The Economic Landscape
In the backdrop of prevailing global and regional economic pressures, North America has seen a significant downturn in port volumes compared to midyear 2022. Import volumes plunged by 22.2 percent across pivotal U.S. maritime ports and tumbled 14.6 percent at major Canadian ports.
This decline can be attributed to several factors, including the softening economy, rising inflation, a shift in consumer spending habits, and elevated inventory levels, according to a recent Cushman & Wakefield U.S. & Canada 2023 Ports Update.
Labor Disruptions and Their Impact
Disruptions were also felt due to labor tensions. On the U.S. West Coast, protracted negotiations between the International Longshore and Warehouse Union (ILWU) and employers culminated in a new six-year contract by August. However, throughout the year, the unpredictable nature of the western ports, caused by intermittent work stoppages, made shippers transfer some cargo to East and Gulf Coast ports.
Canada wasn’t spared either. A 13-day port strike in British Columbia during July severely disrupted supply chains, affecting an estimated $500 million worth of trade daily.
The Silver Lining: Industrial Real Estate
Despite these setbacks, port-adjacent U.S. industrial real estate markets are booming. They are among the most robust in the nation, with premium rents and minimal vacancy rates. Even though these markets have seen muted demand, due to reduced port volumes and economic challenges, some have showcased impressive absorption rates. Notably, Savannah and Houston have shown robust growth.
Developers remain optimistic about these markets. An impressive 139.8 million square feet (msf) of industrial space is currently under construction, making up 34 percent of the U.S. total. This buoyancy is evident in rising rents in eight out of the 12 analyzed port-adjacent markets.
Diving Deeper into Cargo Volumes
In 2022, ten major U.S. ports managed approximately 52 million Twenty-Foot Equivalent Units (TEUs), maintaining the 2021 momentum. Despite this, there was a pronounced drop in 2023, particularly in the first half.
While the first quarter of 2023 saw a dip in volumes across all U.S. ports, the second quarter brought some respite with eight out of ten ports recording increases. Los Angeles and Long Beach were the stars of the show with significant Quarter-over-Quarter (QOQ) growth.
These fluctuations can be attributed to varying consumer spending trends, high retail inventory levels, and a shift in spending away from goods.
West Coast vs. East: The Cargo Tug of War
2021 saw significant backlogs at West Coast ports, leading shippers to pivot their supply chains, even at the cost of time. By the second half of 2022, the East and Gulf Coast ports enjoyed a market share climax of 55.4 percent. However, 2023 witnessed a slight rollback in this trend, likely due to the labor agreement and resurgence in cargo volumes at the Ports of Los Angeles and Long Beach.
Canada’s ports, essential cogs in the nation’s economic machinery, haven’t been immune to these fluctuations. A considerable decrease in volumes was observed in the first half of 2023. The British Columbia port strike in July further compounded the challenges.
Despite these interruptions, Canadian port-adjacent industrial markets are performing well. Vancouver, for instance, stands out with a vacancy rate of just 1.2 percent and the highest asking rental rate in the country.
Looking Ahead
According to The National Retail Federation, U.S. imports by the end of the year might marginally exceed the 2019 full-year total, albeit falling short of the peaks of 2021 and 2022.
Potential threats on the horizon include a possible continuation of the Panama Canal drought, which could redirect cargo from Asian ports back to West Coast ports. Furthermore, stalled labor negotiations on the East Coast may influence volume shifts.
The industrial real estate scene is evolving towards normalization, yet it remains resilient. As the economic landscape becomes increasingly challenging, the industry will likely witness tempered absorption rates compared to the highs during the pandemic. However, historically, port markets are well-positioned, and it’s expected they will sustain some of the most competitive rental rate growths and tightest vacancy rates.
