West Coast ports and dockworkers are in talks to try to avoid a strike that could cut into demand for warehouses, North America's hottest commercial property sector facing the start of the peak shipping season for the holidays.

The International Longshoremen and Warehouse Union, representing 22,000 dockworkers, and the Pacific Maritime Association, which represents ocean carriers and terminal operators, are approaching one year without a contract, resulting in the longest labor-related disruptions since 2015.

The dispute has caused delays in cargo processing amid sporadic work stoppages at the West Coast’s biggest shipping gateways, including the nation’s busiest ports in Los Angeles and Long Beach, as well as others such as Oakland, Seattle and Tacoma. The Port of Seattle reported slowed work over the past week.

The stalemate threatens to reignite pandemic-related supply chain disruptions and further erode demand for warehouses, which has already started to recede from record occupancy and rent growth amid a slowdown in the broader economy.

“The recent labor developments are going to weaken tenant demand overall," said Adrian Ponsen, CoStar’s director of U.S. industrial analytics.

The logjam also comes as the retail industry prepares to enter the peak shipping season for the upcoming holidays, according to a statement from the National Retail Federation.

About 99% of ILWU's Canada union workers this week voted in favor of supporting a strike that would affect Vancouver, the country's biggest port, and start as early as June 24.

"Any disruption to the ports is going to affect the supply chain, and that affects retail’s ability to get product onto the shelves," said Norm Taylor, who was recently named to head Newmark's operations in Canada. "There will be trickle down. Hopefully, the labor dispute will be short lived."

Global supply chain stress was starting to ease this year after U.S. production and distribution systems saw significant shipping bottlenecks caused by the pandemic over the past two years, according to researchers at Oxford Economics.

The previous labor contract covering 29 ports from California to Washington expired on July 1, 2022, with the port operators and union unable to agree on wage increases and other issues.

The port dispute has also affected where shipping and logistics companies are leasing industrial space across the country, Ponsen said.

"Since the Pacific dockworkers union contract expired, importers bringing goods to the U.S. from Asia have been wary of the potential for a strike and have increasingly bypassed West Coast ports,” Ponsen said.

Exporters have instead used the Panama Canal to bring Asian-made goods directly to such major East Coast and Gulf coast ports as Newark, New Jersey, Savannah, Georgia, Norfolk, Virginia, and Houston, Ponsen said.

While industrial properties in those markets will benefit from the recent labor uncertainty, the negative effects will fall hardest on Southern California, home of the nation's biggest ports and industrial market.

Industrial tenants pay substantially higher average warehouse rental rates for access to the Ports of Los Angeles and Long Beach, Ponsen said.

Part of slowdown in industrial real estate demand across the Seattle/Puget Sound region this year could be due to the labor disputes at the ports of Seattle and Tacoma as some companies hold back committing to warehouse space with a potential strike looming, said Elliott Krivenko, CoStar director of market analytics in Seattle.

“In an already uncertain economic atmosphere, a strike could halt demand for logistics space in Seattle and divert demand to other ports,” Krivenko said. “This could disrupt supply chains just as the economy was recovering from the supply chain issues caused by the pandemic.”

Quarterly industrial absorption, a key measure of warehouse demand, fell into negative territory early this year for the first time since early in the pandemic during the third quarter of 2020 as trailing demand declined to less than half of levels for the same period last year, Krivenko said.

The industrial space availability rate, which includes new construction, now sits at 8%, above its long-term average of 6%, according to CoStar data.