Development at nation's seaports projected to boom

Despite an economic downturn from which it may take years to recover, the industrial property segment surrounding the nation's major seaports is pressing ahead with billions in capital investment in an effort to be well-positioned for the next sustained up-cycle, according to a study issued June 22 by the global real estate and supply chain giant Jones Lang LaSalle (JLL).

The "Port, Airport and Global Infrastructure Report," released at an annual supply chain conference in Atlanta sponsored by U.K. firm eyefortransport, paints an improving but still dreary picture of the warehousing and distribution center markets within 15 miles of the nation's key ports. In the past 12 months, vacancy rates rose 1.6 percentage points to 9 percent as tenants experiencing weak end demand for warehoused products shed excess capacity, consolidated operations, or went out of business, the report said.

The firm said it believes that vacancy rates may have peaked and that leasing activity is showing signs of life as domestic consumer demand and export growth pick up steam. However, it cautioned that demand for warehouse and distribution space "remains critically low" and that "activity [is] not yet at levels that will provide a sweeping boost to market sentiment."

Yet that hasn't deterred developers, investors, and users, who over the next five years plan to pour about $8.5 billion into container terminal and harbor dredging projects around the country's top 13 ports, according to the report. That is about one-fourth of the $34 billion that the American Association of Port Authorities said the nation's ports have spent on facility improvements since 1945.

A good portion of the future capital is expected to be earmarked for East and Gulf Coast ports in anticipation of vessels carrying Asian import cargoes being diverted from West Coast ports via an expanded Panama Canal. The massive canal project is set for completion around 2014.

The JLL report said industrial property developers and users near U.S. ports are looking to "get out in front early" with massive capital investments in response to what they foresee as a substantial increase in freight traffic over the long term.

The short term, however, may be more problematic. The report was not optimistic about the industry's ability to quickly regain its pre-downturn footing, saying there are "years of ground to cover" for most markets to return to levels of demand seen before the recession.

Property values in so-called tier I markets like the New York/New Jersey region and California's Inland Empire have been cut in half over the past three years, creating an aggressive buyer's market for industrial space that's expected to last for at least the next 12 months, company executives have said recently.

"It's an upside down market in tier I markets today," Kris Bjorsen, JLL's managing director, supply chain and logistics solutions, told a group gathered in Washington earlier this month for the 21st Annual State of Logistics Report.

The JLL report said that vacancy rates at so-called "port-centric" markets remain below the average vacancy rate of 10.6 percent for industrial real estate in the United States.