LA/Long Beach Ports Have Not Regained Their Market Share
The coronavirus pandemic reshaped the supply chain in a way that is still reverberating among retailers and shipping customers.
The shift away from shipping cargo to the West Coast ports, led by Los Angeles and Long Beach, to other ports on the Gulf and East Coast has been sticky thus far as retailers and others who ship their goods from overseas are looking to reduce the risk of new delays wherever possible.
The impact of market share moving to other ports is still playing out, but experts who spoke with Bisnow were largely bullish on the near future for LA's tight industrial real estate market.
According to a year-end report from Savills, the Gulf Coast and East Coast ports combined captured 51.8% of the market share in 2022, up from 44.5% in 2016, when an expansion to the Panama Canal made it easier for the ships that would have gone to the West Coast to have the option to use ports on other coasts.
Houston’s port was one of many that directly benefited from the shift: The city’s port saw a 15.1% increase in TEU volume in 2022, bumping it up to the fifth-busiest port in the nation by that metric. Los Angeles and Long Beach’s ports were briefly unseated in late 2022 as the nation’s busiest in terms of container volume by the Port of New York and New Jersey. By the end of the year, Los Angeles was back at No. 1, but NY/NJ surpassed Long Beach, claiming the second spot, according to the Savills report.
This shift is part of a big-picture change among shipping clients, which are looking to diversify ports of entry and more to decrease the chances of a repeat of the logjams of the last couple of years.
There are a number of factors affecting the decisions to run shipments through one port over another. Ongoing labor negotiations at the California ports are frequently raised as a risk for importers, with many pointing back to work slowdowns that came out of the last round of protracted discussions in 2015. The lingering effects of the congestion that LA and Long Beach saw at the height of the pandemic are also still fresh.
These concerns and others are leading to an increasing desire by companies to diversify their supply chain like an investment portfolio, spreading their shipments around.
“You're going to see people want to diversify not just between continents [where your goods originate], but also between the ports that they're feeding,” GXO Logistics Chief Investment Officer Mark Manduca said. “Just having one manufacturing hub in one particular country, moving it with one shipping line through one particular port into a country is no longer deemed fit for purpose.”
What this means for the ports of Los Angeles and Long Beach, and whether they can regain that lost market share in the future, is yet to be seen. But experts said they are optimistic for the future of the ports and the warehouse market in the surrounding region that has seen banner years as a result of the surge of goods entering the country at the San Pedro Bay.
“West Coast ports are still going to flourish because the demand is definitely there structurally,” Manduca said. “All we're seeing right now is a shift in the way that people are mapping themselves out from a port perspective.”
Though a loss of market share “absolutely did happen” for LA and Long Beach’s ports over the last year, Newmark National Industrial Research Managing Director Lisa DeNight said, there is such a large population center there that the ports are serving, and that population center is not going anywhere anytime soon.
Incredibly tight vacancy persists in the port-proximate Los Angeles and Inland Empire markets, with year-end vacancy rates at 1.3% and 1%, respectively, according to reports from Cushman & Wakefield for the fourth quarter of 2022. Both vacancy rates increased year-over-year and quarter-over-quarter, but the increases were less than a percentage point.
“A big reason why a lot of importers looked elsewhere is that they literally couldn't find space in the LA and Long Beach industrial market,” DeNight said. “So I think if there is available space, that is not a bad thing and that would be to the benefit of people who want to site there and who have since been boxed out.”
Pre-leasing a building long before it was complete was recently the norm, but that breakneck pace has been slowing.
“Here in the Inland Empire, vacancy is still very low — below a healthy level to have for typical demand,” Cushman & Wakefield Managing Director Rooney Daschbach said. “But what we're not seeing is the same sort of demand that we were becoming accustomed to, where if you built a Class A building, you would lease it fairly quickly.”
The next year could present some additional hurdles for warehouses, as a double-digit decline in cargo volumes is expected “as consumers continue to shift their purchases to services over goods,” a report from KBC Advisors notes. The first half of 2023 is expected to see an almost 17% decline compared to the first half of 2022, the report said.
Pointing to a 69% increase in asking rents over the course of 2022 alone in the Inland Empire, Gregg Healy, Savills executive vice president and head of industrial services for North America, said that the slight slowdown might be a good thing for what has been largely insatiable demand over the last three or so years. Tenants in particular may start to feel some relief.
“It's unreasonable and it's not sustainable either,” Healy said. “So if there is a rebalancing, it also means we’ll get a better equilibrium in places like LA, Long Beach and the Inland Empire.”
CORRECTION, MAR. 13, 11 A.M. PT: A previous version of this story incorrectly stated the rate of rent growth in the Inland Empire over the last year. The story has been updated.
