With all of the attention focused on the supply chain in the past year, it is not surprising that events involving ports grabbed some of the headlines, ranging from ships stuck in the Panama and Suez Canals, to lines of ships parked out in the ocean waiting to land at Southern California ports because of rampant congestion.
What these singular events point to is a worldwide growth in demand for port services and facilities that industry experts believe will continue to rise for many years to come.
One reason for the rising demand is simple—no one is making more land and it is in short supply around most ports. Add in governmental and environmental challenges that can add as much as a decade to the building of new facilities, and you can see why North America’s ports—especially on the West Coast—have had trouble keeping up with the growing flood of imports.
It also is widely hoped that while imports will grow, many congestion problems eventually will be left behind, according to a port study by the industrial real estate firm of Cushman & Wakefield.
C&W points to projections that imports will rise by about 21% this year, adding, “With congestion at most U.S. ports beginning to ease, the stage is set for strong port volumes and performance in 2021.”
Surprisingly, overall inbound loaded twenty-foot equivalent unit (TEU) volumes were reported to have been up by only a modest 2%, while outbound loaded volumes were down on all coasts, in total by about 5.5%, C&W reported.
Good results were booked in 2020 on the inbound side at the largest North American port gateways. California ports did well, especially Long Beach with 6% growth, as did Vancouver at 5%. On the East Coast, Savannah and New York/New Jersey, the largest players, did the best at 4% inbound growth each.
One impact of surging demand during the pandemic was that the multi-year trend of freight shifting from the West Coast to East Coast ports slowed to a stop, but the researchers expect this trend will eventually return.
This earlier shift reflected a desire for speed on the part of importers who were desperate to replenish goods that were flying off their shelves, C&W said. “The gamble was that the shorter ocean voyage to the West Coast would result in a faster journey to retailer distribution centers. However, this did not always materialize given the substantial delays at Southern California ports.”
North American importers also shifted sourcing away from China and toward other Asian countries and Mexico. U.S. imports from Vietnam grew by 27% a year in value from 2018 to 2020, while imports from China dropped in value by 10% a year during the same period.
C&W noted that the U.S. East Coast is reached more cost-effectively via the Suez Canal route than by a transpacific route transiting the Panama Canal or using a land-bridge via a West Coast port. If this sourcing trend away from China continues, volume will shift towards Atlantic versus Pacific Coast ports.
The researchers also assert that the future success of North American ports will be measured by their ability to deal with changes in consumer spending trends and operational issues that ports in other parts of the world continue to struggle with.
For example, will American consumers revert later this year to their pre-pandemic emphasis on spending disposable income on “experiences versus things”? Household spending on travel, live entertainment and restaurants have plummeted since early 2020. The share of U.S. consumption spent on all services fell by 7% while purchases of goods grew a healthy 7% from the fourth quarter 2019 to the fourth quarter 2020.
The company also said that continuing service issues and port congestion could have a bigger impact the longer they last, although most, like the problems at the Panama and Suez Canals, are believed to be temporary.
“The question is, how rapidly will port congestion fade away?” C&W said. “In past crises, such as the West Coast dock strike in 2014-15, problems subsided quickly once a solution was reached. In the current case, a return to normal will largely depend on when import volume growth moderates.”
Import Surge Continuing
The National Retail Federation also expects the retail import surge that began in the summer of 2020 will continue through this summer as retailers work to meet increased consumer demand. (Keep in minds that NRF’s numbers do not include automobiles and restaurants.)
“We’ve never seen imports at this high a level for such an extended period of time,” comments Jonathan Gold, NRF’s vice president for supply chain and customs policy. “Records have been broken multiple times and near-record numbers are happening almost every month. Between federal stimulus checks and money saved by staying home for the better part of a year, consumers have money in their pockets and they’re spending it with retailers as fast as retailers can stock their shelves.”
Under the current forecast, retail import volume is expected to remain at or above the two million TEU mark for 11 out of 13 months by this August. Before 2020, monthly imports had reached two million TEU only one time: in October 2018.
April is forecast at 1.99 million TEUs, up 23.4% year-over-year; May at 2 million TEUs, up 30.6%; June at 2.01 million TEUs, up 24.9%; July at 2.04 million TEUs, up 6.5%, and August at 2.08 million TEUs, down 1.2%. If the August projection holds, it would be the first year-over-year decline since last July.
The import surge that began last year resulted in months of backups at ports, which have faced labor shortages because of COVID-19 infections and equipment shortages because of the high volume.
“Congestion at U.S. ports is abating as container carriers and terminals adjust to the new normal,” says Ben Hackett, founder of Hackett Associates, which measures port activity for NRF on a monthly basis. “We saw the busiest February on record as the ports worked to clear the backlog, and the number of ships at anchor in San Pedro Bay waiting to dock at Los Angeles and Long Beach is dropping.”
The growth in retail sales also drove demand for warehouse space located near ports, according to the industrial real estate services firm CBRE. As major port cities came under additional strain, demand grew for additional warehouse space in markets with already scant availability.
Long Beach and Los Angeles have seen the biggest surge, with year-to-date loaded imports increasing 32.1% and 24.2%, respectively. On the East Coast, increases were experienced by Savannah (17.7%), Port of Virginia (16.8%) and the Port of New York and New Jersey (13.2%).
This increased demand for warehouse space in port areas pushed down the average vacancy rate to 3.6% at the end of 2020, one percentage point lower than the national average. Low availability may persist for some time. Only 75 million sq. ft. are under construction in these markets, with more than a third preleased. All of this equates to rental rates hitting record highs, CBRE says.
Retailers and manufacturers learned to build up a healthy safety stock to limit supply chain disruptions, according to John Morris, leader of CBRE’s Americas Industrial & Logistics business. “While this will help protect consumers, it has put a strain on seaport industrial markets, as they need more supply to meet this surging demand. Without more construction, we will see rental rates continue to soar.”
Seeking Airport Proximity
Distribution firms want to be close to major air hubs to expedite speedy deliveries, but there often is a premium price to pay. According to a separate report from CBRE, industrial rent premiums average 13% in the top U.S. airport submarkets and reach as high as 47% in the No. 1 submarket of Chicago O’Hare.
In this era when customers take next-day delivery for granted, it should not be surprising that third-party logistics firms, e-commerce companies and retailers are all vying for industrial space with proximity to major airports. These companies appear willing to pay a premium for this coveted but limited supply real estate to meet customer needs for rapid order fulfillment. The top airport submarkets by cargo volume garner rents above the local market average.
Third-party logistics providers (3PLs) are the main drivers of this activity, accounting for 29.6% of activity in major airport submarkets, followed by general retail and wholesale (24.4%) and pure-play e-commerce-only companies (16%). Others include food and beverage at 12.9%; manufacturing; 5.9%; automobiles, tires and parts, 4.8%; medical, 4%; and building materials and construction, 2.9%.
“As e-commerce providers and retailers compete to offer faster delivery times, air freight will increasingly be a key component of distribution strategy,” says Morris.
Rent for warehouses and DCs around major air cargo hubs should continue rising, especially in markets with limited development space, he stresses. “Customers today expect fast delivery, but there is a cost associated with leveraging air transportation for e-commerce delivery.”
The submarkets with the highest rent premiums are Chicago O’Hare (47.1%), Oakland (32%), Dallas/Fort Worth airport (22.1%), Los Angeles County South Bay (12.9%) Inland Empire/Ontario, CA (12.2%), the Atlanta airport (7%), Louisville Southside (3.1%), Miami Airport/Doral (2.8%), Cincinnati/Northern Kentucky (2.8%) and Indianapolis Southwest (2.0%).
At more than $6 trillion, air cargo accounted for approximately 35% of the total value of global trade in 2020, according to the International Air Transport Association. Shippers and logistics operators use air cargo to quickly import perishable or high-cost goods from distant locations, such as smartphones from China, salmon from Scotland and roses from Ecuador.
COVID-related travel restrictions led to a 4.6% drop in air cargo volume in March 2020, CBRE says. But after restrictions were eased in the second half of 2020, volume increased as companies sought to quickly stockpile inventory to avoid shortages. Many cargo flights also moved large quantities of personal protective equipment throughout the COVID-19 pandemic.
But the future looks bright to CBRE. “As the U.S. economy continues to recover from the pandemic-induced recession, demand for—and rental rates commanded by—airport-adjacent facilities are set to further take flight in 2021 and beyond.”
