America's appetite for consumer goods — mostly from China — is straining the nation's logistics networks and fueling demand for new warehouse distribution space to serve growing U.S. seaports.
With consumer spending boosted by home equity loans and historically low interest rates, the nation sucked in more than 120 million tons of containerized merchandise in 2004, up 140% from 50 million just a decade before.
From Seattle to Savannah, some of the nation's largest industrial real estate owners are expanding their portfolios by developing and acquiring distribution centers near fast-growing ports.
“Logistics decisions are so critical to real estate development now, and ports are the critical link in the supply chain,” says Dr. John Martin, president of Lancaster, Pa.-based Martin Associates, which provides economic analysis and planning services to seaports.
San Francisco-based AMB Property Corp. has steadily increased its focus on gateway and hub markets — which include some inland cities that are vital to national distribution routes such as Dallas and Atlanta.
In 2000, gateway and hub markets accounted for 67% of AMB's portfolio, or 62 million sq. ft. Today, these markets account for 77% of the giant REIT's portfolio, or 89 million sq. ft.
Duke Realty Corp., a diversified REIT, earlier this year purchased a 5.1 million sq. ft. complex at the Port of Savannah, Ga., and 184 acres in Baltimore as part of a strategy to capitalize on port growth.
ProLogis, which owns more than 377 million sq. ft. of distribution space, has increased its global port presence by 36% in the past year, from 61 million sq. ft. in 15 ports to 83.1 million sq. ft. in 21 ports worldwide.
Why are the big guns trained on ports? The answer is strong demand that is likely to remain high for at least 15 years, barring a catastrophic event, due to reliance on imports rather than domestic manufacturing for most consumable goods.
“We've shifted from a country that did a lot of balanced importing and exporting to one now being dominated by imports,” explains Doug Poutasse, chief investment strategist at AEW Capital Management.
So many containers are entering the country that several ports are becoming significant points of entry for consumer goods for the first time, Poutasse says. “These ports historically were bulk shipping ports, which were not of interest to real estate investors, but they are becoming container ports.”
Tsunami of consumer goods
Importers need new and larger spaces to handle a tidal wave of merchandise. That high demand, along with limited and often constrained supply, attracts developers and investors to the ports.
Industrial vacancy rates throughout much of Southeast Houston registered a dismal 20% at the end of 2005, but in the far Southeast submarket — closest to the Port of Houston — vacancy was less than 5%, according to Cushman & Wakefield. Near the ports of Los Angeles and Long Beach, Calif., the vacancy rate is 1% compared with a national rate of about 8%.
Inside the numbers
The annual volume of shipping containers passing through U.S. ports nearly doubled in the past decade, as measured in 20 ft. equivalent units or TEUs, a standard form of measurement in the shipping industry. (One TEU is equal to a 20 ft. section of a shipping container.)
Shipping volume at U.S. ports increased from approximately 20 million TEUs in 1994 to almost 39 million TEUs in 2004, according to the American Association of Port Authorities.
Consumer goods increasingly enter the country through emerging ports rather than the West Coast, triggering port expansions to keep up with the flow. At the Port of Miami, the number of TEUs rose from 900,000 in 2002 to 1.1 million last year.
In Tacoma, Wash., and in the Port of Virginia, the growth has been even more dramatic. Both ports registered 1.47 million TEUs in 2002, but grew to 2 million and 2.1 million, respectively, in 2005.
Burgeoning trade with China clearly is fueling the increase in container shipments to Los Angeles and other West Coast ports. But why is container traffic increasing on the Atlantic and Gulf Coast regions, which are more difficult to reach than the West Coast from Asia?
The chief reasons are escalating domestic freight costs and events earlier this decade that shocked major retailers sufficiently to alter their supply chains.
A sea change in shipping
Unfortunately for retailers and the logistics companies that serve them, America's rail and truck distribution methods are hard-pressed to keep up with the increasing volume of goods, says Bruce Rutherford, a managing director at global real estate services provider Jones Lang LaSalle.
Three recent trends are making ground distribution more expensive and time consuming:
-
Train lines are already at capacity and difficult to expand.
-
Fuel prices are increasing; the price of crude oil registered $64 per barrel in March, up 14% from $56 a year ago.
-
New federal limits on truck operating hours have forced logistics companies to either hire additional drivers or add days to the time required for long routes (see trucking sidebar on p. 25).
“The response to these conditions by Corporate America has been a reversal of their logistics strategy, and we are going to see an era of new warehouse/distribution center construction around all ports to deal with these three new mega trends,” says Rutherford, who oversees port-related real estate for the Texas region and New Orleans.
After three decades of consolidating scattered warehouse operations into national distribution centers measuring as much as 1 million or 2 million sq. ft., companies are adding regional distribution centers of 50,000 to 100,000 sq. ft. to keep inventory closer to store shelves, Rutherford explains.
The newest distribution centers are closer to retail stores or end users and closer to seaports, where the country now receives most of its consumer goods.
“We in the real estate business know our clients are going to need a lot more distribution facilities,” says Rutherford, “and they're going to have to be placed with greater care and intelligence than they have been in the past to offset the rising costs of transportation.”
Aquatic diversification
There is another trend pushing container traffic to the Gulf and East coasts: risk management. A year after the 9-11 attacks brought risk management through geographic diversification to the attention of Corporate America, the logistics industry suffered a paralyzing blow.
In September 2002, a labor dispute shut down all U.S. container port operations on the West Coast during a five-week contract negotiation, leaving ships backed up for miles at ports, unable to unload cargos.
After work resumed, it took another six weeks to get shipping back to normal. The shutdown and its aftermath cost the U.S. economy $15.6 billion in losses, says Martin, who helped the government assess the event's economic impact.
“The West Coast shutdown brought to the forefront the risk of putting all your eggs in one basket,” Martin says. “That, in and of itself, has caused a fundamental shift in logistics.”
Southern California ports continue to handle about 40% of all U.S. imports and 60% of Asian imports, but in recent years large retailers such as Wal-Mart and Home Depot have directed portions of their container goods to ports along the Gulf and East coasts via the Panama Canal.
Those routes increase shipping costs, but they bring products closer to end users in those areas. The need for cross-country transport by rail or truck also is reduced.
Container business has tended to increase the quickest at ports with a ready supply of industrial space. Savannah, for example, has increased its container volumes by 32% since 2002 to 1.8 million TEUs. “Savannah had been focused on distribution center development since the 1980s, so it had significant growth,” Martin says. Norfolk, Va., is a similar example of a port that is growing chiefly due to its proximity to other areas, including the District of Columbia and Front Royal, an important distribution hub.
In fact, the growth of distribution centers serving ports influences trade flows and creates additional activity. “The location of distribution centers really enhances the port's growth,” says Martin. “The growth that has been experienced on the East and Gulf coasts has been directly related to the growth of the distribution centers in those areas.”
While Asian goods still arrive chiefly on the West Coast, more are reaching the Gulf and East coasts either via the Panama Canal, which is congested and limits the size of vessels passing through, or the Suez Canal, which involves a much longer trip from Asia but doesn't have size limitations.
Martin expects the volume of containers reaching the Gulf and East coasts to grow as Eastern Europe and India increase production of inexpensive goods, such as textiles and electronics.
Porthole of opportunity
The double-digit annual percentage growth that characterized trade volume for the past decade will likely continue for at least 15 years, says John Carver, executive director at Colliers International. “[Container volume] may double or triple by 2020, and that creates a real opportunity for the real estate community,” he says.
“I wouldn't characterize it as a land grab,” adds Carver, “but there's a clear understanding in the real estate industry of the importance of ports, and a focus on areas around ports and distribution hubs.”
Carver heads Colliers' Multimodal Services Group in Los Angeles, a practice group the commercial real estate company has formed in anticipation of brisk business in port-related real estate development, sales and leasing.
Investment opportunities are opening up as port capacities expand. The Port of Houston is wrapping up construction of a new terminal to accommodate increasing container volumes. Smaller ports, like the deep-water Port of Panama City in Florida, are encouraging additional container traffic, says Jerry Ray, senior vice president of development at The St. Joe Co.
“This had not been a container port until Hurricane Katrina, but now it is,” Ray says. St. Joe is Florida's largest private landowner and one of its largest developers. “We have an underutilized port that we can link with a new international airport, and the combination of the two gives us some good things to offer.”
Tide of rising prices
In port cities where available parcels are scarce, land prices are climbing along with cargo volumes. Land prices have doubled in the last two years in Southern California, rising from $5 per sq. ft. to $10 in some submarkets.
“I don't think you can make a mistake in places like L.A.,” says Don Smith, principal at real estate services firm Lee & Associates. “The prices are ungodly, but they're only going to go up.”
Property values also are spiraling near the Port of New York/New Jersey, reports Thomas Carragher, a senior vice president who heads the industrial services group at the Rochelle Park, N.J., office of tenant representation firm Studley.
Carragher is marketing 42 acres on Delancy Street in Neward, N.J., for Coca-Cola Enterprises. The property could accommodate as much as 900,000 sq. ft. of industrial space. Carragher brokered the sale of the property to Coca-Cola Enterprises about five years ago, and says he expects to sell the land this year at a price 400% to 500% higher than the previous purchase price. “The values have gone through the roof,” he says.
Sound advice
How can investors decide in which port to get their feet wet? “There are three things that lead to wonderful demand,” says Larry Harmsen, managing director of ProLogis' Denver office. “You need a thriving port, sizable population, and great rail and highway connections.”
The Port of New York/New Jersey is within a day's trucking drive of nearly 50% of the U.S. population, so many consumers can soak up goods shipped there. While the land around the port has been developed, land is available just down the New Jersey turnpike.
That's where Matrix Development Group has built a large portfolio of industrial space, at Exits 7A and 8A. Matrix recently completed the 600,600 sq. ft. I-95 Business Park in Hamilton, N.J., leased to Colgate Palmolive.
Last year, the company completed a 440,000 sq. ft. speculative project in South Brunswick, N.J., now fully leased to furniture distributor Coaster Co. of America.
Matrix COO and principal Alec Taylor estimates that 90% of the companies at exits 7A and 8A use the ports. “In New York alone there is tremendous demand [for consumer goods], so as much as the ports are expanded, they will be used.”
As investors identify those ports with strong demand for space, they should be wary of markets with few barriers to entry, cautions Poutasse of AEW in Boston.
“Demand for space to bring goods into the United States, and to ship goods out, will continue to increase as far out as we can see. The concern every investor should have is whether the supply will get ahead of demand,” he says. “We try to invest in areas where it is very expensive to build.”
Smith of real estate services firm Lee & Associates shares Poutasse's optimistic outlook. “We're going to be increasingly involved in trade, and the ports are by far the most economical way to move products to the end user,” he says. “You need land to do that, so land near any one of the ports is a wise investment.”
Matt Hudgins is an Austin-based writer
Truck Laws Speed Up Efficiency Efforts
Mandated limits on truck drivers' hours of operation are changing the definition of Class-A industrial space, particularly around the nation's ports. Federal regulations enacted in January 2005 limit a truck driver's previously unrestricted time behind the wheel to eight hours per day.
As a result, destinations that were once within a day's drive of a particular port may now require a two-day trip, or multiple drivers, increasing the transporter's costs. That makes it imperative to provide quick loading or unloading at the distribution center to maximize a driver's working hours.
“When a truck comes into the yard, the driver needs to be able to drop his whole load, pick up an empty (trailer) or backhaul, and get back on the freeway,” says Barry Hibbard, Tejon Ranch Co.'s vice president of commercial development. Tejon Ranch is developing its 270,000 acres in Central California as a distribution hub of industrial properties that will serve retailers receiving cargo from the ports of L.A., Long Beach and Oakland.
Logistics companies favor distribution centers with extra truck parking so that drivers can catch up on required hours of sleep between runs. In the past, developers devoted more than half of a site to warehouse space. Today's projects may call for the structure to be scaled back to 45% of the available area in order to devote the remaining space to tractor-trailer staging areas, says developer Brandon Birtcher, owner of Irvine, Calif.-based Birtcher Development & Investments LLC.
The distribution center needs the latest bells and whistles — such as cross-docks and high ceilings — to expedite loading and unloading. Warehouses that receive goods directly from a port, either by truck or rail, also need plenty of room to store empty shipping containers awaiting transport back to the shipping company, says Chuck Brill, executive vice president and principal at commercial real estate services firm GVA Daum.
Beyond improving the layout of a distribution center, operators are increasing efficiency by adding shifts, says Birtcher. That practice is increasingly important in Southern California, where the Port Authority has begun to offer incentives to companies that will pick up containers from the port at night, when L.A.'s freeways are less congested. To take advantage of the lower cost, however, the warehouse must be ready to receive those containers during overnight hours.
“This is encouraging,” Birtcher says, “in that rather than build more facilities, we can accommodate the growth of the ports by using our real estate more efficiently.”
— Matt Hudgins
Developers Make Green From Brownfields
The headaches of soil remediation and other expenses associated with infill development can be offset in submarkets with spiraling property values and high demand for space — especially near ports.
“There's an enormous amount of infill redevelopment and brownfield development being pursued to meet the current demands of the ports of Los Angeles and Long Beach,” confirms Brandon Birtcher, owner of Irvine, Calif.-based Birtcher Development & Investments LLC.
Case in point: Birtcher is developing the 550,000 sq. ft. Birtcher Distribution Center in Paramount, Calif., on the site of a former metal fabrication plant that contaminated the soil. Birtcher adopted commonly used mitigation methods to remove contaminants and obtain entitlements to develop the distribution center, slated for completion in 2007.
Near busy ports, developers willing to tackle remediation or replace an outmoded structure can usually recoup added costs. Property values near the ports of Los Angeles and Long Beach have increased 25% to 30% in the last year, says Chuck Brill, a principal at real estate services firm GVA Daum. “It's virtually impossible to find a 20-acre (greenfield) property to build a large facility” near the ports.
A dearth of developable land near the ports has driven Wal-Mart, Home Depot and other retailers to place distribution centers 30 to 50 miles away in Riverside and San Bernardino counties. Industrial space leases for 40 cents per sq. ft. monthly in California's Inland Empire as opposed to 63 cents in Orange County. Land prices in some L.A. submarkets have doubled from $5 to $10 per sq. ft. over two years.
However, a distant warehouse increases the cost of drayage — the movement of goods from the port to a distribution center — and rising fuel prices could drive drayage expenses even higher. “Fuel costs are driving people to find parcels close-in to the port,” Brill says.
The demand for modern space is such that Watson Land Co., one of L.A.'s largest landlords, recently demolished an aging manufacturing space in Carson, Calif., in order to build a state-of-the-art distribution center on the same site. The 119,000 sq. ft. structure at 1041 E. 230th St. is in the Watson Industrial Center South complex, 10 miles from the Port of Los Angeles.
And brownfields are becoming less onerous these days, according to Birtcher. “Lenders and developers have become accustomed to developing in contaminated properties, so insurance and mitigation solutions are readily available and acceptable to investors,” Birtcher says. “That has spurred a new wave of redevelopment to support the ports, especially in the last five to seven years.”
— Matt Hudgins