A significant factor in the growth of the industrial real estate sector in the U.S., and a major reason for the continued optimism regarding the future of this sector, is the ongoing transformation of international shipping channels to and from U.S. ports.
The most important element of this transformation has been the Panama Canal expansion project. The expansion was completed in June of 2016, after nearly a decade of construction, and added a third set of locks to the existing Panama Canal system, which doubled the total capacity of the canal and significantly increased the maximum ship size capable of passing through the Canal. For the first time in its history the Canal can accommodate a Post Panamax container vessel, which accommodates nearly three times the cargo volume of the previously largest container ship.
The Panama Canal expansion project has had a tremendous effect on the shipping industry and port systems in the U.S. in terms of traffic patterns, infrastructure upgrades around the east coast ports and rail improvements to handle the unit trains carrying containerized cargo to inland intermodal facilities in the south-east and mid-west. In this article, we will explore how the expansion of the Canal has impacted and bolstered the already robust industrial real estate markets in the eastern portion of the U.S.
East Coast Port Expansion Drives Industrial Real Estate Growth
The Panama Canal Sees Increased Traffic
The expanded capacity of the Panama Canal means more potential destinations for shipping vessels going in both directions. One of the most anticipated effects of the expansion project was the significant increase in shipping traffic volume at ports along the East Coast and in the Gulf of Mexico, as container ships from Asia sought more direct access to East Coast markets.
The results we’ve seen over the first two and a half years since the opening of the new Panama Canal locks have been right in line with these predictions. According to Argelis Moreno de Ducreux, head of the Panama Canal Authority’s Liner Services Segment, August of 2018 set a new record for monthly container tonnage passing through the Canal. In addition, the average container ship size has increased by 28 percent, mostly due to the passage of Post Panamax ships. Post Panamax vessels have a capacity of approximately 12,500 TEU’s compared to the Panamax vessels at approximately 4,500 TEU’s.
While there has been some concern that this could mean diminished traffic at West Coast ports, so far these fears have not materialized. The ports of Los Angeles and Long Beach, Oakland, and Seattle/Tacoma all posted significant year-over-year gains in total container traffic in both 2017 and 2018.
The increased traffic to East Coast ports has been a major boon to the industrial real estate in both gateway and inland port markets, as more and more logistics warehouse space is needed to accommodate the increased incoming and outgoing cargo. In virtually all cases, this has gone hand in hand with infrastructure upgrades to more efficiently link sea ports to Class I rail and finally to truck chassis for final drayage to warehouses or fulfillment centers (in the case of e-Commerce).
East Coast and Gulf Ports Expand and Upgrade
As soon as the Panama Canal expansion project commenced, the race was on to modernize and expand ports all along the Eastern Seaboard and the Gulf Coast to accommodate the increased containerized cargo volumes.
Ports primarily on the East Coast and to a lesser degree the Gulf Coast have undertaken major infrastructure upgrades that often include dredging for increased draft, wharf upgrades including dockside cranes and port rail intermodal infrastructures. These included ports in Miami, Savannah, Charleston, Virginia, Baltimore and New York/New Jersey. Port improvement project costs have run anywhere from several hundred million dollars, to over $4 billion at the Port of New York and New Jersey which included raising the Bayonne Bridge to allow the passage of Post Panamax vessels.
The rapid expansion of the containerized cargo infrastructure at these ports coupled with major rail upgrades to handle the unit trains carrying containerized cargo has changed the industrial real estate landscape in metros east of the Mississippi, as logistics operators look to take advantage of the new supply chain options for imported goods.
Competition Among Ports Bolsters Expansion
The local port authorities also recognize that they are competing. Establishing early connections with ocean freight lines or being recognized as the biggest, best and/or most efficient by these customers leads to real economic impact in the entire region surrounding the gateway port complex. This competitive influence has undoubtedly sped up and increased the scope of improvement projects as ports and their surrounding communities vie for new shipping traffic, federal dollars, and attention from private businesses and investors.
Are East Coast Ports Overreaching?
Thus far, the quickly expanding infrastructure in the eastern U.S. has led to a dramatic increase in net absorption in all major metros impacted by the increased containerized cargo flows. This includes all gateway markets and inland ports that enjoy the benefit of Class I intermodal rail facilities such as Atlanta in the Southeast and Columbus in the Midwest. Xebec currently has major development projects in both metros. Nonetheless, some industry experts have questioned the fervor with which so many ports have approached their expansion projects. After all, they opine, it is unlikely that all of these ports will see a major increase in traffic from new Post Panamax ships, but rather a few ports in each region will become the preferred destination for the largest Post Panamax vessels.
There is compelling evidence to support the belief that even the ports that don’t win the primary Post Panamax traffic stand to gain significantly, as they will see an increase in container traffic by way of “feeders” — the smaller carriers that transport cargo loads from large ships to adjacent ports. This secondary benefit provides a level of insurance for ports and surrounding areas to aggressively pursue expansion and growth even if they are not certain to beat out nearby ports in the Post Panamax sweepstakes.
Will Infrastructure Keep Up with Port Expansions?
As the Panama Canal expansion approached its final days, one of the lingering concerns for those keeping their eye on East Coast port development was whether infrastructure investment would keep pace with the port expansion efforts, thereby making East Coast and Gulf ports a truly viable option for new traffic.
That question has largely been answered in the affirmative, as we’ve seen major infrastructure improvements going hand-in-hand with port expansion, and it seems poised to continue, bolstered by the government and private entities as well. American Association of Port Authorities (AAPA) CEO Kurt Nagle has indicated that AAPA members and private investors are poised to invest approximately $100 billion in infrastructure improvements over the next five years, and even more help could be coming from the Federal Government soon. Both the President and the newly-elected Democratic majority in the House have indicated that infrastructure investment is among their main priorities.
Signs Point to Continued Growth
The Panama Canal expansion project has lived up to its expectations in terms of the increased shipping traffic to East Coast ports and the subsequent boost to the industrial real estate market. In certain respects, it has even surpassed the high expectations that industry experts had set.
The success of this historic engineering feat represents yet another factor that supports the conclusion that the industrial real estate market will remain strong for the foreseeable future. Contact us today to learn more about Xebec’s investment strategy in regions near the improved ports.