Port Cities Face Warehouse Glut as Trade Flows Rebalance

The Covid epidemic with the rush to import and export freight through major U.S. deepwater ports produced a wave of investment in the construction of new distribution and warehouse facilities nearby. That has led to excess capacity as trade flow has rebalanced, with increasing vacancy and tepid rent growth leading to a slowdown in new construction, according to a new report from Cresa, a CRE tenant advisory firm.

“2024 rent growth is on pace to register the slowest growth since 2012,” the report said. Overbuilding and its effect on rents may create opportunities for tenants to negotiate rates, especially for early renewals.

The lease spread between the port and non-port markets has increased, with non-port cities and lease rates growing 7.4% a year since 2014, while port cities have seen 7.8% annual increases. “The compounded annual growth rate (CAGR) for asking lease rates since 2014 for both port and non-port markets is significantly higher than the past year, which shows that the market is slowing. Still, many of the port markets outpaced non-port markets in asking lease growth rate for the past year,” the report stated.

Direct vacancy and availability increased in every port market studied. In fact, inoccupancy more than doubled in the past two years in all of them, with the exception of Houston. Net absorption fell by 2.1 million square feet in Los Angeles, 1.4 million square feet in New York/New Jersey, 1.7 million square feet in Oakland, and 202,600 square feet in Seattle. In other markets, absorption rose. Each area also recorded significant increases in square feet delivered. Only one market – Virginia – saw an increase in projects under construction. In all others, aside from Seattle, where it remained unchanged, construction fell.

However, this drop may be temporary as inventories and goods imports appear to be rising, increasing the flow through distribution centers. “Demand for mid-sized spaces in the 75,000 to 150,000 range continues to grow, as occupiers move away from spaces 300,000 SF and larger,” the report noted. Availability for spaces over 250,000 square feet increased more than 5.8 times in two years, it added.

On the positive side, major ports have seen a rebound in activity due to high containerized cargo volumes, e-commerce growth and robust international trade, the report said. There has also been significant investment in infrastructure, automation and sustainability initiatives. Capacity in deep water ports has soared to its highest level since September 2022, with a sharp increase in 20-foot equivalent units (TEUs). TEU throughput is a measure of the number of containers handled by a port or container yard and the higher the throughput, the more efficient a port is considered to be.

Long Beach, CA saw the highest boost, with TEU throughput rising 20%, while in Los Angeles it was up 17.4%. In all but Charleston, TEU throughput was above 10% for the year in each of the eight major ports: Oakland, Seattle/Tacoma, Port of Virginia, Houston, Savannah, Port of New York and New Jersey.

The report noted that major ports have seen a more balanced trade flow compared to the big fluctuations that occurred before. “Import levels have moderated as supply-chain disruptions eased and consumer demand stabilized, while exports have experienced modest growth driven by recovering global markets and trade agreements,” it stated.

Meanwhile, concerns about the state of the economy and fears of inflation, congestion and supply chain disruptions, and labor disputes could also affect the health of U.S. ports. “A softening job market, cautious consumers, and dwindling savings may impact cargo shipments in the next two to three quarters,” the report noted.

The report did not address the potential impacts of sharp tariff hikes that Donald Trump has said he will introduce if re-elected. A November 2019 analysis by the Port of Los Angeles found that following the imposition of tariffs in the first Trump administration, cargo volumes at the Port of Los Angeles for October 2019 declined, “marking 12 consecutive months of declining U.S. exports, 25% fewer ship calls, and a 19.1% decrease in volume compared with October 2018.”

Port cities face other challenges as well. Insufficient land availability, outdated infrastructure, rising construction costs and the uncertainties in economy are among them. On the other hand, the report identified opportunities for investments in port infrastructure and modernization to improve logistics efficiency and advancements in logistics technology.