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Panama Canal Expansion Expected to Bring Rising Tide of Warehouse Investment to Nation’s Seaports

Investors Parse Data To Pick Seaport Market Winners and Losers
December 19, 2012
As the eight-year, $5.25 billion project to expand the Panama Canal moves toward a 2015 completion, seaports all over the U.S. are gearing up to compete for the lucrative import trade.

Developers, investors and supply chain executives are generally bullish on port markets, confident they will be among the prime beneficiaries of global trade shifts and events such as the canal expansion, which is widely expected to be a boon to East Coast and Gulf Coast ports, including smaller facilities strategically positioned to fight for their share of the new business.

"Capital is being poured into seaport infrastructure from both the private and public sectors, responding to increased demand for port-centric warehouse and distribution space," said John Carver, head of Jones Lang LaSalle’s Ports Airports and Global Infrastructure (PAGI) group.

While every U.S. port has been on a recovery track over the last couple of years, the East and Gulf Coast ports comprise the majority that have already surpassed their pre-recession peak inbound trade volumes as of third-quarter 2012.

East Coast ports face a greater risk from European economic weakness. However, the diversity of their trading partners and the continued shift in imports from China from West Coast to East Coast ports, expected to accelerate on completion of the canal expansion, supports the notion that East Coast ports will continue to outperform the West Coast on a percentage basis, according to real estate economists with Property & Portfolio Research (PPR), a CoStar company.

Several factors may cause the Panama Canal expansion to change the logistics equation in the U.S. Shipping time, capacity and cost will all play a crucial role in post-expansion supply chain decisions, PPR Director of U.S. Research/Industrial Rene Circ and real estate economist Noam Kleinman recently reported in a study of the expected impact of the canal expansion on seaport real estate.

Improved shipping times to East Coast markets as a result of the expanded canal is expected to chip away at the value advantage currently offered by cross-country rail shipments from West Coast markets. Shorter delivery times can paint a more compelling picture for importers who need to make the decision based on speed to market and costs.

Transportation costs by ship, train, or truck, are in constant flux and vary widely depending on the route and time of year. They can also be influenced by supply and demand as well as factors like fuel costs.

While West Coast ports still dominate in terms of handling the bulk of U.S. imports, the East Coast ports -- which are generally closer to major manufacturing centers -- benefit from higher exporting.

Over the past decade, more imports have been slowly redirected towards the East Coast. The West Coast share of total U.S. imports was around 60% in 2003 but gradually drifted down to 55% in 2011, despite the increasing share of Asian imports as a percentage of total U.S. imports.

The added cost savings offered by the post-Panamax vessels, coupled with less congestion, will help speed up the shift, leading to East Coast ports getting their fair share of shipping a lot sooner.

Which ports stand to benefit the most from the canal expansion?

Baltimore and Norfolk boast the only East Coast ports having 50-foot working drafts, which is required for the huge post-Panamax super freighters expected to pass through the canal. New York is dredging to deepen its draft to 50 feet in 2013. It also is increasing the height of the Bayonne bridge, which won't be completed until 2016.

All other East Coast ports expect to be huge beneficiaries of the expansion and have already started the race to increase depth and improve their surrounding infrastructure. Ports in Charleston, Jacksonville, Miami, and Port Everglades, FL, all intend to have 50-foot draft and supporting infrastructure within the 2014-17 timeframe.

The Port of Savannah has plans to reach 48-foot draft by 2014, and the ports in Houston and Philadelphia are expanding to a 45-foot draft. In addition, each of these ports has extensive infrastructure improvements in the works, including installation of post-Panamax cranes, rail facilities and improved highway access.

That said, the effect of all this on logistics real estate depends on variables that aren’t yet known -- the fees and costs of going through the canal in 2015, for example. Also, future technological improvements in cargo handling and the distribution supply chain strategies of shippers could affect the value proposition of siting warehouse facilities in a particular port market.

The five major distribution markets -- Los Angeles, New York/New Jersey, Chicago, Dallas, and Atlanta -- are expected to remain dominant in the post-expansion era. But a few other markets could stand out as beneficiaries, including St. Louis, Minneapolis, Denver, Cleveland, and even Detroit.

The New York-New Jersey metro is already a dominant market and its importance will only rise as a result of the canal expansion. California's Inland Empire, on the other hand, offers much less benefit to distribution seeded from the east.

Smaller markets such as Memphis and Kansas City, which don’t even show up on a West Coast-oriented logistics map, will gain significantly from an increase in East Coast imports.

The Inland Empire has seen tremendous growth over the past decade and thus has the most to lose. The good news here is that although the shift to the East and Gulf coasts will occur, it will take at least 10 years.

Further, the growth in total imports is expected to more than offset any decline in market share for the Inland Empire. While the Inland Empire’s growth story will remain intact, its trajectory may be less dramatic, according to PPR.

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