Shifts in U.S. Industrial Hotspots Forge New Development Opportunities

The pandemic was an epic disruptor. In a matter of weeks, it grounded international travel, sent millions of workers home from the office, froze commerce and upended global supply chains. The long-term effects of these changes are still manifesting, but they are proving to be significant. While the commercial real estate industry has focused on the disruption to the office sector, the re-mapping of global supply chains might prove to have an outsized impact on the industry. 

For decades, the San Pedro Port system in Southern California has been the largest port of entry in the nation and one of the largest in the world—and it has a sprawling industrial real estate sector to support it. In the years since the pandemic, however, supply chain disruptions and trade tensions with China have suppressed cargo volumes at the port system and forced businesses to look for alternative trade routes. 

Now, industrial real estate activity is following the action.

Decreasing Reliance on a Mega Port System 

The Port of Los Angeles and the Port of Long Beach make up the San Pedro Port Complex in Southern California. Serving as a direct trade route to Asia, it is the largest port complex in the country, and its sheer magnitude cannot be understated. One in five trade containers that come into the US travels through the San Pedro Port Complex, and it generates $5 billion per year in revenue. Together, the two ports create more than 1.5 million local jobs and 3 million US jobs. It is the ninth largest port system in the world, and has held the title for more than two decades. New trade routes and supply chain strategies, however, are diminishing the nation’s reliance on Asia and therefore the San Pedro Port Complex. 

In the immediate aftermath of the pandemic, the Asian supply chain route jammed. By the end of 2021, there were as many as 109 cargo ships waiting in a line to get into the port to unload. The reason was a combination of factors, principally a shortage of truck drivers to move goods off of the dock and a burst of consumer demand when pandemic sheltering mandates ended. The latter caused a bottle neck of ships. This would be the first of a series of challenges for the port network. Trade tensions with China and rising container costs have encouraged businesses to cut deals with suppliers in other parts of the world or to near-shore or re-shore manufacturing. In addition, population growth in the Sunbelt has redistributed where goods are delivered, prompting businesses to change supply chain strategy. Lastly, labor tensions at the West Coast ports and a rising threat of strikes are adding yet another reason for businesses to find alternative ports of entry to preserve operations. 

As a result, there has been an incremental decreasing reliance on the Port system. In 2022, cargo volumes at the two ports fell 26%, and the month of October cargo volumes fell to their lowest level since May 2020. The disruption remained through the first half of 2023, with port volumes down 32% through June. In April, John McLaurin, Pacific Merchant Shipping Association President, wrote “Now that pandemic cargo volumes have leveled off, the decline in market share has accelerated.” 

The decline in activity is particularly important to industrial real estate stakeholders. To support the massive San Pedro trade system, Southern California has more than 2 billion square feet of industrial supply, making it the largest industrial market in the country. At one point, the market boasted a sub 1% vacancy rate with many new industrial developments leasing well before completion. In the last two years, however, the vacancy rate has climbed as new products have come to market and demand has decreased. In August, The Orange County Register reported that Southern California’s vacant warehouses have tripled in the last two years. 

New Industrial Hubs Emerge

The decrease in cargo volumes at the San Pedro Port Complex is not ubiquitous across other US trade routes. During the same period that cargo volumes fell 26% in San Pedro, they rose 12% at the New York and New Jersey port complex, and CBRE reports that the port is currently handling 30% more cargo volumes than it did before the pandemic. 

It could be the beginning of growing market share for ports along the East Coast. New York investment firm Cowan found that West Coast ports could lose 10% of market share to the Atlantic trade market—and there are other rising stars that support the theory. The Savannah, Georgia, port is the fourth largest in cargo container traffic, and Houston, Texas’ port is sixth. These ports are also able to accommodate more market share as businesses adopt new supply chain strategies. 

It is worth noting that in 2023, North American cargo volumes fell 20%, due to the pressure of a recession and general economic uncertainty. West Coast cargo volumes fell by 24%, while East Coast cargo volumes fell only 18%. New York and New Jersey illustrated the strength on the East Coast. As CBRE said in a 2023 report, “As economic conditions are stressed throughout the region, the New Jersey industrial market remains resilient.”

Ocean ports aren’t the only rivals for San Pedro. Land-based ports of entry through Mexico are also becoming increasingly popular as near-shoring efforts gain momentum since the start of the pandemic. In 2022, truck land crossings from Mexico were up 12.5% from 2019, and they are continuing to grow steadily. In fact, The Bipartisan Infrastructure bill pledged $3.4 billion to improve land ports of entry into the US. 

The increasing activity has been a boon for the surrounding industrial market. Currently, the New York and New Jersey industrial market measures just under 368 million square feet, and is growing. Developers delivered 9 million square feet to the market last year, and there is currently 10 million square feet in the pipeline, of which 22% is already pre-leased. CBRE says that despite new construction, “Big-box demand is still growing but becoming more balanced with supply. As market rents start easing from rapid growth, owners are prioritizing occupiers with strong balance sheets and long-term needs.” As a result of the low vacancy, rents in the region are up 36%. 

The development pipeline around the New York and New Jersey ports are an example of the explosion of activity that could develop around other US port systems as supply chains become more diversified. There are key opportunities to develop industrial property along growing trade routes. But as developers seek out new opportunities, it is important to utilize technology tools to insulate investments—especially when betting on new markets and emerging demand. Software like Northspyre gives investors valuable insights into new development markets by using predictive analytics to better estimate real estate outcomes and investment viability. It supports developers throughout a project by compiling data in a centralized command center where developers can visualize the project’s progress and keep track of essentials, like budgets and spending. With these tools, developers are able to reduce budgets and deliver on schedule, placing them ahead of competitors. That’s tremendously valuable when entering a new and growing market. 

The Southern California ports have been a dominant powerhouse for years. Although they will remain an important player in US trade, as supply chains diversify, new ports are gaining market share. Developers should be ready to support that change.

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