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A Southern industrial market both quaint and colossal


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A Southern industrial market both quaint and colossal

The Portof Savannah, Ga., may never be the largest port in the U.S., but steady growth inrecent years has made it among the busiest.

It isparadoxical that the Southeast's leading industrial cargo hub is also a quaint touristdestination. Visitors strolling the cobblestone streets of Savannah's downtown likelydo not anticipate the scene on the waterfront: A slow parade of gargantuan containerships from the far reaches of the globe sliding by on their way to the port upriver.Videos shot by incredulous onlookers crop up occasionally on YouTube, the high stacksof shipping containers filling the camera lens edge to edge.

The waterfrontscene is likely to become even more surreal in the coming years as the newly widenedPanama Canal ushers in a steady flow of supersized ships that are increasingly thenorm in global logistics. In June, after roughly a decade of construction, the newcanal will open to commercial traffic.

The Portof Savannah is now the fourth-busiest U.S. port by volume of 20-foot equivalentunits, or TEUs, that pass through it, and the second-busiest by exports alone, afterLos Angeles. Based on its 14-year compound annual growth rate of roughly 7.5%, itis the fastest-growing port in the U.S., according to Stacy Watson, general managerfor economic and industrial development with the Georgia Ports Authority. In aninterview, he attributed its rise in part to the congestion and political strifethat has tied up West Coast hubs in recent years.

"We'restill one of the only ports in the U.S. to be above our pre-recession levels"of container volume, Watson said. "The ocean carriers and the cargo ownershave growth plans, and they feel comfortable doing business at a port that has theability, the financing and the wherewithal to grow alongside them."

In April,the expanded canal began accepting reservations for commercial transits beginningJune 27. Thenew canal's opening is not expected to have an immediate ballooning effect on Savannah'sindustrial commerce, but rather to add to its strength steadily over the next severalyears.

The widenedcanal will, above all, enhance Savannah's efficiency — more cargo, not necessarilymore ships. The Georgia Ports Authority projects that the port's throughput willincrease an average of 5% annually through 2022, and it is erecting additional cranesto handle the new flow.

"Wedon't foresee this big queue of ships beyond the 4,500-TEU capacity just waitingat the canal," Watson said.

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Top to bottom: A dredge deepening the shipping channel to the Port of Savannah; a container ship passes historic River St. on its way to port; the Georgia Ports Authority Garden City Terminal near Savannah.
Source: Georgia Ports Authority/Stephen B. Morton

Increasedport volume does not necessarily translate directly into increased real estate demand.Atlanta serves as an inland hub for much of the product that comes into the port.But Savannah's industrial real estate market will be a major beneficiary of theport's increasing commerce, observers say.

Savannahis a small industrial real estate market compared to New York and Los Angeles, butits footprint more than doubled from about 20 million square feet around 2000 toa little less than 50 million square feet by the time the recession hit.

Speculativeconstruction dried up during the recession, but it gradually came back in late 2014and early 2015. Roughly 2.5 million square feet of new space, about half of it spec,is expected to be delivered in 2016, according to Stephen Ezelle, partner with Cushman& Wakefield ¦Gilbert & Ezelle Real Estate Services LLC. Other recent estimateshave put the total new industrial supply under construction in the market at 3.6million square feet.

The varietyof new development — buildings ranging from 40,000 to 475,000 square feet — indicatesa wide variety of tenants looking to establish or expand their foothold, from smallsuppliers all the way to large distribution retail tenants such as Pier 1 Imports,Dollar Tree and Home Depot, Ezelle said. Savannah's vacancy rate, which peaked in2009 around 18%, was down to 2.2% at the end of 2015.

"Noquestion, Savannah's industrial market has come a long way in the past 15 yearsor so," Ezelle said in an interview. "The port is very well-positionedto get its more-than-fair share of the container throughput from the West Coastover to the East Coast."

Ezellecited the Savannah port's size — roughly 1,200 contiguous acres — as well as itsdual-rail connectivity, on-dock intermodal ramps and proximity to major arteriessuch as I-95, I-10 and I-16, as strategic advantages. He framed the harbor expansionproject as a necessary expense that will transform the market over time.

"Thekind of growth you want is real, long-term, consistent growth, as opposed to somespike," he said. "The shipping companies with post-Panamax ships knew[the port deepening] was coming and have been slowly increasing their activity,and they are now committing, knowing it will be delivered."

, STAG Industrial Inc. and Granite REIT have some exposure to the Savannah market, butDuke Realty Corp. is byfar the most significant equity REIT player there. The Indianapolis-headquarteredREIT moved in in force in 2006, chasing the port play, buying up a local developer'sholdings.

"Savannahwas already a growing port, even without the Panama Canal deepening," ChrisBrown, regional senior vice president for Duke Realty's Georgia/Tennessee region,said in an interview. "To me [the canal widening] is like adding an extra laneto the highway. The highway is already there and functioning great, but the volumesare getting bigger."

DukeRealty's industrial properties in the market were 100% leased as of the end of April,but the company is not undertaking any new development for now. Even though tenantdemand is healthy, particularly among third-party logistics concerns, managing riskis a priority for the company, Brown said.

"Itjust generally feels healthier overall, even if we ran into a recession," Brownsaid of the Savannah market. "It doesn't feel like we'll have the oversupplythat we had in 2007."

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Stateand local leaders hope to keep things that way by making the port more hospitableto today's New Panamax vessels. Of all international harbors of its level of commerce,Savannah's is the shallowest. Historically, larger container ships have had to waituntil high tide to enter and leave the port.

Recognizinga fork in the road, state and local officials moved to prepare the Port of Savannahfor the brave new world of 21st-century global logistics and, in January 2015, commenced the multistageSavannah Harbor Expansion Project, led by the Army Corps of Engineers. Among otherthings, the $760 million expansion project involves resurrecting a Civil War-eraironclad warship, the CSS Georgia, from the riverbed and dredging a 40-mile shippingchannel, increasing its depth to 47 feet from 42 feet and extending it out to deepwater and all the way up to the Garden City Terminal.

The dredgingis ongoing, but removal of the ironclad has proven difficult. There were live canonsand cannonballs to deal with, and engineers underestimated the ship's weight andhave been unable to lift it from the murky waters, even in pieces.

"Wehaven't figured out exactly what we're going to do with it yet, but it will notstop the deepening of the harbor," Billy Birdwell, spokesperson for the U.S.Army Corps of Engineers' Savannah District, said in an interview.

The completiondate of the harbor deepening, which involves a number of environmental mitigationinitiatives, is to be determined. Business in and out of the port is not expectedto slow to facilitate it.

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"Thosecargo vessels are already calling on Savannah — they just have to come in light-loadedand go out light-loaded," Birdwell said of the New Panamax vessels. "Thedeepening will allow that window to expand, so there will be more hours of the daywhen they can come in and out. And it will allow them to come in with heavier loads."

For prospectivetenants in the market today, the harbor deepening is not necessarily front of mind,according to Rex Benton III, executive vice president and principal at NAI Global'sSavannah office.

"Theactivity we're seeing is not a direct correlation to harbor deepening," Bentonsaid in an interview. "It's more of a check off the box. It will keep developerscomfortable about the market."

Bentondescribed a vibrant leasing market overall, driven by industrial users of all stripes.The typical deal ranges from 50,000 to 150,000 square feet, with a few deals floatingin the 300,000-to-400,000-square-foot range. Distributors could be targetingSouth Florida or any market within a couple days' travel distance.

Bentonexpects a certain cool-headedness to prevail among developers for the foreseeablefuture, however.

"Ithink they're still cautious," he said of the group.

"ButSavannah has been and will continue to be on developers' radar because of the strengthof the port."