Is 2017 the Year of the Anticipated Coastal Import Shift?

by | 17 January 2017

The Panama Canal expansion opened six months ago, increasing the size of ships that can pass through to 14,000 TEUs.* The expansion generated optimism that larger ships would increase inbound container volumes and thus lead to an increase in demand for industrial real estate. However, through October 2016 the canal was performing below capacity. One recent Journal of Commerce article suggests that less than one-third of the 12 daily slots through the Panama Canal are being taken.

Many expect that the Panama Canal expansion will create a shift in container traffic from West Coast ports to East Coast ports. But this hasn’t happened yet. According to data released by local port authorities throughout the U.S., loaded imports increased in East Coast ports by 2.1% in 2016 (through November) and increased by 2.8% along West Coast ports for the same time period. So when will a shift, if any, happen?

ALL EYES ON THE BAYONNE BRIDGE

New York-New Jersey, the largest port on the East Coast, is still expected to be the main beneficiary of any increase in inbound container volume from the Panama Canal expansion. This is because of its proximity to the largest population concentration on the East Coast and the recent dredging project that deepened its harbor to 50 feet.

The problem is that access to the terminals through the Kill Van Kull tidal strait (connecting Staten Island, NY with Bayonne, NJ) requires ships to pass under the Bayonne Bridge. Today, the bridge’s 151-foot height only allows ships of less than 10,000 TEUs to berth at three of the port’s main terminals. Progress is underway to elevate the Bayonne Bridge to 215 feet, allowing ships of up to 18,000-TEU capacity to call at all four of the port’s main terminals.

The Bayonne Bridge is not the only project under way to accommodate larger vessels crossing the Panama Canal. Dredging projects to deepen harbors in Charleston and Savannah continue, with both slated to complete in either 2018 or 2019. The Port of Baltimore is also requesting funding to improve its intermodal rail capabilities to ship more products via rail to the Midwest.

With the Bayonne Bridge not slated to be completed until the end of 2017, we don’t expect any major coastal shift due to the Panama Canal expansion in the coming year. However, developers and occupiers are looking at possible long-term growth along East Coast port markets as a reason to increase occupied space and development in or near port markets.

Some of the markets already benefitting include Charleston and Savannah, which finished Q3 2016 with the highest and third-highest YTD net absorption as a percent of inventory (6.4% and 4.3% respectively) in the country. Markets in Baltimore, Virginia, New Jersey, Massachusetts and Eastern Pennsylvania are all posting significant amounts of positive absorption and an increase in development in 2016.

Loaded Inbound Container Volume (TEUs)

  2015 (YTD as of November) 2016 (YTD as of November) % Change
Port of Los Angeles
3,838,054 4,150,531 8.1%
Port of Virginia
999,496 1,077,183 7.8%
Washington Seaport Alliance
1,199,348 1,268,051 5.7%
Port of Charleston
768,818 812,523 5.7%
Port of Baltimore
368,899 386,017 4.6%
Port of Oakland
774,573 809,707 4.5%
Port of Houston
775,824 810,441 4.5%
Port of Savannah
1,511,191 1,537,448 1.7%
Port of New York and New Jersey
2,962,536 2,935,287 -0.9%
Port of Long Beach
3,329,263 3,170,976 -4.8%

Note: 2016 data as of November. Port of Baltimore 2016 data as of October.

West Coast port markets are also performing well. Despite the Hanjin bankruptcy, loaded inbound containers at the Port of Long Beach were only down 4.8% for 2016 (as of November). The new year also brought welcome news as the Port of Long Beach is expected to approve a lease of the vacant Hanjin terminal to Terminal Investment Limited, the terminal operating subsidiary of the Mediterranean Shipping Company (MSC), which could significantly increase loaded inbound containers at the port in 2017.

Continued strong performance along West Coast ports helped keep real estate fundamentals robust in 2016. At the end of the third quarter, Los Angeles posted the lowest vacancy rate in the country at 1.3%. The Inland Empire, a major benefactor of imports from the ports of Los Angeles and Long Beach completed 18.7 million square feet of new construction through Q3 2016—the most in the country. Oakland also posted an annual asking rental rate growth of 19.6% to $8.04 per square foot per year (PSF/YR) for warehouse/distribution space.

U.S. Seaport Market Net Absorption**

2015 (YTD as of Q3) 2016 (YTD as of Q3) % Increase
50,429,049 54,528,005 8.12%

** Note: Analysis only includes markets connected to seaports

GEARING UP FOR A STRONG 2017 AND POSSIBLE COASTAL SHIFT IN 2018

While East Coast ports and the corresponding industrial markets will have to wait until at least 2018 for an increase in demand from larger vessels crossing the Panama Canal, the continued growth of e-commerce and the confident American consumer should be enough to keep imports robust and industrial fundamentals strong along both coasts in the coming year.

*TEU stands for Twenty-Foot Equivalent Unit, which can be used to measure a ship’s cargo-carrying capacity. The dimensions of one TEU are equal to that of a standard 20′ shipping container: 20 feet long, 8 feet tall.

James Breeze is National Director of Industrial Research for Colliers International in the United States. Based in the Greater Los Angeles area, he prepares quarterly and specialized industrial research reports and interprets trends and data across the country.