COVER STORY, APRIL 2010

PORTENT OF THINGS TO COME
What advantages do West Coast cities harbor and how are they reflected in industrial real estate?
John Carver

Seattle has experienced a siphoning off of container activity by Tacoma, Wash., during the past several years, but activity at both ports remains flat as second quarter 2010 begins.

How do the West Coast ports stack up against their Atlantic counter-ports? How have shifts in cargo activity affected the real estate markets surrounding Pacific seaports? Where does the opportunity lie for developers and occupiers?

Strengths

Port-centric markets, particularly those on the West Coast, have historically proven more resilient to market downturns than their inland counterparts. Compared to the national average vacancy rate in the 8 percent range, port markets on the West Coast are closer to 5.1 percent. Considerable activity has occurred in port-centric markets in the last 12 months by tenants seeking to lower their real estate costs by locking in new terms at current pricing levels. In so doing, they are reaffirming their commitment to the West Coast. By comparison, East Coast port markets are experiencing vacancy rates in excess of 12 percent.

On the capital side, port infrastructure ranks today as one of the most favored product types in the country. Virtually unavailable 12 months ago, financing is beginning to emerge for qualified projects, with West Coast port markets viewed as among the most stable in the country.

Weaknesses

Land values at port locations along the Pacific Coast, despite the hit taken during the past few years, remain significantly higher than on the East Coast. This requires a more comprehensive network optimization by shippers and logistics providers to justify the premium rents involved. Recognizing that real estate accounts for less than 8 percent of a company’s overall operational costs, strategic supply-chain modeling helps support the high cost of West Coast options.

Opportunities

For the first time in nearly 2 years, the Port of Long Beach reported an increase in cargo volumes during the month of February, with expectations that the positive growth will continue, albeit slowly.

For development and investment interests, U.S. ports are beginning to explore the viability of privatization of their port or near-port assets for funding-desired infrastructure improvements or simply to improve operational efficiency. It has long been a trend in many foreign markets in both the maritime and airport arenas where public-private partnerships are providing new opportunities for development in closer proximity to the ports themselves. Expect that this trend will spread into intermodal and other port locations in the country.

Threats

Many East Coast ports are located in “right-to-work” states. This has been used with some success in selling against the Pacific seaports, which operate under exclusive labor contracts with the International Longshore and Warehouse Union (ILWU). For the most part, this has not resulted in an exodus by port users to East Coast destinations. It has however contributed to a diversification strategy among heavy shippers, which has benefitted port developments along the Atlantic and Gulf coasts. One of the lessons learned by supply-chain engineers from the 2002 labor dispute, which closed Pacific ports for nearly 2 weeks, was the need to build flexibility into their supply chains and not be dependent on a single port system. While this has helped stimulate development activity on the East Coast during the past few years, the Pacific ports can be expected to long remain the preferred point of entry.

With the correlation between cargo traffic and real estate demand well documented and understood, the long-term outlook for the West Coast ports remains on a solid footing.

Leading the firm’s Port, Airport and Global Infrastructure practice, John Carver is an executive vice president based in Jones Lang LaSalle’s downtown Los Angeles office.

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