Written by William C. Throne

There has been a lot of press lately about the shipyard industry. The Navy’s FY2019 budget submission includes proposed increases in shipbuilding rates that are intended as initial steps to increase the size of the Navy toward a fleet goal of 355 ships. The Navy’s coming request for the 2020 fiscal year will include billions to buy two new Ford-class aircraft carriers to be awarded under a dual contract.

For the Mid-Atlantic Region, 2019 private sector total FY Man days are expected to exceed 1.7 million. A 14.5% increase is anticipated in 2020, totaling almost 2.0 million FY Man days. These numbers point to an exceedingly healthy ship repair industry.

The question for Hampton Roads, and the other shipyard communities across the U.S. is: How will these contracts affect the local industrial market?

Ship building and repair can be broken into four categories. Each has their own specific demands for industrial space. The following is a brief description of each category and the likely positive impact on the Hampton Roads Industrial market.

1. Major ship repairers own their own 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. They are static, 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 do not 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. 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/ connex box storage, cranes and oversized parts and equipment. Often times ship repairers lease waterfront for barge and other support services.

3. Ship repair subcontractors service the ship repair industry with manpower and parts to perform specific 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 the 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 make rail or water service required. Like major shipyards, it is difficult for specialty manufacturers to be nimble. New contracts for specialty products typically need 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.

In conclusion, given the anticipated demands on the ship repair community, the industrial real estate market should expect significant interest in leasing additional space in almost all sectors in the coming years. This demand will be felt in each submarket across Hampton Roads.

William C. Throne – Bill serves as the co-lead for the Cushman & Wakefield Ports and Intermodal Advisory Group. He has specialized experience in port/rail served/supply chain related properties and waterfront facilities. Bill serves on the advisory Board of the Old Dominion University/Center for Real Estate and Economic Development (ODU/CREED) and for many years has authored the annual Hampton Roads Industrial Market Review.