Unhappy recent history arising from congestion and labor problems shocked the supply chain so profoundly that the Gulf and East Coast ports perennial threat to divert freight away from West Coast ports appears to be finally bearing fruit.
That is one of the conclusions of the May Industrial Real Estate report published by Yardi Matrix, a research firm that provides market intelligence about various segments of commercial real estate.
Past issues that plagued West Coast ports during the Covid 19 crisis seem to have cleared up by now but threaten to return. “After a prolonged period of bottlenecks and backlogs, the supply chain has normalized and the new normal for major U.S. ports appears to be emerging,” YM observed.
“Eastern seaports have benefited from capital improvements, while Western ports have struggled with backlogs, a lack of industrial space and labor issues that spooked shipping companies.”
Longshoremen’s union labor talks covering 22,000 workers have remained stalled, although the actual impact on West Coast industrial markets has been minimal so far. Vacancy rates remain razor-thin and rent growth is robust, YM pointed out.
In the Inland Empire, in-place rents have grown 18.2% over the last 12 months, with a vacancy rate of 1.9%, while Los Angeles has seen 12.3% growth and a 2.0% vacancy rate.
Volume at nearly all major ports declined year-over-year in the first quarter, reflecting issues including the slowdown of consumer trade. But the impact has been more pronounced at ports in the western U.S., according to YM.
Through April 2023, container volumes were down year-over-year in eight of the top nine U.S. ports, with Houston (up 3.4%) the lone exception, based on reports from local port authorities.
Year-over-year volume was down at other major ports between 9.0% (Virginia) and 31.5% (Los Angeles). West Coast ports were down compared to pre-pandemic levels, while the major ports in other parts of the country remain up from 2019 levels.
Overall import volume fell 11.8% year-over-year in March, according to the U.S. Census Bureau. Consumer demand for goods has fallen steadily over recent quarters as pandemic restrictions have eased, allowing people to spend money on services again, while inflation has eaten away at their discretionary income, YM explains.
Further depressing import volumes is the process of destocking, it says. In response to supply-chain backlogs, many companies beefed up inventories. Inventory-to-sales ratios have remained elevated so far this year, and imports are unlikely to rebound until some existing inventories are cleared.
Overall, the industrial market seems to be holding its own in the face of economic turmoil. National in-place rents for industrial space averaged $7.18 per square foot in April, an increase of three cents from March and up 7.3% year-over-year.
Large coastal markets continue to see the biggest gains in the average rate of in-place rents, which is reported to have grown by 18.2% in the Inland Empire, 12.3% in Los Angeles, 9.7% in New Jersey and 9.2% in Boston.
The national vacancy rate in April increased 20 basis points from the previous month to 4.1%. Industrial occupancy remains solid despite record-level new supply being delivered in recent years and an under-construction pipeline that represents 3.4% of stock, YM pointed out.
The lowest vacancy rates in the country are in Columbus (1.7%), the Inland Empire (1.9%), Los Angeles (2.0%) and Charlotte, NC (2.4%).
The average rate of new leases signed in the last 12 months rose to $9.58 per square foot through April, which is $2.40 more than the average for all leases.
Seeing a Downturn Coming
According to YM, occupier demand and absorption are cooling as consumer spending takes a hit from rising inflation and as companies tighten their belts as consensus economic forecasts call for a recession to start in the second half of 2023.
“To be sure, demand remains well to the positive side, but it is braking somewhat, particularly among consumer-related businesses, the company explained. “Firms that operate in the ecommerce and brick-and-mortar retail segments are trying to conserve cash and have become more conservative in projecting space needs.”
Cited as a prime example is Amazon, which has contracted occupied space slightly in recent months by canceling some announced expansion plans, subleasing space and closing some facilities. Amazon remains the biggest industrial user and continues to expand, YM said its slowed growth, reflects the more cautious environment.
Nationally, 616.4 million square feet of new industrial space are under construction. An additional 721.9 million square feet are currently in the planning stages of development.
The first four months of the year saw 162.4
million square feet of industrial space delivered.
Dallas–Fort Worth has had the highest amount of deliveries this year, with 17.6 million square feet of new space coming online.
“This is more than twice the amount of the second highest market, Indianapolis, which has delivered 8.3 million square feet so far in 2023,” YM noted.
After decreasing for nine consecutive months,
the warehousing and storage subsector added
4,000 jobs in April.
“Warehousing and storage employment was already growing quickly in the second half of the last decade, but the pandemic-driven ecommerce boom led the subsector to add workers at a frenzied pace,”
However, warehousing and storage employment is now only slightly ahead of its pre-pandemic trendline. But in spite of this subsector cooling in recent months, there are twice as many warehousing and storage workers in April as there were at the end of 2016, YM said.
What does the future hold? Although the amount of space under construction is high, YM said that new starts are slowing, with 86.8 million square feet of new stock slated to begin construction this year. YM said this slowdown partially reflects concerns about slowing demand.
However, the biggest reason for reduced starts is tightened bank underwriting standards in the wake of the threatened and real failures at SVB Bank, Signature Bank, Republic and others.
“Construction debt remains somewhat unavailable, as banks are financing relationship customers; private equity is taking up some slack, but terms and cost are far less favorable for borrowers. the company said. “That means some projects won’t pencil out or will need more equity to proceed.”
YM also made the point that while industrial property values have cooled, they are still better than most other property classes.
In first quarter 2023 industrial market had its first negative quarterly return in in the MSCI/PREA U.S. AFOE Quarterly Property Fund Index. Industrial’s appreciation return was -1.6% in the quarter. compared to -3.9% for the entire index.