Colliers’ Logistics & Transportation Group recently hosted a visit to the Panama Canal. The question was debated, is the Panama Canal a deciding factor for industrial occupiers considering an eastern U.S. facility? This article, co-authored by Micah Mallace, director of regional sales at the South Carolina Ports Authority and James Breeze, national director of Industrial Research at Colliers International, will go over the data and take a look at what will continue to drive East Coast port growth in the coming years.
The expanded Panama Canal is unquestionably a game changer. However, it is not what many claim it to be—the primary driver for East Coast port growth. The primary driver of this growth has been e-commerce, and the resulting shift in supply chain strategy to a regional distribution model. This model takes into effect consumer demand, population growth, transportation costs and risk mitigation. The Panama Canal expansion has been a facilitator of this supply chain shift.
How the East has Won
East Coast ports have grown significantly the past decade and certainly since the expanded Panama Canal opened in 2016. In 2017, U.S. East Coast ports surpassed West Coast ports in total container volume for the first time. East Coast ports handled 46% of containerized trade while the West Coast handled 45% and the Gulf Coast moved 9%. Similarly, 82% of volume from Asia moved via a West Coast gateway in 2000; that number was down to 64% in 2018. East Coast/Asia import volume grew 32% comparing 2018 to the 12 months leading up to the delivery of the expanded Panama Canal. While these numbers don’t foreshadow the end of West Coast distribution (the ports of Los Angeles and Long Beach posted record activity in 2018), it could suggest the improved canal drove container volume and occupiers to the East Coast, but this is not a cause effect relationship.
There is no doubt that the new canal certainly had an impact. For example, the South Carolina Ports Authority has seen a 105% increase in capacity of ships connecting to Asia since the new Panama Canal opened. The benefit is tremendous for an ocean carrier. Unit cost decreased due to economies of scale from larger ships on a shorter route connecting Asia to the East Coast. Thus, the Panama Canal has had an impact as a facilitator of a trade expansion that was and remains underway.
But facilitator does not mean generator. Cost, risk mitigation, population growth and consumer demand for home delivery via online purchases are all driving import growth along the East Coast. Cost is simple; it is cheaper to deliver product to consumers on the East Coast via an East Coast port. Domestic transportation accounts for a greater percentage of freight spend than ocean. Risk mitigation is an ever-present consideration in business. Companies seek port diversity because weather, labor and other risk factors can cripple a supply chain dependent on any single gateway. Population growth is also a consideration, with the southern U.S. growing more than any region over the past five years, and this is expected to continue over the next five years. Five of the top 10 fastest-growing states (2016-2017) in terms of real population numbers are located in the South. Texas (#1), Florida (#2), North Carolina (#5), Georgia (#6), Tennessee (#9) and South Carolina (#10). These three factors have driven the incremental shift of cargo from West to East for years.
The Shift in Supply Chain Management
The change agent in the last decade, which accounts for the improperly attributed Panama Canal growth, is consumer demand. A generational shift in supply chain strategy has been underway for the past 10 years. After the recession, online sales grew exponentially. Immediate gratification is the focus of retail distribution today. Consumers will shop elsewhere if a product is not on the store shelf and e-commerce has driven home delivery windows from weeks to hours. The only mechanism for such fulfillment is to hold greater inventory in more locations in close proximity to consumption markets. Industrial occupiers are changing their supply chain strategy from one central distribution hub, to many distribution centers across the country. This shift in strategy is the main reason for the record amount of industrial real estate demand post-recession.
Since 2010, a whopping 1.8 billion square feet of industrial space has absorbed in the U.S.—and nearly half of this absorption happened over the past 36 months. Companies are occupying industrial real estate at a record clip to cut down on their largest transportation cost—long-haul trucking. To decrease this cost, companies are leasing more space, especially in areas with the most population growth. The Southeast U.S. has the highest population concentration is the country and is projected to be the fastest growing over the next five years.
Because of this, distribution centers are being occupied in the Southeast more than any other region in the U.S. In 2018, 27.7% of the total net absorption in the U.S. was in the Southeast, up from 22.4% in 2014. This shift has made Atlanta one of the top industrial hubs in the U.S. and has also created emerging industrial markets posting immense activity and development including the Shenandoah Valley in Virginia; Greenville, SC; the I-4 Corridor in Florida; and Southeastern port markets. This shift in demand could not have happened if it wasn’t for the ability to get products to the East Coast in a cost-effective way, and the Panama Canal expansion was a facilitator of this.
On the Horizon
Going forward, regionalized industrial absorption and port volume growth will continue as long as companies require a de-centralized distribution network. One need only look at population growth to forecast what areas will be strongest. According to the latest U.S. Census data, the South is expected to grow by more than 40 million people between 2010 and 2040 (35% growth). The second fastest growing—the West—is forecast to grow by more than 23 million (32%). On the other hand, the Northeast is not expected to grow, and the Midwest is expected to remain flat.
Companies make location and cargo routing decisions based on cost, risk mitigation, population growth and consumer demand. These factors drove port growth and absorption in eastern gateway markets. E-commerce reinvigorated the regionalized distribution model which accelerated that growth. And lastly, the Panama Canal was the icing on the cake; offering a line item cost advantage in an equation that already made sense.
This report was co-authored by Micah Mallace, director of regional sales at the South Carolina Ports Authority and James Breeze, national director of Industrial Research at Colliers International.