John Carver takes a look at the latest trends in US airport real estate.
An axiom of commercial real estate is that you can get a good sense of the future by looking at your local airport. In general, when airports prosper, so does development: first in their immediate vicinity, then as a ripple effect into the greater metropolitan area.
Airport traffic is a bellwether that plays out in the availability and cost of surrounding commercial and industrial real estate. And despite the tendency by some to focus strictly on cargo plane activity, the volume of passenger aircraft is even more important. Despite many dedicated commercial aircraft, the majority of cargo travels in the bellies of passenger planes.
On this basis, the outlook for growth in both in US airports and in surrounding commercial real estate portfolios is cautiously optimistic. Passenger volumes are now approaching levels last seen in 2007, prior to the start of the recession. Downsizing and consolidation of cargo carriers over the last two years have largely been completed, and the industry appears to be tentatively in growth mode once again.
Higher fuel costs continue to plague airline operations, but planned and ongoing improvement projects should offset some of these rising costs over the long-term. The development of larger aircraft, such as the new B747-8 passenger craft that can hold greater cargo volumes, as well as terminal and infrastructure improvements at many major airports, are positive signs. In addition, airports are increasingly partnering with logistics firms to improve shipping efficiency.
Driven by increased trade, demand for industrial real estate near major US airports is beginning to pick up. Market conditions should continue to stabilise through the remainder of 2011 and strengthen in 2012 especially after Japan's supply chain distribution issues are solved. Air cargo volumes through US airports increased by 11% in 2010 to 28.2 million metric tonnes, approaching the 2007 peak when 30.4 million metric tonnes were shipped.
Little new industrial real estate product has been delivered since the downturn began causing extra cargo moving through airport distribution facilities to backfill space that was under-utilised. Additionally, some airport industrial markets where geographic restrictions are challenging, such as LA and New York, have seen little construction activity in several years. The result has been fairly steady market conditions/vacancy rates throughout the downturn.
On the other hand, airport markets where development was more active in recent years are gaining momentum at a slower pace. Dallas/Fort Worth and Miami are two examples where construction activity boomed in the pre-recession years, only to contribute to higher vacancy levels due to overbuilding during the downturn. However, DFW and Miami also recorded strong annual increases in cargo activity in 2010, 12.1% and 17.9% respectively - as this continues to increase, absorption of excess space should continue.
Growth and development rates and trends vary across all locations and can be divided into three general categories:
1) Mature: airport markets characterised by robust air cargo volumes, established infrastructure and healthy real estate markets:
John F Kennedy: one of the world's leading international air cargo centres, covering 4,930 acres and more than four million sqft of warehouse and office space.
The dense JFK area has the lowest vacancy levels of all competitive markets, and has strengthened further over the last year as airfreight volumes began to rebound. Authorities have a major $42.3 million plan to demolish six old and/or obsolete cargo buildings and five hangars.
This will create much-needed space for airlines to expand their passenger and commercial businesses and will include a specially designed "cargo campus." Plans to demolish Terminal 6 are still under way and will allow Jet Blue to begin planning for the expansion of international operations
at Terminal 5.
Los Angeles: LAX, the major cargo airport for a metropolitan area of almost 18 million people, experienced 15.8% growth in air freight volumes in 2010. It has the broadest range of air carriers of any US airport, along with hundreds of freight forwarders and customs house brokers. A number of carriers, including United, Virgin Atlantic and Asiana, have opened new cargo facilities adjacent to the airport.
Demand for industrial buildings in the space-constrained region surrounding LAX has resulted in vacancy falling by 120 basis points below last year's level. Industrial property around the airport commands an almost 82% rent premium, making it one of the most expensive airport-adjacent micro-markets in the US.
Chicago O'Hare: As part of the ongoing O'Hare Modernization Program, a $1.17 billion agreement between the City of Chicago and American and United Airlines has been announced that will allow a massive improvement programme to move forward. Trucking and freight companies are very active in the area surrounding the airport; and further out, manufacturing and food companies are starting to move into the sub-market.
2) Evolutionary: airports at various stages of advancing from less established, lower-tier markets to more mature
Memphis: With unmatched accessibility to the "Four Rs" of cargo logistics - runway, roads, rail, and river - Memphis has been the busiest cargo airport in North America since 1992 and the third busiest US trucking corridor along the I40. Though much of Memphis' industrial market suffers from dated and obsolete products, newer development is emerging south and east of the airport.
Anchorage: Second only to Memphis in terms of US air cargo volume, this northern commerce-focused outpost is in somewhat of a holding pattern. Anchorage lost its major tenant, Delta Cargo, last year.
Though the void has been largely backfilled and available industrial space is relatively scarce, uncertainties over both the economy and the availability and cost of jet fuel is expected to keep the market somewhat challenged for the near future.
Miami: Miami International Airport handles 83% of all air imports and 81% of exports to and from Latin America and the Caribbean and 69% of all perishable products entering the US. These dynamics helped offset the Florida real estate bust and make Miami an airport 'up-and-comer'. New warehouses to provide airside-to-landside plane access for easy multimodal cargo movement offer strong incentives to encourage new freight services.
Atlanta-Hartsfield Jackson: After steadily declining from 2004 to 2009, air cargo volume rose for an uninterrupted 17-month stretch through March 2011 before posting slight year-over-year drops in April/May. Investment continues to flow into Hartsfield; construction crews are extending the airport's longest runway by 500ft to allow planes, such as B747s and B777s, to take off with more fuel and fly further during the hottest months. The airport welcomed Cargoitalia and Asiana last year.
Dallas/Fort Worth: Like Miami, Dallas is helping to rescue an overbuilt industrial space market with its double-digit cargo volume growth. At 300,000 sqft, it had the fourth highest net absorption rate among US airport sub-markets in 2010 and is also performing well this year. Many of the nation's largest industrial landlords hold more than 500,000sqft around the airport.
3) Ascending: airports are strong in certain air shipping and local real estate factors and relatively weak in others, though some are moving to strengthen their shortcomings:
Louisville: This airport is the nation's third largest air shipper thanks to its UPS hub, which expanded its footprint
to 5.2 million sqft last year. However, Louisville is hampered by a paucity of operational airlines and flights serving the airport that will have a knock-on effect on space demand.
Indianapolis: The airport's central US location, ease of use and proximity to a major FedEx hub have recently attracted approximately 2.5 million sqft of leasing by e-commerce firms, led by Amazon.com. Investment sales activity for real estate is also heating up. On the downside there is a limited supply of commercial space and relatively low aircraft movement.
Oakland: The potential 'sleeper' among the top dozen US air cargo shippers, Oakland's combined sea and airport logistics, convenience and sophisticated service capabilities position the area as a prominent player for shipping high-priced, time-sensitive international cargo. Its largest terminal is undergoing a $200 million expansion and renovation, while the Bay Area Rapid Transit (BART) metro link is in the midst of a major improvement programme.
Continuing economic recovery and increased trade activity will drive cargo volume growth, which in turn will drive demand for industrial real estate near major airports. The various terminal and runway improvement projects planned or underway will support increased cargo volumes and translate into sustained demand for warehouse and distribution space near major airports.
As industrial real estate markets near major airports are beginning to stabilise or show improvement, we expect this trend to continue through the remainder of 2011, with even stronger recovery emerging in 2012. We will see how the markets are performing over the coming months; barring a major economic meltdown, we hope to report more good news for US airport real estate.