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Impact of West Coast Port Negotiations on Industrial CRE

Jason Price • 6/15/2022

WHAT’S HAPPENING?

  • Union labor negotiations periodically happen between West Coast port workers and the port employers and operators. 
  • Any potential delay or stalemate coming out of these negotiations means that occupiers are going to deal with more logjams, longer lead times, and probably another idiosyncratic round of cost pressures tied to getting goods through these impacted ports. 

  • While any slowdown at the ports can cause near-term disruptions for industrial real estate, markets affected have historically bounced back briskly. Ongoing negotiations are merely noise and not signal.  

On July 1, 2022, contracts which apply to 15,000+ International Longshore and Warehouse Union (ILWU) members—including longshore workers, marine clerks, and foremen at 29 ports along the U.S. West Coast—are set to expire. Originally set to expire in June 2019, the dates for these contracts were postponed by three years after the union voted to extend the term to avoid cargo disruptions in exchange for higher pensions and raises. Talks have already begun in San Francisco and will continue every day until a deal is in place between the ILWU and the Pacific Maritime Association. One key point of contention by the ILWU—which could lengthen negotiation time—is the use of automation and robots at the ports as such investments could potentially replace jobs.   

Any shutdown or slowdown at West Coast ports would be detrimental to the U.S. economy as almost half of Asian imports into the U.S. are loaded and moved through them, while approximately 50% of all U.S. agricultural exports are shipped from the California seaports. In total, these goods were approximately 9% of GDP last year. Adding to and increasing the ongoing congestion at the ports would likely further elevate the share of trade volume flowing through East Coast ports—at a time when site selections are already migrating to the East to mitigate ongoing supply chain risk. This would probably temper import and export cargo volume totals in the summer months.  

HOW HAS THIS PLAYED OUT IN THE PAST? 

Contract negotiations are not new for port workers across the country. Lockouts, shutdowns and/or slowdowns occurred in 1936, 1971, 2002, 2008, 2012 and 2015.  

Some of the more significant negotiations: 

  • 1971: ILWU members went on strike during negotiations for 130 days; all West Coast ports were brought to a standstill. The result was in favor of the ILWU as it secured the union’s position there for a generation to come. 

  • September 2002: While negotiations intensified, the PMA locked out port workers for more than 10 days along the coast after they accused them of engaging in a work slowdown. With container ships unable to unload cargo, crowding the harbors along the West Coast, President Bush sought a court order to issue a temporary injunction which ordered the ports to be reopened. A tentative agreement was finally reached in late November 2002. 

  • Early 2015: Talks broke down between the union and the Pacific Maritime Association (PMA) wherein dockworkers stopped working for more than a week after the PMA reduced night and weekend work. This caused a logjam in U.S. transportation lanes and drained an estimated $8 billion from Southern California’s economy. President Obama’s labor secretary stepped in to help achieve a new deal in May that year.  

HOW PORTS, OCCUPIERS AND LOCAL INDUSTRIAL MARKETS WERE IMPACTED IN 2015 

During the last negotiations in late 2014 through 2015, port volumes across the West Coast fell. January and February 2015 were among the lowest for twenty-foot equivalent units (TEUs) handled that year along the California ports. The work slowdowns resulted in annual growth rates for some of the ports to fall into the red by year-end 2015.  

  • The Port of Los Angeles registered a 2.2% decline in cargo handled in 2015 while the Port of Portland was down 35% annually. In fact, two of the three major California container ports recorded annual declines in volume that year, with just the Port of Long Beach avoiding annual losses. 

  • While the Port of Long Beach and the Northwest Seaport Alliance both ended 2015 with positive annual gains, their January and February figures were among their lowest in recent history at the time. However, the Ports of Seattle and Tacoma each posted declines in 2014 due to work slowdowns in the latter months during ongoing negotiations.  

  • Meanwhile, as some trade flows were redirected to the Gulf and East Coast port markets, the Port of New York/New Jersey realized a 10.4% increase compared to the previous year, a high not reached again until 2021. Also, the Port of Houston recorded a 10.8% rise in volume due to a surge in TEUs from March through May 2015. 

Although the 2015 slowdown did not cause any long-term negative effects to local West Coast industrial markets, it did coincide with a decline in demand for space in the area. Throughout the first quarter of 2015, quarterly net absorption totals for industrial space fell sharply in Los Angeles, Orange County, Inland Empire, Portland and Seattle. These markets totaled just 7.7 million square feet (msf) of net occupancy gains in that time, 30% below the five-quarter average. However, as West Coast ports reopened and Asian goods once again flowed through them, absorption totals improved throughout many of the West Coast markets. 

Conversely, as some cargo volume from Asian ports was redirected away from West Coast ports, net absorption in some key Gulf and East Coast port markets surged. In Northern and Central New Jersey, quarterly net absorption reached a historical high of 3.4 msf during the first quarter of 2015 while Houston posted almost 3.0 msf of net absorption, its highest quarterly total that year. However, once bottlenecks on the West Coast eased in the second quarter, both the New Jersey and Houston industrial markets posted a deceleration in absorption in Q2 before modestly rebounding thereafter as demand grew. 

STAYING THE COURSE—MORE NOISE THAN SIGNAL  

An important reality is that quarterly changes in industrial demand are volatile. While some immediate impacts may have occurred in leasing markets in 2015, it is more likely that the effects of negotiations (and any delays from them) were more noise than signal. For occupiers, a focus on maintaining continuity of service and communicating consistent wait times for West Coast customers has been and will remain a primary concern, particularly as the current round of negotiations unfolds. In 2015, delivery timelines increased nationally, but this was more pronounced in California, after which a temporary surge in inventories was reported (according to ISM data). A repeat of that experience may potentially challenge occupiers this summer, especially those reliant on rail transport where ongoing congestion remains relatively more elevated (versus trucking congestion, which has improved drastically along the West Coast since late 2021). 

WHAT TO WATCH 

  • The ILWU negotiations have historically caused some bottlenecks at West Coast ports and have resulted in substantial financial losses. Currently, the contracts are due to expire July 1, 2022—if that date is not met, the country—and industrial occupiers—may be due for another source of supply chain issues. 

  • As supply chains have been top of mind, negotiators are making efforts to avoid this outcome. However, it is not yet known if contracts will be renewed on time, as constant negotiations are already underway with no progress yet reported. Historically, both parties have agreed to extend negotiations past the expiration date, allowing more time to strike a deal. 

  • Combined with low vacancy and uncertainty, if negotiations stall or take longer than expected, it is possible that port markets along the Gulf and East Coast may siphon demand throughout the remaining quarters of 2022 (as they have during prior trade slowdowns along the West Coast). This will also be the first round of negotiations post-Panama Canal expansion, supporting the potential for this to happen. 
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