By Michael G. McGuinness
Supply or cargo chains are complex ecosystems involving multiple organizations, infrastructure modes, carriers and workers that comprise the movement of commodities from their point of origin (factory, farm, mine, etc.) to the retailer and consumer. They include beneficial cargo owners (BCOs), ocean carriers, port authorities, regulatory agencies, marine terminal operators, port labor, rail and motor carriers, warehouse, distribution, fulfillment and e-commerce centers and retail businesses. A problem at any link in this chain can cause the entire system to back up. This industry employs over 400,000 people in our region. This is precisely why the findings from the first quarter 2018 NAIOP Research Foundation Industrial Space Demand report, outlined below, are so important for New Jersey’s policy makers.
Demand for U.S. industrial space is expected to remain robust and steady throughout 2018, with quarterly net absorption forecast to average 55.6 million square feet. Although 26 percent higher than 2017, it is about 7 percent lower than what was forecast six months ago. According to Dr. Hany Guirguis, Manhattan College, and Dr. Joshua Harris, New York University, the predicted increase over 2017 figures is due to the faster and broader macroeconomic growth and increased consumer spending expected in 2018. The model, run on a quarterly basis, forecasts slightly lower industrial space demand in 2019, when inflation and interest rates are expected to rise, moderating growth. U.S. gross domestic product grew by 2.6 percent in the fourth quarter of 2017, according to the advance estimate released by the U.S. Bureau of Economic Analysis, and by 2.3 percent for all of 2017. (For comparison, U.S. GDP grew by just 1.5 percent in 2016.) Sustained growth, especially with low unemployment at 4.1 percent as of January 2018, will translate into increasing demand for industrial properties as industrial users see more justification for investment in and expansion of facilities.
The new federal tax law has great potential to influence the economy in the coming years, especially for the industrial sector. This tax code is so new that its impacts are not yet reflected in the indicators used in this model. The lower corporate and pass-through tax rates, accelerated depreciation of equipment, lower rates on repatriated profits and other provisions should leave industrial tenants with more cash for expansion of production capabilities and facilities. Given rising broad-based demand worldwide, there is good reason to expect this will occur. Further, most U.S. consumers will see higher after-tax incomes, even in New York and New Jersey, where limitations on state and local tax deductions will have a greater impact. As a result, consumer spending is likely to increase, generating more demand for manufacturing and warehouse/ distribution facilities. The fact that e-commerce merchants are the dominant new users of industrial space will likely result in more direct connections between consumer financial health and net industrial demand.
Despite strong demand for industrial space, the drop in net absorption from the prior forecast suggests that the root cause of this underperformance is lack of new supply. Space constraints, however, are not the only hurdle to impede firms that use industrial space. Shortages of skilled labor are also an issue. An unemployment rate of 4.1 percent means fewer skilled workers are available for hire; this is likely slowing the rate of new hiring. The most comprehensive measure of labor underutilization, labeled U-6 by the federal Bureau of Labor Statistics, is known as the underemployment rate. It has fallen from 9.1 percent at the end of 2016 to 8.2 percent as of January 2018, the lowest reading of this measure since 2007. Despite these hurdles, the Port of New York and New Jersey experienced 14 percent growth in volume over 2017 figures as of March 2018. Clearly, the supply chain, a.k.a. logistics or transportation, distribution and logistics (TDL) industry is what fuels the state’s present and future economy. As such, our state and local leaders must act now to address these problems.
Fortunately, the Council on Port Performance (CPP, on which I sit), managed by the Port Authority of New York and New Jersey, is taking the lead and ramping up efforts to address the shortage of skilled labor and industrial space constraints. Six teams are now meeting to implement the initiatives identified in the CPP 2018 Work Plan. The Rail Network Optimization team is examining ways to utilize existing rail infrastructure more efficiently to handle future volume and exploring opportunities for the establishment of inland ports to facilitate the movement of ever-increasing international cargo. The Supply Chain Analysis Team is focusing on minimizing disruptions and eliminating bottlenecks, which may include: analyzing regulations and restrictions that might limit workforce availability (age requirements, wages, drug testing, etc.); evaluating terminal hours of operations; and examining local ordinances restricting deliveries or W/D operating hours. The Workforce Development Team is working to locally attract, engage and retain the right-sized, highly skilled, diverse and properly trained workforce to meet the current and growing needs of the TLD industry. Raising awareness and marketing port-based career opportunities, developing education curricula for schools (especially at the high school level) and setting up a job bank are also in progress. On April 18, the team hosted a Career Awareness and Job Expo day that brought 550 high school juniors and seniors and about 200 older job seekers together to mingle with 40 port employers and trainers at a Port Elizabeth warehouse.
The general feeling and take-home message that day may have been captured by this quote from an attendee: “Only maritime provides a reliable path to the middle class for those who seek it. Meanwhile, find me a solid middle class anywhere in the world, and I will bet that maritime had an important role in it.” (Blog Post April 19, 2018, by Rik van Hemmen)
All of the above topics, and more, will be addressed at I.CON ‘18: The Industrial Conference, June 6 to 8 at the Hyatt Regency, Jersey City. In addition to updates on e-commerce trends, the logistics supply chain, use of labor analytics for marketing sites, demand for new industrial development and trends in current and future industrial facilities, several educational tours will be offered, including: the Amazon Fulfillment Center in Robbinsville; Global Container Terminals; a cold storage facility; and a waterside boat tour of New York Harbor and the Bayonne Bridge. There will also be a tour of the Greenville Rail Transfer Facility where car floats will carry 18 railcars — the equivalent of 72 trucks — from New Jersey across New York Harbor to consumers in New York City and Long Island.
Michael McGuinness is CEO of NAIOP New Jersey and has guided the commercial real estate development association’s progress since he joined the staff in 1997. In addition to overseeing daily operations, programs and staff, McGuinness directs the chapter’s legislative activities and manages the Developers Political Action Committee (DPAC).
