JLL research takes deep dive into trends impacting North America-based container shipping

Recent research from industrial real estate firm JLL, entitled “Docked and Loaded: Five Trends turning the tide of the North American shipping industry,” takes a close look at various factors impacting the ocean shipping sector.

A key underlying theme of JLL’s research explains that one year after the opening of the $5 billion Panama Canal expansion, there has been what the firm called a “profound effect” on industrial real estate demand. Another key theme focused on how even though West Coast ports remain naturally competitive, East and Gulf port demand is heading up. And these demand gains are being reflected in around 25.4 million square feet of industrial real estate under construction in the 14 port markets tracked by JLL in its 2017 Seaport Outlook, with 65% in East and Gulf Court ports.

Taking that a step further, Walter Kemmsies, Managing Director, Economist and Chief Strategist of JLL’s Port, Airport and Global Infrastructure (PAGI) Group, noted in the research that West Coast ports handles around half of all shipping volume, with East Coast ports seeing strong growth. But future West Coast growth for industrial real estate locations like distribution centers may potentially be stalled, with Kemmsies noting that there is little room to build DCs near West Coast ports in tandem with increasing pressure to move cargo from the first mile to the last mile. What’s more, JLL said that Mid-Atlantic and Southeastern port volumes have risen 20% going back to 2013, whereas West Coast volumes are up 5% for the same period.

“We have seen a very tight industrial warehouse and distribution market from a real estate perspective, and the seaport-related warehouse vacancy [rate] really continues to be a reflection of very solid leasing fundamentals,” said Aaron Ahlburn, JLL Managing Director, Industrial & Logistics.

Shipment volumes in the years prior to the Panama Canal expansion were driven up in anticipation of the Canal opening up coupled with risk mitigation actions by various ports, he added. This is being reflected in current volumes and concurrent leasing activity in the years leading up to the formal Canal expansion.

And JLL Vice President, Americas Industrial Research Mehtab Randhawa said that with the Canal opening clearly helping the industrial real estate market, there are strong industry fundamentals intact across the board at all the port markets JLL is in, citing the Port of Houston and several East Coast ports, too.

“The Canal’s impact on real estate is really just starting to play out now as it’s only been around a year since it opened up, and we will see a lot more going forward with more ships and cargo coming in,” she said. “The first mile is likely to see more demand coming in from the Gulf ports.”

While the widening of the Panama Canal helps large ships come through, JLL’S Kemmsies highlighted that the ports have deepened their navigation channels and improved their intermodal investments, too.

As an example, he noted how the Port of New York and New Jersey lost a fair amount of share to the West Coast in the early 1990s but then dredged its channel to 52 feet and started to regain share in the early 2000s. And since then the Norfolk Southern railroad opened up its Norfolk Corridor, which runs from Norfolk, Virginia to Chicago and its Crescent Corridor from Norfolk to Houston. Dredging activity at the Port of Savannah, he said, has also kept pace, too. These efforts, he said, have drawn attention from West Coast ports.

“It is not just the Panama Canal infrastructure expansion, it is also the [over all] expansion of infrastructure on the East Coast,” he said.

The JLL report also examined the impact of mergers and alliances in the ocean shipping sector, which, it said, are leading to uncertainty and a changing landscape. With the sector going from four alliances to three in April, it said they account for around 90% of global trade routes. And JLL pointed to how alliances help carriers stay competitive, reduce costs and cut or control capacity by sharing vessels, limiting services or reducing multiple ships on the same route and benefitting through economies of scale.

Kemmsies said it is important to remember that large ships lose money when they are sitting idly at a port, and they want to be moving on the open water, as there is when they are profitable.

“18,000 TEU (Twenty-Foot Equivalent Units) vessels even if operated on a 24x7 basis with automated equipment will still take around 4.5 days to do a full unload and reload on the West Coast,” he said. “And an 18,000 TEU vessel would generate around 14,000 truck trips, given the current mix of 20- and 40-foot containers and the mx of volumes that leave the port area by rail and by truck. This is hard for those terminals to match, and what makes it worse is every so often weather patterns force multiple ships to arrive at a port at the same time. That creates a lot of congestion and chaos. There are enough chassis at large ports to handle the volume, but the problem is these are really big ports and having the right chassis in the right location at the right time when there are schedule snafus with a couple of large ships is a serious issue.”

One way importers are countering that is by increasing their amount of space near the ports so that they can cross-dock and trans-load much faster in order to handle surges that occur due to volume issues at the ports, he added.  And even though there are fewer alliances, he said each alliance has a much bigger share of port volumes and is a driver of real estate demand around port gateways.

Given the ongoing proliferation of e-commerce on today’s supply chains, JLL noted how the pairing of next-day deliveries are bringing the trucking sector both gains as well as challenges.

“E-commerce means a shorter order to delivery cycle, which is what everybody is competing on,” said Kemmsies. “There is a big push in the industry for same-day delivery, and in some cases it is in a few hours. Doing this on a national basis because of that time demand requires a need to hold more inventory in more places. The inventory –to-sales ratio fell for about 20 years until around 2014, and since then it has been on an upward tear simply because of the impact of e-commerce. This has resulted in a demand for real estate near ports, because you need to do transloading and repackaging so the contents of the international boxes, like the domestic ones, are closer to the port so that stock can be strategically replenished in various parts of the country. This is because time is of the essence.”

Railroad activity, said JLL, needs to be nimble as competition from other modes ramps up. And JLL said that the sector is poised to grow, with it shifting from traditional cargo as coal volumes continue to wane. Intermodal volumes continue to impress, it said, now accounting for more than half of railcar volumes, which marks a 40% gain compared to ten years ago.

“Rails have been a little slow on the uptake,” said Kemmsies. “For a long time there was a focus on moving bulk commodities, like cement, coal, iron ore, and agricultural products, from point A to point B. They need to be nimble. The majority of long-haul container shipments in the U.S. are still dominated by truck, and until you get to really long distances truck is still the preferred option, as it is more nimble. Railroads need to learn how to become more nimble, which is not easy to do with fixed tracking. And for them to be nimble they need to work effectively with trucking companies and you are seeing that happen….in places like the Centerpoint facility in Chicago and the Logistics Park Kansas City, where DCs are being built at a rate of 3.4 million square feet per year around a BNSF rail hub that is 150,000 feet of track. Railroads are starting to step up an take a big share of these volumes through the establishment of these types of inland hubs and supporting industrial real estate investors.”