Ports & Infrastructure

Pacific Ports and the Need for Real Estate

By Chris Steele, President, Real Estate Line of Business, TranSystems

The competition for land in areas surrounding ports is and continues to be heated.
The port’s natural link to the logistics chain drives the need for warehouse and shipping-related uses. Most active, successful ports are also centers for other major economic activity as well, with large population centers and employment across a wide variety of industries. For example Los Angeles/Long Beach (LA/LB) and New York/New Jersey are both the two largest ports and the two largest metropolitan areas in the United States.

Land price aside, functional solutions can be found for companies looking to serve these coastal populations. As these cities act both as a waypoint in the logistics chain and as a destination/consumption center, the warehouse and distribution space can be located, centralized and designed in such a way that the space fulfills most needs. But price is a factor, these sites don’t service only their own local populations and Pacific ports also face a heightened real estate challenge due to offshoring and the resulting increased need for space.

Offshoring

Few developments have had as dramatic an impact on real estate development patterns as offshoring of manufacturing. The ability to ship efficiently from long distance, and in bulk, allowed for the wholesale movement of manufacturing for many goods completely out of the country and out of the hemisphere.

In many ways, this drove the need for even more warehouse and logistics real estate development, particularly around the West Coast ports of LA/LB, Seattle and Oakland. These metropolitan areas already had growth and real estate pressures of their own due to their own population and employment growth over time. In addition to this, there was (and is) the mounting need for new, purpose-built facilities for this offshored activity. These facilities must be able to handle foreign trade, support cross-dock activity and service both long-haul, cross country distribution and regional freight.
Even in the current economic market, port activity has kept these real estate markets tight. For example, while CBRE shows the current industrial vacancy rate for the Inland Empire to be approximately 7.2%, that for Los Angeles County is only 2%.

Future pressures

While the weak U.S. dollar and faltering economy have caused a dip in import activity in 2007-08, long-term trends suggest that import volumes from Asia will rebound and grow for the foreseeable future.

Consider for a moment how busy and crowded the Port of LA/LB was during 2000-06. As late as the fall of last year, PIERS data suggested that TEU volume at the port could increase by as much as an additional 21 million TEUs over the next five years. This represents roughly a 37% increase and would certainly affect industrial real estate in the area.

Likewise, pressures on warehouse and industrial space in the area would not be limited to those resulting from the ports alone. Each of the following counties on the West Coast already have a population density of more than 250 persons per square mile and are expected to continue to grow significantly over the next five years:

• Los Angeles and Riverside counties in the Los Angeles metro area

• Contra Costa, Sacramento and San Joaquin around and east of Oakland

• And further north, Washington and Multnomah counties in Oregon and Clark County in Washington — all part of the Portland metro area

All of this equates to significant new population growth (and demand for real estate of all kinds — distribution included) in the backyards of the ports of LA/LB, Oakland and Portland.

This likely sounds like an invitation to invest in industrial land around these ports. Many industrial REITS and private developers are looking at the data above and are doing precisely that.

Off-port solutions

Today congestion, the price of land and pending regulation have begun to shift development away from the areas directly surrounding the Port of Los Angeles and out farther into the surrounding areas. Riverside and San Bernardino have been experiencing explosive growth, and both areas are now looking for ways to actually move cargo off ships, onto rail and into their communities so that they may become the de facto ports of entry and circumvent the traffic and congestion of Los Angeles and Long Beach.

While (as noted in my last column) some shipping and real estate trends are adjusting away from offshoring and back to a domestic production focus, the impact of Pacific trade continues to have significant impacts on inland development up and down the Pacific Coast. As land becomes increasingly hard to come by and as the trends begin to shift, many developers are now looking for the next hot market and the next opportunity.

Inland ports and multimodal centers are some of the best ways of both accelerating freight traffic through the ports and maximizing access to inland markets for this overseas cargo.

Next month, we’ll talk more about those options.