US port markets are experiencing outsized growth in industrial rents

An extraordinary amount of new supply – over 700 million square feet under construction and 650 million square feet in the pipeline –dampened the growth of industrial rents nationwide over the past year. But that’s a different story in supply-constrained port markets, particularly Southern California and New Jersey, where rent growth is more than double the national average, according to David Greek, managing partner of Greek Development. , based in New Jersey.

He notes that emergence of the trend of “just in case” stocks to compensate for product shortages due to supply chain disruptions has driven up demand for warehouse space at ports, where shipments are received, processed, broken down and stored before being sent to distribution facilities close to consumers.

According to Kelsey Rogers, head of US industrial research at real estate services firm JLL, the top 10 US port markets have seen exceptional year-over-year rental growth. But the Los Angeles rent premium, which has an overall industrial vacancy rate of 2.0% and even less vacancy near ports, tops the list, with rents growing nearly 70% from a year to year. According to an October CommercialEdge data provider report, the average rate of transactions signed here over the past year was $17.39 per square foot, while the average industrial rent in place is $11.49. Rents in the port markets of Miami and North Bay have also increased significantly since the third quarter of 2021, by 60% and 33%, respectively.

Industrial vacancy remains tight, at 2.5%, in the Port of New Jersey, where rents rose 7.6% year over year – the fourth fastest increase nationally, according to Arizona-based Doug Ressler, head of research at Yardi Matrix and head of business intelligence at CommercialEdge. Rates for new leases signed over the past 12 months have averaged $11.60 per square foot, compared to $8.87 per square foot for in-place rents.

The low vacancy rate at the port has widened the distance tenants are willing to travel to find space, notes Greek. He says 10 years ago tenants had specific locations in mind when looking to sign new leases, but now they’re heading to rural southern New Jersey, exits 2 and 3 on the turnpike and the Lehigh Valley in Pennsylvania to find space.

Collectively, asking rents grew an average of 25% year-over-year in major port markets nationwide, compared to overall growth of 15.1% nationwide, said Lisa DeNight, chief executive. from national industrial research to the Newmark real estate services company.

The unbridled growth of rents in the main port markets is the product of a limited supply and a lack of land for the construction of new facilities. Greek, whose company is currently redeveloping infill sites in Philadelphia, notes that delivering new supplies to these high-barrier-to-entry markets can take years due to a lengthy approval process and cleaning up infill sites, which had often been occupied by polluting manufacturing operations or utility production.

Meanwhile, overcrowding and congestion at the ports of Los Angeles and Long Beach have forced companies to divert ships to smaller ports, Rogers said, noting that labor strikes and lower vacancy rates at 1% also contribute to these changes. The migration of these industrial occupants from the west to the east coast has benefited markets such as Savannah, Georgia, Jacksonville, Florida and Houston, where there may be more available space and lower rents.

While DeNight expects import volumes to the U.S. to decline in the short to medium term, she notes that the continued shift in market share from West Coast ports to East Coast ports is is a structural trend that will continue to gain momentum. “Friendshoring” (manufacturing and sourcing components and raw materials within a group of countries that share common values) will reconfigure many supply chains, with East Coast seaports reaping the benefits, she says.

“Availability and higher rents are definitely pushing tenants to other ports,” says Stephanie Rodriguez, National Manager, Industrial Services, of real estate services firm Colliers. “It’s clean when you look at the increases in TEU volume in ports like Houston, Charleston and Virginia. Houston’s industrial market recently ranked fourth in total net uptake, recording over 20 million square feet absorbed since the beginning of the year.

According to DeNight, the industrial vacancy in the northern New Jersey and Los Angeles markets has been tight for years and extremely low for the past year, forcing users to react essentially to the speed of new construction due to strong competition for l ‘space. Ports like Savannah and Houston have more space to offer. Savannah, in particular, is the fastest growing port market in the nation, with a construction pipeline measuring nearly 30% of its existing inventory, DeNight adds.

Rents are also significantly lower in smaller port markets than the average asking rent in Los Angeles, she notes. For example, in Houston, primary warehouse space costs half as much as in Los Angeles, and the average asking rent in Savannah is less than $6 per square foot.

However, as a result, smaller secondary ports are also experiencing phenomenal rental growth. According to research by Colliers, the Port of Charleston led rent growth at small ports over the past year, with an 83.4% increase since the third quarter of 2021. It was followed by ports from Baltimore and Tampa Bay, Florida, where rents have gone up. 59.2 and 57.7%, respectively. Rodriguez notes that the expansion of the Panama Canal has had a positive impact on other US ports, especially on the East and Gulf Coasts.

At the same time, high rents in major ports are not the main reason for tenants moving to secondary ports, according to Greek, who says smaller ports on the east and west coasts are seeing increased traffic due to the availability of warehouses, as well as supply chain and labor issues that are causing backups at major ports of call, such as the recent labor dispute at the Port of Long Beach that left 100 ships stranded in the port.

Initially, some Asian shippers redirected traffic to the Port of New York/New Jersey, he notes, but now seek different entry points without backup issues, benefiting Savannah, Charleston, Philadelphia, Tampa and Houston on the East Coast. and San Diego, Vancouver and San Francisco on the west coast. Additionally, the Port of Miami, which has traditionally served traffic from South and Central America, now welcomes vessels from Europe and Asia.

The two-year supply chain shake-up has also caused some tenants to diversify ports of entry or move operations entirely to alternate ports, DeNight says. “While not all tenants are able or willing to make a change, there has been a noticeable exit from the more constrained port markets, due to cost, space availability issues and the resilience of the Supply Chain.”

“Scarcity of available space is the primary reason some tenants may be starved of opportunities in key port areas, although the recent shipping shift may also cause logistics companies and retailers to reassess and possibly redirect their industrial real estate needs,” said Matthew Dolly, national industrial research manager at real estate services firm Transwestern.

But while rents have risen astronomically in the largest port markets, users still want and need to be there for access to the nation’s largest population centers and easy labor availability, adds he. They will also often absorb rising rents to avoid the much higher transportation costs associated with distribution to much more distant locations, notes Dolly.

Tenants may also prefer larger ports because of the efficiencies provided by their sophisticated offloading logistics infrastructure, which is still in construction mode at secondary ports, Ressler adds.

When space isn’t available near industrial end-user ports, investors and developers look to the next ring, according to DeNight. She notes that the “next ring” of established and emerging markets is seeing a jolt of activity in tenant demand, development and rental growth. “The Inland Empire, for example, is a mature primary market that plays the ‘catcher’s glove’ in Los Angeles, but the area has seen vacancy rates drop to less than 1%, despite a large development pipeline then. that tenants keep pushing inward to try to secure space,” she says.

On the East Coast, the I-81/78 corridor in eastern Pennsylvania and southern New Jersey is seeing more tenants who are overpriced or unable to find space in North Jersey, adds FromNight. A similar dynamic is playing out in emerging logistics hubs such as Greenville/Spartanburg, with demand rising in part to support increased activity resulting from Port of Charleston expansions.

Markets within a day’s drive of ports, such as Phoenix on the West Coast and Savannah, Atlanta, Central Florida and Charlotte, North Carolina on the East Coast, are seeing increased industrial rental volumes, Rogers says . The Phoenix market, in particular, is seeing an influx of industrial activity as it continues to attract tenants squeezed out of the Los Angeles market.

Phoenix had nearly 45 million square feet of industrial space under construction at the end of September, equivalent to 15.1% of existing inventory, according to Ressler, with planned projects that could double the pipeline.

Savannah, meanwhile, offers the most space availability, and its construction pipeline is more than a third of its existing inventory, indicating “tremendous future expansion,” notes Dolly.

Houston has led the United States in occupancy growth over the past 12 months and ranks third in the nation for industrial space under construction.

Charleston, SC is also gearing up for major industrial expansion, while Miami has seen industrial construction levels double in the past two years, Dolly adds.