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Pier pressure: U.S. ports are spending billions on infrastructure improvements--and opportunities for appraisers are flooding in.

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When a Chinese container ship passed through the Panama Canal in June, it was greeted by flag-waving crowds, visiting dignitaries and fireworks. The cause for celebration: The vessel was the first ship of its size to use the newly expanded canal--the result of a $5.4 billion construction project that took nearly a decade.

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The canal expansion represents a major change for Panama, but it also has ramifications for U.S. ports. Previously, the canal could handle ships carrying about 5,000 standard 20-foot containers. Now, it can handle "Post Panamax" vessels carrying as many as 13,000. The result is a more cost-effective way to ship cargo from Asia to ports on the U.S. East Coast--and those ports are increasing capacity to handle it.

But the Panama Canal project is just one factor changing U.S. ports. All along the Atlantic, Gulf and Pacific coasts, ports are spending billions of dollars on infrastructure improvements to handle a flood of imports and exports. Naturally, much of the activity involves real estate transactions, notes Sidney H. Smith III, MAI, president of Smith, Kirkpatrick & Klager, an appraisal firm in Corpus Christi, Texas. His firm has seen an increase in port-related work and, he says, "the opportunities for appraisers related to ports are vast and varied."

Understanding the deeper currents

The expansion of the Panama Canal is really a response to a broader trend. Ships have been growing larger for some time, as companies seek economies of scale in moving goods across the oceans. Twenty years ago, the largest container ships carried about 6,400 containers; today, the largest carries 19,000.

These changes were driven by growth in global trade that's been underway for decades. In 2000, about 6 billion tons of goods moved by sea; by 2014, the figure approached 10 billion tons, according to the United Nations Conference on Trade and Development.

"The whole system has had to react to the growth in global trade, and ports everywhere are being upsized," says Walter Kemmsies, Ph.D., managing director, economist and chief strategist for the U.S. Ports, Airports and Global Infrastructure Group at real estate services firm JLL in Chicago. For example, improvements in Indian ports and the Suez Canal have made it easier to ship more goods to America's East Coast. Meanwhile, ports on the U.S. West Coast--which are closer to China and other Asian producers--have been working to keep up with growing volumes. From 2000 to 2015, the United States saw a 79 percent increase in the number of containers moving through its ports, according to the U.S. Maritime Administration.

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Ports are responding with an array of improvements. The Port Authority of New York and New Jersey, for example, is raising the Bayonne Bridge 60 feet to make room for Post Panamax ships. Miami's port is investing in better rail and highway connections. Other ports are dredging channels, installing larger cranes, or looking for land to build more warehouses and distribution centers.

Ports compete for shipping, and improvements often focus on increased speed in the loading and unloading of vessels. "For a bigger ship to pay for itself, it can't spend a lot of time in port," says Kemmsies. "To make money, they want to keep water running under the ship." Shippers, not surprisingly, will take their business to the ports that have the infrastructure needed for a fast turnaround.

Assessing the ports

What do these changes mean for appraisers? "Buildings are getting built, site improvements are being made, loans are being advanced, zoning is being changed, warehouses and office buildings are being leased--the list of activity that's generated by ports goes on and on," says Walter Duke 111, MAI, president of Walter Duke + Partners, a commercial real estate appraisal firm based in Fort Lauderdale, Florida. "Anytime you have those kinds of initiatives, it creates more opportunities for appraisers."

In this environment, ports are purchasing more real estate. In Corpus Christi, for example, the port authority issued $115 million in revenue bonds last year to buy land and finance various long-term capital projects. But ports often are in urban areas where available real estate is limited. As a result, much of the work that appraisers see involves the establishment of lease rates for facilities. "A lot of leased properties are port-owned or government-owned," says Lance W. Dore, MAI, president of The Dore Group in San Diego. "They're usually long-term leases, anywhere from 10 to 50 years, and a lot of them are now expiring or simply out of date. Many ports have been in the process of repositioning these leases for their tenant base. So there's a lot of renewal work out there."

Port-related appraisal opportunities are numerous. Smith's Corpus Christi firm has been involved in projects where the owners of industrial facilities around ports have been "buying out neighborhoods to build buffer zones," he says. Port improvements also frequently involve upgrades to transportation corridors, and his firm has done a fair amount of work regarding right-of-way assessments for railroads, highways and easements. At one point, Smith was hired to appraise an entire retired Navy base--complete with barracks and blast-hardened buildings--whose ownership had reverted to a port. "That's probably the only one of those I'll do in my life," he says.

Today, continues Smith, "the [Post Panamax] ships are too tall to get under the bridge going over the Corpus Christi ship channel." In response, the Texas Department of Transportation is about to replace the existing 138-foot-high span with a bridge that provides more than 200 feet of clearance. "Appraisers are going to have to value the homes and businesses that will be displaced," he points out.

In Florida, port projects have provided Duke's firm with an opportunity to perform economic-impact studies. A port "is a huge economic engine," he says, and "we've been asked by various clients involved with Port Everglades, the Port of Miami and Port Canaveral to determine the direct and indirect benefits related to specific projects and developments."

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As Duke's experience suggests, the changes taking place in U.S. ports have a ripple effect that can be felt far from the port itself. The loads carried on today's large vessels can put a lot of stress on local facilities. "When a big ship shows up, if you put all the containers on rail, it would be a train about 70 miles long," says Kemmsies. Imported goods have to be unloaded and decompressed into smaller shipments for distribution across the country, while goods being exported have to be collected in staging areas and consolidated for shipment. To handle it all, companies often will establish warehouses and other facilities miles from the port--creating another source of opportunity for appraisers.

Port property values: Varied and complex

In working on port-related assignments, appraisers may find themselves facing some unusual situations. For example, Smith recalls a company that wanted to build a plant on a site where the Army Corps of Engineers had deposited hills of silt dredged up from a channel. To develop an opinion of value for a property, he called the Corps and learned that it had rights to use a certain amount of surface and air space along the shore for such materials. "They might have rights to use up to a designated elevation," says Smith. "But they may have used only a portion of the void space they had rights to. So they would have unused air space that they could use for fill. That void space is worth something, and somebody has to pay them for it. How much is the big question."

Then there is new land created by dredged material that may need to be valued--and land that's underwater can't be overlooked. "You may have to do submerged-land values," says Dore, explaining that "the port actually leases out the submerged land within its authority." That land may be used for marinas, piers or industrial intakes. "The submerged-land issue can sneak up on appraisers if they don't ask the right questions," he says.

Values for rental rates can be complicated. Typically, port assessments are based on the value of the property to the tenant--that is, what level of revenue the renting business can make at the location. But that can be difficult, says Dore, because "in ports you have highly specialized uses--cargo ship container operations, ship building, distribution facilities, cargo offloading for cars. A lot of these things are one of a kind, so value can be subject to a lot of interpretation."

"For typical properties like offices and shopping centers, there usually is sufficient comparable data available on rents and income and sales. This is not so with deep-water ports," says Smith. "The driving force in a deep-water port is what it's worth to the user to be in that particular spot.

"I have experienced situations where the basis for a lease in one case might be $100,000 an acre, while on a very similar property in very close proximity, the user is going to make a lot more money having their business there," says Smith. "The port recognizes that and the rate goes up in correlation to the user's need and business model, so that particular tenant could pay based on $250,000 an acre. There is no physical difference in the sites, but one user is in a business where they make so much more money that they can afford to pay the higher rate. Other complicating factors could include port franchise agreements based on things like product throughput, which would be similar to a percentage-of-sales situation. So it can be a real challenge when you're asked to help determine what a reasonable rental rate would be."

With all the complexity involved in port valuation, "you have to be exceedingly transparent about the information you provide because it is all subject to public review from various parties," says Dore. That's true of work done for public agencies in general, he says, "but ports are more sensitive because of what they are--land near water."

Parties ranging from shippers to condo builders to conservationists therefore will be interested in the assessment. "Some people view ports as amenities, some as environmentally sensitive, some as industrial sites," says Dore. "You have these competing interests, and it becomes sort of a hot potato sometimes. You have to be clear at the very beginning about your scope of work because you can get attacked pretty quickly by various parties over various issues."

U.S. ports are by no means done making improvements. Many still are working on Post Panamax-related expansion, while others are streamlining existing operations. "Even though the global economy is currently a little slow, you still see massive amounts of port expansion throughout the world," says Duke. "The need for moving materials around the world is only getting greater, and I don't see it changing. I think that will keep creating tremendous opportunities for the valuation profession."

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The lure of the sea

Shippers and logistics firms aren't the only parties interested in port-related real estate. In Florida, "the cruise industry spawns tremendous economic development," says Walter Duke III, MAI, president of Walter Duke + Partners, a commercial real estate appraisal firm based in Fort Lauderdale. He points to a 2 million-square-foot retail, hotel and office development under way just outside Port Everglades. "It's not being built because of the demographics in the Immediately surrounding area," he says. "It's because of its proximity to a seaport and the potential to capture the business of the 80,000 cruise passengers a week that come into the area."

In some ports, "there is pressure to redevelop the old Industrial components and put them into high-rise residential and mixed use," says Lance W. Dore, MAI, president of The Dore Group in San Diego. Such pressure extends beyond industrial holdings. Dore says that in his city, a shopping area known as Seaport Village "is currently undergoing review for a complete redo." Proposed uses include hotels, office space, retail--even an aquarium and a giant Ferris wheel. "Port land is premium land," says Dore. "The fact is, there's a shortage of it, and people like it."

Peter Haapaniemi is a Detroit-based freelance writer.
Fastest-growing
U.S. ports

Annual Increase In shipping
container volume

1.    Savannah (Ga.)        11.7%
2.    New York/New Jersey   10.4%
3.    Charleston (S.C.)     10.1%
4.    Houston                9.2%
5.    Baltimore              7.8%
6.    Virginia (Norfolk)     6.5%
7.    Long Beach (Calif.)    5.4%
8.    Miami                  5.3%
9.    Everglades (Fort
      Lauderdale, Fla.)      4.7%
10.   Seattle/Tacoma           3%

Source: CBRE Seaports & Logistics 2016 North
America Annual Report
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Title Annotation:Sector Spotlight
Author:Haapaniemi, Peter
Publication:Valuation Magazine
Geographic Code:1U5FL
Date:Jun 22, 2016
Words:2111
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