DC space tightens at U.S. seaports

It's not like the heady days of the early 21st century, but after a historically subpar performance for the last four years, the U.S. industrial property market is showing signs of tightening.

The strongest evidence of that is at U.S. seaports, where space is becoming mighty scarce, according to a study released Tuesday by Chicago-based real estate and logistics giant Jones Lang LaSalle. The annual "U.S. Seaport Outlook" analyzes the industrial markets surrounding the nation's major container ports. According to the report, only 20 parcels of space remain available for those who need at least 250,000 square feet of warehouse and distribution center (DC) space within five miles of a major U.S. port.

Vacancies do increase farther away from the ports, according to the study. There are about 60 available parcels of more than 250,000 square feet within a 15-mile radius around the nation's ports, the report says.

Supply is even tighter for "big box" DCs sized at 500,000 square feet or more. There is only nine ready-to-occupy big box facilities within a 15-mile radius of a port anywhere in the country, says the report.

This scarcity of space means that large-scale users in big markets, like Southern California or the New York-New Jersey-Central Pennsylvania region, will either have to outbid other prospective tenants for prime locations near seaports or be willing to ship more goods to inland port destinations, according to the report. The prototype for these inland distribution center models is the Inland Empire east of Los Angeles. But even there, occupancies and speculative development have hit their highest levels since before the worst of the financial crisis in the third quarter of 2008.

Not only is space tight at the ports but it's also going fast, according to Steven J. Callaway, senior vice president and head of global customer solutions for San Francisco-based ProLogis, the world's largest industrial property developer. According to Calloway, this holds true not just for the large "Class A" facilities but also for the smaller, perhaps less desirable, "Class B" facilities at or near seaports.

Speculative (or "spec") development—a build-it-and-they-will-come model of development—is also on the rise at many ports, according to Callaway. Spec development had ground to a halt in late 2008 and early 2009 as the global financial crisis and recession coincided with huge amounts of space becoming available from building projects that had been in the pipeline for several years. But rents have now risen high enough in the Southern California region, home to the ports of Los Angeles and Long Beach, that they have once again sparked spec development—at least where land is available to build on. "This has been the case for the past 12 months," Callaway says.

Spec development has also returned to markets like Houston, Dallas, Miami, and the New York/New Jersey area, according to Callaway.

Jones Lang LaSalle says industrial property demand at seaports is being driven in part by the lack of available land. Another factor is the growth of U.S. exports, which are turning ports into two-way trading mechanisms and further increasing the supply chain's appetite for space surrounding them, the report said. Demand is also high for facilities that have access to large population centers and those that have strong connections to inland distribution facilities.

But a rising tide isn't lifting all ports. The Jones Lang LaSalle report shows that Houston; Charleston, S.C.; Jacksonville, Fla.; and Baltimore are still struggling with double-digit vacancy rates. High vacancy rates persist at these locations even though all but Houston have experienced the fastest growth in industrial occupancies over the past 18 months. "We expect development to remain cautious as these markets continue to strengthen over the coming quarters," Aaron Ahlburn, the firm's head of industrial research, said in a statement.

Although rising demand is driving up industrial rents in many markets, data from the real estate brokerage firm CBRE Group shows that nationwide rents remain about 25 percent below the all-time peak—not adjusted for inflation—set around 2001, according to Callaway.

Callaway says the overall market is now in equilibrium. The buyer's market that had persisted since the downturn has now abated as demand has picked up but the amount of annual new-build square footage remains about 50 percent below its 150 million square-foot historical average.

Companies looking for space can still strike attractive deals, but they shouldn't sit on the sidelines for too long, Callaway says. "They could be looking at rents 25 percent higher than they are now over the next few years," he says.