Drewry Shipping Consultants, in their latest Container Forecast, predicted that 2009 would be a very tough year for the Container Industry.  They went on to question whether the liners would be able to hold rates steady or whether there would be further price cuts or even industry consolidation.

A couple of things stood out to me from this report.  First, in 2008 the number of TEU through global ports grew at a 7.2% year over year growth rate.  7.2% is a very healthy number and significantly above the rate of US GDP growth for the same period.  While some individual ports had declines in their throughput, overall the industry held up pretty well.  Drewry went on to predict that 2009 YOY growth should trickle in at only 2.8%.  I would bet that this is still a substantial spread over the 2009 YOY GDP growth that the US will generate.  So, the container industry will continue to outperform the US economy.

The second thing that stood out was whether a decline in rates was a bad thing for real estate.  We have to keep in mind the reason why so many companies outsource their manufacturing – to reduce costs.  The cost of labor was the primary driving force and this outsourcing significantly lengthened our supply chains.  In 2008, as oil prices escalated and the transport piece of the supply chain became more expensive, many companies examined bringing those manufacturing operations back to the US.  Oil has receded and now the economic conditions and excess shipping supply are pushing the cost of off-shoring down again.

As companies suffer through the domestic economic woes and try to find ways to maintain margins in an environment where raising prices would amount to suicide, cutting costs will become a primary focus.  With lower shipping rates, off-shoring becomes an attractive option.  More companies may off-shore to save costs, meaning more containers on the shipping lines (albeit at a lower rate) and the demand for port related real estate increases.  This is a good thing if you are a real estate professional.

Finally, the shipping lines will not be immune to the need to become as efficient as possible.  We’ve already seen some lines trimming service and mothballing ships.  While these are never easy decisions to make, they do make the liners more efficient and more profitable.  This may mean survival now, but will lead to much better positioned companies as the economy improves.  One area where a number of shipping lines are focusing their efforts is in the shift to larger vessels.  A 10,000+ TEU vessel carries more cargo using less fuel (per TEU) and requires a smaller crew.  As companies fight to protect margins, expect to see larger ships being used everywhere they can be.

Does your portfolio strategy contemplate the long term effects of larger vessels or potentially fewer carriers?

The Navy this week announced that it has decided to home port a carrier at Naval Station Mayport in Florida.  Currently, the entire carrier fleet is stationed at Naval facilities in Hampton Roads.  The Navy’s motivation behind the move is to diversify the fleet and prevent a Pearl Harbour type incident from diminishing our retaliatory abilities.

The decision was met with significant opposition from Virginia lawmakers who vow to continue the fight to keep the carrier fleet in Virginia.  They claim that this is a politically motivated last minute effort by the Bush administration to push this through before they leave the office.  Consequently, they have begun to pressure the incoming Obama administration to reconsider the decision.  As you would expect, Florida lawmakers support the decision and call it critical to the security of America.

To compound the issue, the decision comes at a time when the Naval has its own budgetary issues to contend with and moving a carrier isn’t cheap.  In the five years that it will take to complete the move, the Navy would have to spend over $550 million to prepare the Mayport facility and channel for a ship of this size.  In addition, it will remove 11,000 jobs and $600 million in annual income from the Hampton Roads economy.

If the safety of the fleet is truly the primary concern, I would think the $550 million could buy some significant surface to air defenses for the Hampton Roads area.  Plus, any spending on protecting the fleet in its current location could be allocated across the entire fleet, not just one carrier.

Yesterday, Richmond headquartered Circuit City Stores announced that they will be shutting their stores and liquidating their assets.  We have know for a while that CC was struggling financially, but I think everyone had held out hope that they would be able to find a buyer and turn them around.  Unfortunately, that does not appear to be the case. Over the years, CC has struggled to compete with its brick and mortar rival Best Buy as well as other online merchants.

CC demise will be felt especially hard in the Richmond economy.  CC will obviously shut its Headquarters location and terminate approximately 1,500 employees there.  No package, no severance, just out the door in 60 days.  Across the country, CC will shutter its 567 stores and release the balance of its 30,000 employees.

The closing of the CC Headquarters building will bring more office space to a submarket that is already reeling from the impending departure of MeadWestvaco and Wachovia, as well as the LandAmerica break up.  Conceivably, this 8 million SF suburban market could see a vacancy rate (actual and sublease) of close to 50% in the very near future.  That will be a ton of space for this market to work through over the coming years.

On the upside, If you are a company looking to relocate your headquarters out of an expensive location like NY, Chicago or Boston, Richmond is a very attractive alternative.  Not only does it have a lower cost of living, but it also has a very well educated workforce, a higher quality of life and plenty of (soon to be discounted) headquarters office space.

The next hurdle becomes making sure that Virginia’s General Assembly doesn’t cut the economic development budgets so much that they can’t get out there and attract these tenants.  Altria made the move and others can and will as well.