This article is a part of the Maintain the Chain series that uncovers the latest supply chain trends and examines the impacts on industrial real estate.
OVERVIEW OF U.S. AND CANADA PORT-PROXIMATE INDUSTRIAL REAL ESTATE MARKETS AND PORT PERFORMANCE.
INDUSTRIAL PORT MARKETS NOT IMMUNE TO HEADWINDS BUT MAINTAIN RESILIENCE
Most port-proximate industrial real estate markets are registering tempered demand totals due to lower port volumes and softening economic conditions. Key port markets, such as Los Angeles and New Jersey, posted net losses through the first half of the year amid a slowdown in deal activity coupled with some large occupiers right sizing their footprints and placing large blocks of logistics space onto the market for sublease. Also tempering demand has been the notable annual decline in loaded inbound containers, as both key gateways have yielded (year-over-year) (YOY) decreases more than 20%. However, there have been some port markets that have seen healthy absorption totals through the first half of 2023. Savannah’s 6.6 million square feet (msf) of net absorption year-to-date (YTD) ranked fifth highest in the nation and represented 5.8% of its current inventory, the highest of any market. Meanwhile, Houston also yielded healthy growth, with 10.2 msf of YTD absorption, the highest of all U.S. industrial markets.
Developers remain bullish on port-proximate markets, as 139.8 msf of industrial product is under construction—34% of the U.S. total. Savannah, Los Angeles, central New Jersey and Charleston have recorded an increase in construction pipelines since the start of 2022, while most industrial markets have yielded declines in product under development. As landlord confidence persists, asking rents continue to rise. Eight of the 12 port-proximate markets included in this report have exceeded 10% annual rent growth, including northern and central New Jersey and Hampton Roads, all three of which surpassed 25% increases YOY. The 12 industrial port markets are priced at a 51.6% premium over the U.S. average asking rental rate of $9.59 per square foot (psf). However, this is fueled mainly by the New York, New Jersey and California port markets, which have been priced among the highest in the nation. The remaining port markets in the Gulf and East Coast registered average asking rents that were below the national average.
WHAT’S CONTRIBUTING TO LOWER PORT VOLUMES
Cargo volumes across major U.S. maritime ports have fallen YOY amid the softening economy, higher inflation, more modest consumer spending on goods, and elevated inventory levels.
Cargo Volume Down Across the Nation in H1 2023
In 2022, due to a strong first half of the year, the 10 major U.S. ports handled roughly 52 million TEUs, on par with the totals achieved in 2021. For 2022, there were three U.S. ports that finished in the top 25 globally for TEUs handled: Port of Los Angeles, Port of Long Beach and Port of New York/New Jersey. However, TEU volumes across U.S. ports have declined throughout 2023, as consumer spending shifted away from goods and as retail inventory levels remained elevated. From January to June, the top 10 U.S. ports handled 21.3 million TEUs, down 13.6% from the second half of 2022, and 20.2% lower than the first half of 2022.
While port volumes declined quarter-over-quarter (QOQ) at all major U.S. ports in the first quarter of 2023, eight of the 10 ports recorded increases in TEUs handled in the second quarter of 2023. The Ports of Los Angeles (25.2%) and Long Beach (16.8%) recorded the largest QOQ increases.
Amid the moderation of retail sales, imports declined 22.2% YoY to 10.2 million TEUs—down from 13.1 million. Most ports recorded double-digit YOY drops in import totals during the first half of 2023, but markets such as Houston and Jacksonville fared well, with minimal decreases of 2.4% and 0.5%, respectively. While port volumes are down in comparison to the record-breaking totals of 2021 and 2022, YTD TEUs handled are in line with 2019 levels.
West Coast Negotiations Push Cargo East–But How Much Will Stick?
After major backlogs in 2021 at West Coast ports, shippers began de-risking their supply chains, even at the expense of time to shift cargo eastward. Also, the prolonged labor negotiations on the West Coast caused importers to shift labor to the East and Gulf Coast ports, starting mid-2022. Despite a six-year labor agreement between the ILWU) and the Pacific Maritime Association (PMA) in August, only some cargo redirected to the East and Gulf Coast ports is expected to return to the western ports. However, the agreement will benefit supply chain stability, especially for imports from Asian markets.
Market share for East and Gulf Coast ports climbed in the second half of 2022, peaking at 55.4% in the fourth quarter of 2022. However, it has slipped back to just over 50.6% in the second quarter of 2023 amid the labor agreement and increases in cargo volumes at the Ports of Los Angeles and Long Beach. In comparison to 2022, the Ports of New York/New Jersey and Long Beach saw their market shares fall 100 and 30 basis points (bps), respectively, both landing at 17.5% in the first half of 2023. Meanwhile, the Ports of Houston and Charleston registered slight increases in market share, up 90 bps to 11.1% and up 20 bps to 5.7%, respectively. With port infrastructure improving at many of the East and Gulf Coast ports, elevated market share levels should persist, as many shippers now want bicoastal options to bring goods into the U.S., and especially into Midwestern markets.
Canada’s 17 ports play a key role in supporting the country’s overall health, economy and supply chains, and contribute billions to the country’s gross domestic product (GDP).
The four key Canadian maritime ports (Montreal, Vancouver, Prince Rupert and Halifax) handled just over 2.8 million TEUs since the start of 2023, a 15.1% decrease compared to the first half of 2022. The Port of Prince Rupert experienced the sharpest decline in that time, down 26.7%. During the same period, imports to the top four ports fell 16.7% YOY to 1.4 million TEUs of cargo handled, including 790,307 TEUs at the Port of Vancouver, the nation’s busiest port.
The British Columbia port strike that lasted 13 days in the first half of July 2023 had a notable impact on both supply chains and various Canadian businesses. The work stoppage at the Vancouver port was problematic, given that 25% of the country’s total imports and exports—and 43% of those going through the Canadian port system—go through British Columbia. An estimated $800 million worth of goods flow though British Columbia’s ports every day, and according to an estimate by the Canadian Manufacturers and Exporters, each day of the strike disrupted approximately $500 million of trade.
Canadian Port-proximate Industrial Markets Remain Steady, Despite Declines in Cargo Volumes
The key port-proximate Canadian industrial markets (Montreal, Vancouver, Prince Rupert and Halifax) account for 33.6% of the total national industrial inventory, with Montreal (339.8 msf) and Vancouver (234.4 msf) boasting the second- and third-largest inventories, respectively, behind Toronto (809.7 msf). Canadian port markets registered tight vacancy rates of 1.7% at midyear, on par with the nationwide average of 1.6%. Vancouver’s vacancy rate was a mere
1.2%, and the asking rental rate of $21.08 psf was the highest of any market in the country. The importance of Vancouver—not only as one of the largest markets in Canada, but also serving as a key gateway for goods coming into Canada from Asia—is evident by the robust construction deliveries in the first half of 2023—3.7 msf, which is the second-highest in the nation. Of that 3.7 msf, 91.5% is pre-leased, and there is another 4.9 msf of product currently under development, 76.6% of which has been pre-leased.
What to Watch
- Annual U.S. imports will likely finish 3% higher than the 2019 full-year total by the close of this year—down notably compared to the record-setting totals of 2021 and 2022, according to The National Retail Federation.
- Shipping delays could occur if the Panama Canal drought continues. If daily transits are reduced and bottlenecks grow, cargo from Asian ports could be reverted to West Coast ports from East and Gulf Coast ports. The canal handles approximately 5% of world trade, with 36 ships passing through daily under typical conditions—but currently, that number is down to 32.
- If upcoming East Coast labor negotiations result in a stalemate, additional volume could shift to West Coast ports. The International Longshoremen’s Association (ILA) contract, which is set to expire in late September 2024, impacts port workers from Texas to the Northeast. Talks began but subsequently stalled in the spring. While there is over a year remaining before the expiration date, the lack of agreement could push exporters and importers to shift cargo back west.
- Industrial real estate markets are normalizing but remain tight. Healthy delivery totals for new construction are projected to persist in the second half of 2023, pushing vacancy rates higher amid moderated demand totals. Industrial markets will continue to normalize, but vacancy rates will remain well below long-term averages. As softer economic conditions persist, absorption totals will remain tempered in comparison to the peak levels registered during the pandemic. Most industrial markets—including port-proximate markets—should register modest rent growth, despite growth slowing. Historically speaking, port markets are in a good place and will likely see some of the tighter vacancy rates and strongest industrial rental rate growth.