Oakland’s Port Challenges Mirror SoCal. Demand Is Stacking Up, But CRE Can’t Keep Up

With a slowdown in cargo traffic headed for the ports of Los Angeles and Long Beach, the Port of Oakland seems positioned to take advantage of diverted shipments, but the area’s aging industrial stock and high land prices have replicated some of Southern California’s challenges, albeit on a smaller scale.

Many of the same dynamics affecting the Southern California ports are at play in the northern part of the state, restricting Oakland’s import and export capabilities, sending cargo on a longer route to the East Coast and requiring developers to get creative.

Among the challenges present at the Port of Oakland are logistics issues and low availability of warehousing and distribution real estate, leading industrial investors to look to other East Bay metros.

“There is an overall shortage of warehouse space due to increased demand coupled with increased e-commerce. This has impacted U.S. ports including the Port of Oakland with cargo moving through the system more slowly and containers sitting on the port for longer periods of time,” Port of Oakland Maritime Director Bryan Brandes wrote in an email to Bisnow. 

Oakland’s industrial stock is getting old, CBRE Senior Vice President Kevin Hatcher said, with an abundance of properties built in the 1950s and 1960s that just don’t meet the needs of today’s warehouse operators. The buildings that populate the land around the Port of Oakland need serious capital commitments to bring up to modern standards, which include taller clear heights, more dock doors and parking lots that developers simply didn’t build 70 years ago.

“So, the only buildings that you see that are Class-A are when an industrial developer has come in and spent the time and the money to knock down the existing building and rebuild on the site, which … the rents have justified that in recent years, but it's very hard. And it takes a long time, it takes a lot of capital. And there's a lot of risk involved. So, there's not a lot of folks doing that,” Hatcher said. 

Instead, investors look to markets like Richmond or Fremont, where there is more available land and newer developments are easier to get out of the ground, but that are near enough to the port to act as serviceable distribution centers. 

Just under 3M SF of industrial properties were under construction near the Oakland port as of Q3, according to a Cushman & Wakefield report, the smallest amount of development in the pipeline when compared to 12 other metros with ports, including Los Angeles, Seattle and Houston. The port-adjacent submarket in Oakland carries a vacancy rate of 3.7%, according to Cushman.

Overall in Oakland, the industrial market remains tight but has loosened just a bit, which Cushman & Wakefield Executive Managing Director Jay Hagglund said represents a correction more than a downturn. 

“We're seeing maybe the tenants are a little more empowered. First of all, rents are not going up. And in Oakland, I'm not talking about Class-A warehouses, I'm just talking about the older buildings that have some functional issues, you know, but rates have flatlined,” Hagglund said. 

Prologis Director and Head of Research Heather Belfor said because demand for industrial space in and near the port is so high, the cost of the land itself proves to be one of the biggest hurdles for new development.

“Because if something is obsolete, and small, how much can you really renovate it to … facilitate the automation that someone would ideally want, you may not be able to do that with a renovation. So generally speaking, it's a full redevelopment, meaning you tear down and rebuild it," Belfor said. “And that doesn't always pencil with the cost of land in that area. Like it doesn't make sense, because the rents that you'd have to pass through just seems like it's just too much. So that's why newer supply has been further out over time."

In fact, Belfor said, land values are so high around the port that developers can turn a profit without even standing up a building, jumping on the growing trend known as industrial outdoor storage, or IOS.

With just a vacant parcel like an unused parking lot and perhaps a fence to keep goods secure, developers are increasingly finding success with IOS as an alternative to traditional industrial development.

“The premium on those rents, that you get even over a logistics facility, is so high, because you don't have a building on it. You don't have to construct anything,” Belfor said.