Latest posts by Christopher Trahan (see all)
- Are Farmland Values Ripe For A New Season? (7 mins) - April 24, 2018
- 3rd Annual Titans of Real Estate Conference Preview: Howard and Michael Milstein. (3 min) - April 9, 2018
- The State Of Economic Development (7 mins) - March 29, 2018
Industrial real estate in the U.S. is booming. Fueled by e-commerce companies such as Amazon, the industrial real estate sector is experiencing one of the longest and strongest expansions on record. According to a report by Cushman & Wakefield (C&W), the industrial sector just reached its 28th consecutive quarter of gain in net occupancy with this first quarter of 2017 experiencing a 30-year low in vacancy rates. 1 Additionally, the sector’s net absorption surpassed 1.3 billion square feet accumulated since 2010. Demand is pushing up rents, currently 4.2 percent year on year, as logistics and distribution services require more space. Despite analysts’ optimistic forecasts for industrial real estate, however, U.S. state and federal policy makers are hindering the sector’s economic potential by withholding investment in the country’s maritime infrastructure.
Completed a little more than a year ago, the Panama Canal Expansion Program created an opportunity for Asian shipping companies to send “mega-ships”, commonly known as Neopanamax ships, through the Panama Canal to reach the seaports of the U.S. East and Gulf Coasts. Last generation Panamax cargo ships have capacity to hold 52,500 tons whereas Neopanamax cargo ships carry 120,000 tons. It is not difficult to see that an American port capable of docking Neopanamax class ships would significantly increase demand for warehousing and logistics facilities in the port’s geographic region. Much of the U.S. maritime infrastructure however, i.e. ocean and inland ports and waterways, is not prioritized by authorities and is thus neglected. 2 This neglect is a deterrent for private investment and expansion. Meanwhile, many U.S. port facilities stay dilapidated and outdated.
To be sure, few regions have made maritime investment a priority. Today, the ports of Seattle-Tacoma, Oakland, Los Angeles, Long Beach, New York/New Jersey, Baltimore, Virginia, Charleston, Savannah, Jacksonville, Miami, and Houston host Neopanamax ships. Jones Lang LaSalle’s (JLL) most recent study on U.S. ports states that these regions capable of hosting Neopanamax ships continue experience increasing industrial real estate occupancy levels and command the highest rents for warehouse and distribution spaces. 3 These regions command rents as high as $10 per square foot annually. JLL estimates that in Port, Airport, and Global Infrastructure markets, close to 25.4 million square feet of industrial real estate is under construction, 65 percent of which is attributable to these U.S. East and Gulf Coast ports.
Still, despite successful preparation by these regions, and because only few ports are capable of handling Neopanamax ships, increased amounts of cargo have caused severe capacity and infrastructure strains in these areas. Additionally, because so few ports across the U.S. are capable of handling Neopanamax ships, it will be a long time before the full capacity of the Panama Canal will be utilized. This certainly impacts the potential of industrial real estate in port areas. While few port regions of the U.S. can economically benefit their industrial real estate sectors through hosting Neopanamax ships, most port regions cannot and are years behind. The blame lies on both state and federal authorities for not prioritizing maritime investment.
Perhaps the most egregious example is the lack of investment along the Mississippi River System. The system itself contains just under 100 ports and stretches from Louisiana across the middle of the U.S. to Oklahoma, Missouri, Minnesota, Iowa, Illinois Ohio, Pennsylvania, Kentucky, Tennessee and beyond. Many of these ports suffer from neglect. The lack of state investment continually drives away private investment. For instance, the Port of New Orleans has access to six Class 1 railroads and is perhaps the best case for maritime investment in the U.S. since it is located on the mouth of the Mississippi. Still, the port’s intermodal and surrounding transportation infrastructure remain poorly maintained and underfunded.
Port infrastructure not only requires investment in its cranes and facilities, but also requires investment in surrounding transportation infrastructure so goods can be delivered to warehouses via the barges, trucks and trains to disperse cargo. Port and transportation infrastructure is vital to growth for industrial real estate in port regions. In 2016, Chiquita Banana relocated away from the Port of New Orleans citing inadequate government funding. 4
The Port of New Orleans is years behind the capability to host a Neopanamax ship. Because Louisiana cannot afford river dredging, the deepening of the river by the removal of sediment, the state and the Mississippi River System’s related ports must rely on the federal government for funding. Shipping via barge up through the Mississippi River System makes sense. According to a study by the Iowa Department of Transportation, one river barge can move 1500 tons of cargo from a Neopanamax ship and travel 514 miles on a single gallon of fuel. By increasing the amount of cargo sent through the Mississippi River System, the demand for industrial real estate space in port regions will significantly increase reflecting the gains made in port regions that currently host Neopanamax ships. This logic is not exclusive to the Mississippi River System. Industrial real estate in U.S. port regions across the country stand to benefit if investment is prioritized.
Government officials are to blame for the lack of investment. State governments are often preoccupied with balancing their budgets year to year while appropriately funding healthcare and education with available resources. Despite this, the failure of many states to invest in maritime infrastructure has come at a cost to their economic competitiveness. In port regions, it is no secret that land owners and local businesses hold government responsible for not seizing opportunities for growth through maritime infrastructure investment.
State governments and federal authorities should have prioritized maritime investment long before now for a better overall U.S. economic condition. Unfortunately, according to a report by the Waterways Council, Inc., $6.2 billion worth of maritime infrastructure projects are federally authorized but have been waiting on funding for years. 5 The report also lists federally authorized maritime infrastructure projects currently under construction. These projects are awaiting an additional $2.1 billion to be completed. These projects, if funded, would not only benefit the economy, but they would significantly impact the industrial real estate sector.
The Federal Office of Management and Budget recently funded only $26.6 million out of the authorized $105 million meant for investment under the Inland Waterways Trust Fund in the latest FY 18 government budget. The lack of state and federal investment in U.S. maritime infrastructure needs to change. It is indisputable that the Panama Canal’s expansion and other maritime investment are catalysts for tremendous economic growth. If our leaders invest into the future, there will be even greater implications on the industrial real estate sector.
- Cushman & Wakefield (Q1 2017) U.S. Industrial. Market Beat Reports. ↩
- America’s maritime infrastructure: Crying out for dollars (February 2013) The Economist. ↩
- Seaport Outlook. (Spring 2017) Jones Lang LaSalle. Retrieved from JLL http://www.us.jll.com/united-states/en-us/research/property/ports. ↩
- Greg LaRose & Richard Rainey (July 2016) Chiquita moving Gulf operations from New Orleans to Gulfport. The Times Picayune. Retrieved from http://www.nola.com/business/index.ssf/2016/07/chiquita_moving_gulf_operation.html. ↩
- Infrastructure Investment Recommendations for the Inland Waterways Transportation System (2017) Waterways Council. Retrieved from http://waterwayscouncil.org/. ↩