Few commercial property sectors have excelled more during the COVID-19 pandemic than U.S. port facilities, and this growth is continuing. U.S. ports handled 2.4 million 20-foot containers this past May, the most processed in a single month since the National Retail Federation began tracking imports in 2002.
The ever-increasing traffic in shipping containers has been a boon for ports on both the West and East coasts, resulting in record cargo volumes for properties from Los Angeles to Miami and Savannah, Georgia. Trent Agnew, a senior managing director and industrial group leader for JLL, spoke to Scotsman Guide this past July about his company’s latest findings on U.S. ports and how these properties remain ripe for investors.
Rents in U.S. port markets rose by 23% year over year in first-quarter 2022. What’s behind this major surge?
It’s a combination of the backlog of products coming from the Asian ports and the demand from retailers. Predominantly, the port tenants are third-party logistics companies and retailers importing goods into the U.S. There are also some manufacturing operations, but it’s predominantly logistics. This growth is cyclical. The driver right now is the influx of Asian partners setting up operations and supplying goods to the major retailers.
On the rent side, the major components in the higher rent rates are the cost of land and construction combined with record low vacancy rates. The cost of land has gone up in some places by as much as 75% to 100% in the last 18 months. The combination of land prices moving up and construction costs rising have driven up the cost of doing business.
With higher gas prices, it’s become less appealing to have operations in other areas, and more compelling to develop as close to the international ports as possible.
Rents at the Port of Miami jumped by 53% during the same period. What caused this run-up?
Part of the issue with the Port of Miami is that it is the closest main port for fresh produce to arrive from Latin America and the Caribbean. So, it has a large demand for cold storage. But probably the biggest issue with Miami is a lack of space. The ports of New Jersey, Miami and Los Angeles in South Bay are some of the most restrained ports in the country. The Port of Miami includes 195 million square feet, with 4.4 million square feet of space under construction. So far this year, 1.6 million square feet have been delivered. But the vacancy rate is still about 1.9%.
You also found that Los Angeles and Long Beach are experiencing sharp rent increases. What are you seeing in these marketplaces?
Los Angeles is a much broader market. The ports there have about 775 million square feet of space. Their vacancy rate is 0.7%, an all-time low for the market. With all these ports, it is a case of supply and demand, and entitlements with California take 18-24 months, or longer, which keeps supply in check. In Los Angeles, it has been easier to build storage space farther away from the port in the Inland Empire. But with higher gas prices, it’s become less appealing to have operations in other areas, and more compelling to develop as close to the international ports as possible.
What was the most surprising thing you found when researching U.S. industrial ports?
The unexpected finding was probably the growth in the Port of Savannah. The Georgia port has been one of the main beneficiaries of the movement of containers from the congested West Coast ports to East Coast ports. Virtually every square foot of product delivered has been leased. Savannah is one of the best functioning and most coordinated ports in the nation. It’s near the top of the rankings in different categories, including the speed of offloading containers from ships. I’d say Savannah has been the shining star of the post-COVID market.
Do you still see ports as a good long-term play for investors?
The user side of the equation remains very active, with a record number of containers coming to U.S. ports this year. But the investor demand has cooled in the second quarter due to the rising cost of capital and the market volatility, and we expect things to be choppy through the rest of the year. That said, international trade is going to continue to grow, and we expect to continue to see outsized interest in these markets.
We are seeing cutting-edge technology being implemented at these ports. There will be more dredging, new cranes will be built, and many ports are getting new rail systems that are partly funded by the federal government. We are seeing significant investments in these ports that are long-term plays. Everyone has a strong conviction in the success of our sector going forward. ●
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