Why Industrial Occupiers Are Doubling Down On Space Near Ports

A dramatic uptick in shipping costs is driving demand for industrial space near well-placed ports, leading many companies to pay a premium for distribution facilities in strategic locations.

“This trend is most pronounced in the mammoth port markets of Southern California and Northern New Jersey,” says Mark Russo, director and head of industrial research at Savills, noting that average asking rents for warehouses within 5 to 10 miles of those “regions run between 41% and 63% higher than in outlying areas 40 to 60 miles away. But, paying a premium for facilities in strategic locations often makes sense, given that transportation can make up 50% of total occupier costs, while real estate often comprises less than 10%.”

Rents in major port markets grew by an average 15.6% over the past year, nearly double the national industrial average, and range from $478 psf in Savannah to $13.80 psf in southern California. Scarce land availability is also expected to continue to impact the sector: Prologis reports that construction starts have risen to an all time high of 120 million square feet for industrial, but that development is mostly in low-barrier secondary and tertiary markets and the outlying submarkets of inland markets.

Despite rising rents, however, Russo also points out that local transport costs go up by 15.2% for every additional 10 miles a warehouse site is located from a port.

Meanwhile, against the backdrop of rising inflation and a challenged supply chain, freight rates have also taken a hit, with some rates tripling over the past year. Domestic transport costs also rose by 35.1%, according to the Cass Freight Index, which tracks average truck, rail and air freight rates within North America.

“These rising costs are making proximity to major ports increasingly valuable for industrial occupiers,” Russo says. “A trend of manufacturing onshoring—such as the January announcement that Intel will build two semiconductor plants in Ohio—has the potential to reduce dependency on ocean freight. But, even if more goods are produced domestically, they would still need to be moved between and within regions, and warehousing locations will continue to have a major impact on shipping costs.”