COVER STORY, SEPTEMBER 2010

PORT OF DEBATE
Land-use fight to heat up when recession lifts.
Jon Ross

Last year, Baltimore officials had a difficult decision on their hands. The Port of Baltimore, which had been surrounded on all sides by office, retail and multifamily properties, was in danger of being eroded. Commercial developers had heeded the call of residents who wanted to live and eat and play by the water and were envisioning condominiums where prime warehouse space had steadfastly stood for years. Port officials started banging on the doors of City Hall, begging for something, anything to ward off the interlopers and protect the shipping industry.

“This is a problem around the world,” says John J. Hentschel, president of Hentschel Real Estate Services. Hentschel studied the debate for the city, publishing Charting the Future of Baltimore’s Industrial Waterfront early last year. “There is an inordinate amount of pressure because people have rediscovered the waterfront. Everybody wants to live on the water.”

To solve the issue, port officials wanted the city to expand a provision called the Maritime Industrial Zoning Act, which had originally been enacted on a 10-year term in 2004. This law would prohibit commercial development on industrial land, effectively keeping the port in business and securing the employment base and import/export livelihood of an entire region. Condo developers, of course, pushed against the rule, setting the tables for a big fight over land use in the port. Then the bottom fell out of the market, and the issue dissolved.

“The urgency subsided because the real estate market collapsed. The condo creep and the encroachment by commercial development ceased,” says Hentschel, who fully anticipates the debate to heat up in urban ports all around the Southeast once the recession abates and commercial development gets back on track. “When you’re developing in a greenfield, you can place things where you want them. If a patchwork quilt of land uses already exists, it’s pretty tough to change uses — either nobody has the money or nobody has the authority to do that kind of stuff. Cities are going to have to start contending with, ‘how do we integrate the uses rather than segregate the uses?’”

Though this land-use fight will heat up when the economy turns around, the Baltimore port area, in the near term, has to confront the recessionary issues felt throughout the region. Container throughput is humming along and has even started picking up a bit, but activity centering around industrial real estate in proximity to the port is still slow. In 2006, Duke Realty purchased a former GM plant in order to develop the Chesapeake Commerce Center, which is projected to span 2 million square feet of warehouse space. Henschel says that project, which started delivering in 2008, has not been generating a lot of interest. Hollander 95 — a former affordable housing property that was slated to boast 600,000 square feet of warehouse space — is another casualty of the recession.

Port of Savannah.

While the debate over mixed-use versus industrial space is waiting in the background in Baltimore, port officials in Savannah, Georgia, are more concerned with the present. Stacy Watson of the Georgia Ports Authority estimates there is currently more than 6.5 million square feet of vacant warehouse space within 30 miles of the port. This new space was built right as the market started to decline, and even with competitive lease rates, it’s difficult to find users who are in a position to occupy buildings. Port activity in Savannah is on the rise — he says the port is seeing double-digit growth — but potential lessors are concerned about sustainability and want to be sure output is truly here for good before they commit to vacant space.  

“Is the container throughput increase going to be something that’s going to be sustainable, or is it a rare condition?” Watson says. “Right now, activity as far as prospects, activity as far as interest, has actually gone up. I’ve seen some of the project work pick up, but we’re still waiting for the tire kickers to become purchasers.”

Watson is remaining positive amid this uncertainty. The Panama Canal expansion will definitely bring more real estate activity to the port area simply because the Savannah port will be handling more throughput, but the expansion is still off in the future. He knows tire-kickers eventually have to become buyers, but he just doesn’t know when. 

“I’d like to say that I’d be going out and working with those existing developers who have land to encourage them to build more spec space,” Watson says of what business might look like 6 months down the road. “That would be my wish.”

The Jacksonville, Florida, port has also seen an uptick in throughput, which for the most part is due to businesses restocking their shelves after months upon months of little to no activity. Numbers are better than they were in 2009, says JAXPORT’s David Stubbs, but true increases are a little skewed. 

“[Numbers] may still very well be down from where they were 2 years ago. I’m a little apprehensive about throwing out big percentages or even reading big percentage increases,” he says, noting that the increase is most likely temporary until the economy truly revives itself. “There was a lack of purchasing, and inventory levels at many organizations were just getting down to bare-bones levels.”

Just like in Baltimore and Savannah, space is abundant in Jacksonville, making it easy for companies that are doing well to find properties close to the port. Stubbs points out that historically Jacksonville’s commercial industry and port activity have been closely tied together, so when one sector gets booming, the other isn’t far behind. 

“Activity will pick up,” he says, “and you will see a lot of the warehouse space absorbed in the next 12 to 18 months.”

While the first concern on the minds of port officials throughout the Southeast is making it through the recession, once the darkness clears, officials everywhere may find themselves dealing with Baltimore’s conflicting uses. As Hentschel points out, there’s a lot of pressure from all sides to make port areas live/work/play oases. The immediate future of port real estate relies on container throughput, but in the next 5 or 10 years, the look of the Southeast’s port systems may change dramatically.

©2010 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.