NORTHEAST WAREHOUSE MARKET

March 7, 2008
 
NORTHEAST WAREHOUSE MARKET GAINING MOMENTUM FROM SHIFTING TRADE PATTERNS by Laura Stone Mortimer, Senior Economist

Last year was one of shifting trade flows moving from Asia into the U.S. Growth in the market share of containerized imports arriving at West Coast ports from Northeast Asian countries declined by 1.5%. The same cannot be said for East Coast ports, which experienced an increase in market share of nearly 9%, thanks to increases in all-water shipments. This is anticipated to be a structural shift in trade flows, where goods traveling to the East Coast move by all-water services rather than by intermodal stacktrain service from the West Coast. Statistics provided by the Intermodal Association of North America show that in 2007, eastbound shipments of intermodal containers from the West Coast to the Northeast declined by 27% and shipments to the Southeast declined by 16%.

The comparative advantage held by West Coast markets as import gateways to the U.S. is being threatened by rising intermodal fees and increasingly stringent environmental regulations. The East is gaining market share of the containerized import traffic as a result of faster vessels, which lower the transit time, and lower intermodal fares from the East and Southeast ports that are located in lucrative, population-rich markets.

That Northeast port and distribution markets are benefiting from increased import traffic is evidenced by demand for warehouse space. While most markets nationwide are feeling the pressure as a result of the U.S. housing correction and the decline in consumer spending, the Northeast region continues to perform well and has yet to see demand wane.

A regional analysis of our markets shows that warehouse availability in the Midwest, Southeast and West Pacific all experienced an increase in the warehouse availability rate of 50 basis points (bps) in 2007. Net absorption rates in these regions have slowed to roughly 1% in 2007, compared to 3% in 2006. The Northeast, however, has held steady at 1.9% annually over the past two years. Sustained demand is due in part to large importers and retailers who desire distribution centers on the East Coast, in order to take advantage of all-water services, which avoid the higher costs associated with intermodal transport. Time-sensitive merchandise and shipments traveling to the interior of the U.S., however, will continue to travel through the West Coast ports and to utilize intermodal services that offer faster shipping times, despite higher fees.

The historical dominance of West Coast port and distribution markets may be threatened by this structural shift, with western railroads surrendering the Northeast industrial markets to all-water services. Shippers are importing more containers through East Coast ports to reach the most heavily populated areas of the U.S. In the long-term, shifting trade flows will positively affect industrial space in the Northeast, creating sustained demand as a result of relative cost advantages and more available land than on the constrained West Coast. The expansion of the Panama Canal by 2014 will increase trade flows, largely to the advantage of East Coast. As a result, the Northeast warehouse sector should outperform warehouse sectors in other divisions during this time of uncertainty, experiencing falling availability and rental gains.