Industries Commercial Real Estate

Anchor in the storm?

Growth in state ports could mean better times ahead for close-in markets.

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Typically a big, empty warehouse would be no cause for celebration for a developer. Yet Copeland Rhea, market leader for South Carolina-based Johnson Development, is happily sitting on one — a 330,000-square-foot spec building his company built in the S.T. Holland Intermodal Park in Isle of Wight County in 2007. “The number of companies looking at our facilities certainly is picking up,” says Rhea. Plus, the building, close to Interstate 95, is only 24 miles from the Port of Virginia — the third largest port on the East Coast for container traffic.

If a high tide lifts all boats, as the saying goes, then a good year at the port can mean more business for some segments of commercial real estate. Vinod Agarwal, director of the Economic Forecasting Project at Old Dominion University, estimates that general cargo tonnage coming through the port will rise 2.8 percent this year to 15.8 million tons. Compared with last year, that’s just a “modest increase,” Agarwal notes. Still, it’s a long way from the depths of the recession in 2009 when tonnage dropped to 14.9 million tons. 

The first half of this year was slow but the rest of 2011 should be better, he says. New-auto sales and taxable sales are increasing, “so these are some good signs that we’re coming out of the bottom.” 

That’s good news for markets and buildings that serve tenants in need of port services, especially shipping and receiving. Several major deals this year seem to indicate that parcels close to the port are back in favor. For instance, Belgium-based Katoen Natie, a logistics company, announced in March that it would spend $10.5 million to buy and refurbish the 662,000-square-foot former Ford Motor Co. Norfolk Assembly Plant next to the Elizabeth River. The project is supposed to create about 225 jobs.

Lumber Liquidators, a Toano-based retailer of hardwood flooring, leased 515,000 square feet of warehouse space in West Park, an industrial park in Hampton, next to Interstate 64.  In April, California-based California Cartage Co. leased 385,320 square feet at the Virginia Commerce Center in Suffolk, where it will provide logistics services for the Target Import Warehouse located nearby. Then in May International Paper announced plans to reuse part of its closed mill in Isle of Wight County to mill fluff pulp, which would be sold on the global market. (Fluff pulp is a type of chemical pulp used in baby diapers.)

Russell Held, deputy executive director for development at the Virginia Port Authority, says part of the reason localities around the port are getting these deals is because of the availability of empty buildings. That wasn’t true about five or six years ago. “Some company might come in and say, ‘I need 150,000 square feet, and I need it tomorrow.’ That was our weak link. We didn’t have that space available,” he says. Port officials talked up that point with developers, and Held says the private sector responded with speculative buildings like the one Rhea is marketing at Holland Intermodal Park.

The recession interrupted the spec building market, Held says, and today financing conditions are more difficult. “But I think we’re going to see it again, speculative development,” he says. This year the port’s economic development team estimates about 3.5 million square feet of port-related space will be bought or leased, he says. “We think we’re going to see the market demand come back around” for both speculative development and build-to-suit projects. 

The Virginia Inland Port in Warren County just north of Front Royal has spurred some commercial projects and spec development, too. Rhea’s company was in the process of building two spec buildings when Home Depot approached them about building and leasing a 465,000-square-foot warehouse. Johnson Development had just completed the project for Home Depot when the recession stopped its plans to finish the other two buildings, Rhea says. But the pads and site work there is done, so Rhea thinks he’ll be able to move more quickly than competitors if a prospective tenant appears. “The market is very competitive right now. “We really in our minds have an advantage because … all we have to do is go vertical on the buildings” to complete a Class A industrial project, he says.
Some major infrastructure changes are affecting port-related development as well. A 4.5-mile-long rail line down the median of Interstate 664 and Route 164 that connects APM Terminals’ port facility in Portsmouth to the rail network of Norfolk Southern Corp. and CSX Corp. in Suffolk is now in use. It replaces a rail line that had 14 road crossings. The $60 million project was completed in December 2009 but sat idle for about a year. Now a second track along the same corridor is being built and should be ready by the end of the year.

The bigger rail project for the port is Norfolk Southern’s Heartland Corridor project, completed in September 2010. That project involved expanding 28 tunnels along rail lines connecting the port to Chicago and markets in the Midwest to make room for double-stacked trains. The project reduced the time from Norfolk to Chicago from four days to three and cut 250 miles off the trip.

That kind of transportation upgrade raises the port’s value in the eyes of companies comparing East Coast ports, says Kevin Hughes, Suffolk’s director of economic development. “In this business folks are always looking for what’s going to be the fastest, cheapest way to get to their consumers,” he says.
The proposed U.S. 460 corridor project could also speed the movement of freight in and out of the port. That project, planned as a public-private partnership, would extend 55 miles between Suffolk and Petersburg as a four-lane, limited-access, divided highway. It would run parallel to the existing U.S. 460. With a price tag estimated at between $1.5 billion and $2 billion, the project is sparking opposition from those who want the state to back projects that will do more to relieve traffic problems in congested areas, such as Hampton Roads and Northern Virginia.

For those who have properties near the proposed road, though, it could be a big benefit. “That’s going to be very helpful for us because it basically goes right through the industrial park, and we just happen to be in a location where we can benefit,” says Rhea of Johnson Development.

Craig Cope, vice president for Liberty Property Trust in Richmond and Hampton Roads, says the 460 expansion could mean a new swath of development along the western Suffolk/Isle of Wight County corridor. “As they push traffic out to 460 and off of 64, it would get more development if more trucks are directed that way,” he says.

Just a few years away is the completion of the $5.2 billion expansion of the Panama Canal. That will open the door to much larger cargo vessels from Asia being able to reach Gulf Coast and East Coast ports, instead of delivering on the West Coast where goods are then shipped to U.S. companies. This new corridor is expected to produce lower transportation costs and thus boost the tonnage coming into Norfolk and other East Coast ports.

Projects like that one, plus a slowly improving economy, have many feeling hopeful. “What we think is, if [companies] are going to go with one East Coast port, why not the mid-Atlantic and why not Virginia?” says Held. “We are a true crossroads.” Plus, the port here has the advantage of a natural deep-water harbor and doesn’t require the major dredging work needed by other major ports, including New York, Charleston and Savannah.

When the Panama Canal expansion is done, Hampton Roads should see some impact, says Agarwal of ODU. “This port will become more competitive,” he says. “It’s in a position to take advantage of the big ships.” 

September Interiors

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