Property's Chiarello, adding that availability of land is an issue and industrial development is moving further and further from the port complex.

But, Chiarello believes the day is quickly approaching when industrial developers will build multi-story warehouses near the ports – similar to the industrial properties in Japan. "The land cost, construction costs and transportation costs have to reach a certain point for vertical development to make sense," he notes. "I expect we'll see that type of development within five years."

West Coast Dominance

In the meantime, many importers and exporters have diversified their supply chains away from LA and Long Beach to take advantage of other West Coast ports in Seattle and Tacoma. Chiarello says LA and Long Beach are dealing with significant union and environmental issues that make moving cargo about 15 percent more expensive than it was 12 months ago.

Together, Seattle and Tacoma are the third largest container port in the U.S. Roughly 70 percent of the cargo that comes in through the Pacific Northwest ports is shipped to the U.S. interior via rail.

"We've had success in the last few years with some major importers such as Wal-Mart, The Home Depot and Michaels establishing distribution centers near the port," says Charlie Sheldon, seaport managing director of the Port of Seattle. "There's been a rash of industrial property development."

In fact, roughly 200 million square feet of industrial space dots the corridor between the Port of Seattle and the Port of Tacoma, Sheldon says. But similar to the situation in Southern California, land near the ports is scarce, causing developers to build their projects miles from the ports. Unlike the Ports of LA and Long Beach, however, developers will likely continue to build single-story distribution facilities in the Pacific Northwest.  

AMB Property is actively developing industrial properties near the Ports of Seattle and Tacoma. "It's been a very strong market for us," Chiarello says. "Although import traffic has declined somewhat over the past 12 months, we continue to believe it will be a strong market for us since importers will want it to be part of their [supply chain]."

In fact, Chiarello says a large importer recently conducted a study to evaluate whether it made sense to route everything through the Ports of LA/LB instead of using Seattle/Tacoma as well. The study found that it was more cost effective and efficient to continue to Seattle/Tacoma.

In addition to attracting major importers and industrial developers, the Port of Seattle also has successfully attracted new shipping lines. Earlier this year, China Shipping Lines and Seattle-based SSA Terminals announced that the carrier will begin calling at the Port of Seattle 's newly reconfigured Terminal 30 when the facility opens in mid-2009.

The Port is investing $120 million to create a state-of-the-art container facility at Terminal 30 and relocating cruise facilities to Terminal 91. The 1,500-foot berth at T-30 will accommodate vessels carrying as many as 8,000 TEU. The terminal also will feature a new truck gate designed to minimize congestion and idling.

The improvements are critical to maintain the Port's competitiveness. "We're in a dog fight for containers," Sheldon notes, adding that the Port of Seattle anticipates a 10 percent decline in container volume in 2008. "All ports are down this year, but we have the capacity to double our volume in the future."

Emerging East Coast ports

Aside from Southern California's San Pedro Port Complex, the second busiest U.S. seaport is the Port of New York and New Jersey (PONY/NJ). In 2007, PONY/NJ set a new cargo record, handling some 5.3 million TEU, a 7.6 percent increase. The port is planning $2 billion in seaport investments over the next 10 years so it will better equipped to handle future container traffic.

But, availability of land is the biggest impediment to growth. Chiarello says PONY/NJ has been talking with industrial developers such as AMB Property vertical development. In the meantime, the REIT is focused on finding redevelopment opportunities around the port similar to its current redevelopment of a former landfill in Jersey City, N.J. about five miles from the port.

The project, dubbed Pulaski Distribution Center, will offer 875,000 square feet of warehouse space and features trailer access. "When you get into [the New York/New Jersey market], you have to be a bit creative with finding land," Chiarello says.

Even as PONY/NJ dominates East Coast container trade today, Chiarello expects that Savannah, Ga.'s up-and-coming port will eventually eclipse it. "That's a bold statement, but the Port of Savannah has all the right pieces," he says.

Historically, the Port of Savannah has been overshadowed by the Port of Charleston in South Carolina. Today, however, the Port of Savannah is the fourth-largest container port and the fastest growing container port in the U.S. with 2.6 million TEU annually. "Savannah is giving Charleston a run for its money," Chiarello says.

By focusing on attracting importers instead of shipping lines, the Port of Savannah has managed to attract large companies such as Kmart. These importers, in turn, convince the shipping lines to service the Port. "That model has been significantly successful and they continue to feed off it," Chiarello says.

Over the next decade, the Georgia Ports Authority will invest $1.2 billion in expansion projects at the Port of Savannah including the addition of 25 high-speed, super post-Panamax container cranes, as well as increasing the depth of the Savannah River Navigation Channel. These expansion projects will increase throughput capacity from the current 2.6 million TEU to 6 million TEU in 2018.

With that future container growth in mind, several developers have acquired large tracts of land near the Port of Savannah and are in the midst of developing large distribution warehouses. AMB Property recently completed its Morgan Business Center - Building 100, a 346,000-square-foot facility located just 10 miles from the port.

Building 100, awarded Gold LEED certification by the U.S. Green Building Council, is the first phase of a master-planned business park expected to total more than 3 million square feet of distribution space upon completion. More than 150,000 square feet of Building 100 has been leased to Dorel Juvenile Group Inc., a manufacturer and distributor of children's products.

While AMB Property is investing heavily in Savannah and bypassing Charleston, S.C., a number of industrial developers have decided to build near the Port of Charleston. In fact, the industrial market, which encompasses about 20 million square feet, is set to double in the next few years, according to Bernard Groseclose, president & CEO of the South Carolina State Ports Authority.

"We have seen a growing connection between real estate development, whether it be manufacturing or distribution/logistics, and the port," Groseclose says. Developers are encouraged by the port's expansion plans, which call for a new terminal that will increase the port's capacity by 50 percent over the next seven years – right about the same time as the Panama Canal expansion opens.  

"The expansion is a good sign for developers – it indicates to them there is opportunity to grow their business as well," Groseclose says.

In 2007, the Port of Charleston handled 1.75 million TEU and obtained the distinction of being the most productive port in the U.S. by moving an average of 40 containers per crane per hour, according to Groseclose. That compares to about 20 to 25 containers per crane per hour at the West Coast ports. "We can work ships 50 percent faster, which means ships are in port for a shorter amount of time, making it more cost effective for the shippers," he contends. "We market that very heavily."

 Attracting shipping lines

While the Port of Charleston and the Port of Savannah have been long-time competitors, they've recently had to deal with yet another competitor, the Port of Jacksonville in Florida. Just two years ago, the port, dubbed JAXPORT, was primarily involved in Puerto Rican trade. Today, JAXPORT has managed to attract two of the largest Asian steamship lines: Mitsui O.S.K. and Hanjin Shipping Company of Seoul, Korea.

"We knew if we wanted to experience the growth and success that Charleston and Savannah have experienced, we needed to pursue east-west trade," says Rick Ferrin, executive director of the Jacksonville Port Authority.  

Mitsui O.S.K. was the first Asian steamship line to sign a lease at JAXPORT in 2005 and early next year, the company will open its $230 million container terminal, and last month, Hanjin Korea approved a 30-year lease agreement with JAXPORT. The lease calls for Hanjin to build an approximately 90-acre container facility at the Dames Point Marine Terminal in North Jacksonville with the option for further expansion.

The $300 million Hanjin Container Terminal at Dames Point is expected to open for business in late 2011 and will be a key hub operation for Hanjin’s east coast port activity. With the addition of Hanjin, JAXPORT will increase its volume from 710,000 TEU in 2007 to nearly 3 million TEU by 2015, Ferrin notes.

"It's a huge deal to land Hanjin – it will bring a lot of business to JAXPORT," says Keith Tickell, executive vice president of Flagler Development Group, a Jacksonville, Fla.-based industrial developer.

Flagler Development has previously developed small-box industrial properties in Jacksonville, but with the increased container traffic from the east-west trade, the company expects to develop more high-cube facilities in excess of 500,000 square feet. "We believe that Jacksonville is a good market for industrial development even without the port, but the port adds a multiplier effect," Tickell says.

Flagler Development is just one of several developers active in the Jacksonville market. In fact, a number of national developers have entered the market over the past two years and are just now delivering product. While the current industrial vacancy rate is still manageable and in the single-digits, the new space could create an overhang since Mitsui won't be up to speed for several months and Hanjin won't be fully operational until fourth quarter 2010. "It's just a matter of timing – we feel confident that demand will be there," Tickell says.

In the meantime, Jacksonville – and other U.S. seaports – will have to navigate the treacherous waters of U.S. recession and a global economic slowdown. The next few quarters will be tough, but smart industrial property investors are using this time to identify the most active seaports of the future.

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