Mixed Recovery for US Seaport Industrial Property Markets

Edited: Jennifer Brenner
Source: Colliers International

Industrial occupancy rates for commercial space in and around the nation's most active export-focused ports appear to have stabilized, according to a new white paper from Colliers International that examines the shipping trade's varied impact on industrial demand for space.

The seven-page report, which deftly analyzes how maritime freight volumes impact occupancy rates in the nation's ten largest container seaports, demonstrates how the global recession has vastly reconfigured U.S. shipping and occupancy patterns between 2001 and 2009. Yet some positive trends are beginning to take hold. Among the report's key findings:

• Between 2001 and 2007, containerized trade volumes increased by nearly 60% as the global economic boom triggered a wave of spending on U.S. and foreign goods
  
• Demand for industrial space in these markets followed suit, driving occupancy up by roughly 20% during that period -- faster than any other U.S. commercial real estate asset class
  
• Since the volume of containerized shipping peaked in 2007, average industrial vacancy within these ports actually dropped by 15%
  
• Ports that were chiefly dependent on imports have sustained the greatest vacancy declines -- but those markets that have focused on exports have been the least affected thanks to foreign nations' steady demand for U.S. goods

"We expect that export volume will play an outsized role in the U.S. economy and by extension the largest industrial seaport markets going forward," said Thomas Galvin, regional research analyst for Colliers International, who sees robust export demand as an "antidote" against additional occupancy declines in select industrial port markets.

A critical part of this antidote will come in the form of labor growth. To that end, Galvin believes that the U.S. government will be instrumental in sparking future export growth. In his State of the Union Address, President Barack Obama proposed a program that would double the total volume of American exports in the next five years. Another critical part of the initiative is the creation of roughly two million new jobs, many of which would ultimately fill vacant seaport buildings.

"If these new jobs materialize, they will fuel demand for as much as 500 million square feet of industrial space within our largest port markets. Exports currently account for almost 12 percent of GDP, and that's up from just 4 percent of GDP in 1970. The reason behind this growth is globalization, which will continue to buoy our largest seaports into the future."

In 2009, the total volume of maritime container traffic flowing through the ten largest U.S. ports continued to decline. But the outlook appears to have brightened over the past few months. First, the closely-watched Baltic Dry Index -- a key benchmark which tracks activity within the world's 26 most active shipping lanes -- began ticking upwards in early 2009. While this bellwether indicates that global shipping rates are in fact strengthening, they are nowhere close to the peak rates achieved at the end of 2007. Secondly, and equally as important, the dollar volume of exported goods shipped from the largest U.S. ports showed virtually no declines during the past eight years.

Due to consolidation, a smaller number of seaports will ultimately benefit. The market share of the top ten U.S. seaports (based on the volume of maritime containers passing into and from each market) jumped from 89.2% in 2001 to 91.6% in 2008 -- demonstrating that foreign container ships visited fewer U.S. ports during that seven year period.

The impact was hardly uniform among these markets. The ports with a greater focus on exports such as Houston and Fort Lauderdale sustained less of a slowdown due to the weak dollar that has fueled demand for American goods. Conversely, import-driven ports like Los Angeles, New York and Seattle have been challenged to fill much of their industrial space.

Industrial markets in major port cities are still in the early stages of a recovery. As a sub-set of all U.S. industrial markets, those located in or around major seaports have on average sustained occupancy declines that are greater than the nation as a whole. Of the eight U.S. industrial markets that eked out marginal occupancy increases between 2007 and 2009, only one of these markets was a major U.S. port (Houston). On the bottom of the red column, which lists industrial markets that posted occupancy declines during that period, the last two markets were both ports (Baltimore and Orlando).