By Bill Throne
Lately, the shipyard industry has been a hot topic. The Navy’s FY 2019 budget proposed increases in shipbuilding rates, an initial step in pursuing a bigger plan to increase the size of the Navy’s fleet to 355 ships. In addition, the Navy’s coming request for the 2020 fiscal year will include billions to buy two new Ford-class aircraft carriers, which will be awarded under a dual contract.
These are just two elements in an exceedingly healthy ship repair industry that is being felt by shipyard employers across the sector. According to the Commander Navy Regional Maintenance Center FY 2019 Q2 M3 report on private sector workload estimates, the 2019 private sector total FY workdays are expected to reach 4.6 million, while 2020 workload estimates are expected to increase by 13.4 percent.
This growth in ship repair has direct impacts on local industrial markets as well, which is an important factor to consider for both the shipyards and local owners of real estate. An understanding of how the ship repair industry utilizes industrial property is the first step in matching existing inventory with anticipated demand.
Shipbuilding and repair can be broken down into four categories – each with their own unique considerations for demand for industrial space:
1. Major ship repairers own their facilities and can offer a full range of construction and repair services directly at the waterfront. Pier, dock and bulkhead facilities are located on site, and as a result, they are static and expensive to permit, build and operate.
Impact on industrial real estate: Ship repair facilities tend to be land constrained. If contract awards stress internal facilities, they will look off-site to contract directly for additional warehouse space or laydown yard area. They may also consider utilizing third-party contracts to handle scheduled deliveries of supplies and equipment.
2. Ship repairers offer similar services to major ship repair providers but don’t have the same extensive facility offerings.
Impact on industrial real estate: Ship repairers typically own facilities with limited to substantial production capacity. With contract awards, they are often forced to flex in and out of the industrial market with leases for buildings and land, and three to five year terms consistent with other industrial tenants are typical. Leased properties help provide additional space for support services, assembly and staging. Land is used for laydown box storage, cranes and oversized parts and equipment. In addition, ship repairers often lease waterfront for barge and other support services as well.
3. Ship repair subcontractors service the ship repair industry with labor and parts, and perform specialized work on ships.
Impact on industrial real estate: While subcontractors do tend to own industrial real estate, these properties typically serve as corporate offices identified for contract bidding, with limited production capacity. Their need for additional space is closely linked to contract award. Facilities are as closely matched to the project as possible, allowing the subcontractor to efficiently bid each contract. Lease terms tend to be shorter, again, to minimize lease cost exposure over the term of a contract.
4. Specialty suppliers and manufacturers provide unique components or services to ship repairers.
Impact on industrial real estate: These companies typically own their facilities. Production equipment is specialized, expensive and practically impossible to move. Shipping and movement of oversized components may require rail or water service, and like major shipyards, it is difficult for specialty manufacturers to be nimble. New contracts for specialty products typically involve long-lead time items and can require process or equipment reconfiguration. Facility stresses are usually solved through leasing of buildings or land off-site to accommodate storage of non-critical items. While specialty manufacturers are contract driven, the nature of the production cycle allows for longer-term commitments for warehouse and laydown properties.
Given the anticipated demands on the ship repair community, maritime industrial real estate markets should expect significant interest in leasing buildings and land in the coming years. This positive demand is expected to continue in each shipbuilding community across the U.S. at least through 2023.
Bill Throne is co-lead of Cushman & Wakefield’s Ports & Intermodal Advisory Group. He began work in commercial real estate with Cushman and Wakefield in 1985 after leaving the U.S. Navy, where he served as an officer and a fighter pilot. He has industrial sales and leasing experience in Los Angeles, California, as well as in the East Bay Region of San Francisco, California, before relocating to Hampton Roads. Bill specializes in leasing and selling commercial land and industrial properties.