Path Of Progress – Hot Real Estate Markets

Topics: Buying & Selling

Article from the Wall Street Journal

The Port of Houston is sizzling, and not just because it is summer in Texas.

Houston leads all but three U.S. metropolitan areas in the construction of industrial space, with more than 4.7 million square feet under way. And the rent for industrial properties rose faster there than in any other market in the year through March.

Brokers credit Texas’s rapidly expanding oil-and-natural-gas sector for rising demand for space at the ports. But a less-obvious factor also is responsible: the widening of the Panama Canal.

When Panama in 2006 approved plans to modernize its 100-year-old canal to allow for bigger ships carrying 21/2 times as much container cargo, it threatened to break the West Coast’s hold on trade with Northeast Asia.

Today, more than 70% of U.S. container traffic from Asia passes through Pacific ports, and as much as a third of those containers travel through Los Angeles and Long Beach by truck and train to consumers in the eastern half of the nation.

But once it is completed in early 2016, a wider canal will give shippers the option to bypass those ports and their more-expensive overland supply routes, and go directly to ports in New York, Baltimore, Norfolk, Miami and elsewhere.

Because of cheaper per-unit shipping costs, as much as 25% of West-bound cargo from Asia could shift to the South and Northeast, according to a report by brokerage firm JLL.

Investment in industrial real estate on the East Coast has soared, particularly near the ports which are expected to be able to accommodate the bigger ships, called post-Panamax vessels.

“Clearly, there are investor-developers who are betting that being proximate to these ports is a good investment decision to make in light of the expansion,” said Al Pontius, a senior vice president at Marcus & Millichap.

However, Mr. Pontius and other brokers warn that too much new warehouse supply could be in the pipeline. If developers “over-anticipate the need for space, they’ll negate the benefits of increased demand,” Mr. Pontius said.

“The generally accepted thinking is container traffic at those ports could increase 5% to 15%,” said John Morris, head of industrial real estate at Cushman & Wakefield. “I think it won’t be anything that matches the hype.”

There are more than 12 million square feet of new industrial space under construction at eastern and southern ports that are expected to be able handle post-Panamax ships, according to Cassidy Turley.

Today, Baltimore and Norfolk, Va. are the only East ports able to handle post-Panamax ships. While construction in Norfolk has been limited, Baltimore has 4.9 million square feet of new space on the way.

In northern New Jersey, which jointly operates its port with New York, there are an additional 2.6 million square feet of new warehouse space being built. The port’s operators are expected to complete the raising of the Bayonne Bridge by 64 feet in 2015, allowing post-Panamax vessels to dock there.

Though not yet ready, the ports of Houston, Charleston, S.C., Savannah, Ga., Miami and the Port of Everglades in Fort Lauderdale all are expected to be by 2016. There is new warehouse space under construction in all of these markets.

The eastern ports are hoping that lowered per-unit shipping costs will give them an edge over the West ports. But logistics experts caution that speed is a major consideration for their clients, especially those shipping higher-value goods with bigger profit margins.

Transporting a container from Shanghai to New York overseas via the widened canal will take shippers 36 days compared with 25 by shipping to Los Angeles and transporting it by rail, according to logistics firm IMS Worldwide Inc.

“My customers want to get their containers there now,” said IMS President Curtis Spencer. He added that overland routes through West ports have maintained their heavy traffic despite the overseas alternative already offered by the Suez Canal.

Still, representatives for the eastern and southern ports argue that even if traffic from the Panama Canal doesn’t increase as much as they expect, there are other reasons to expand supply.

Consumer-goods and e-commerce companies like Amazon also are occupying more warehouse space and their demands are expected to grow, according to CBRE. Last year, Amazon announced a deal with developer Duke Realty DRE -0.91% to build a distribution center surrounding Baltimore’s port.

“Developers are saying it makes sense to build now, and the Panama Canal is helping that,” said John Nicholson III, senior managing director of Cassidy Turley, who recently represented Frontier Logistics in a deal with developer Avera to lease 600,000 square feet for a distribution center now under construction. That deal represents the largest build-to-suit lease in the history of Houston’s port.

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