What An Eastern-Shifting Supply Chain Means For North American Seaports And Industrial Real Estate

Former key ports of entry along the West Coast of North America have begun to compete with increasingly modern and more efficient East Coast ports. Rising dependence on intermodal services has made railway connections between ports a necessity, while e-commerce has spurred industrial real estate development, leading to increased competition and location flexibility for warehouses.

The $5M Panama Canal expansion, completed in June 2016, can explain the shift east. The expansion added two new locks and created a new lane that can handle much larger post-Panamax and super post-Panamax ships, which hold up to 14,000 TEUs. For K.C. Conway, senior vice president for credit risk management and market intelligence for SunTrust Banks, the efficiency of the expansion has yet to be proven. “The Panama Canal did not really open up to expanded trade until June 2016,” Conway said. “One of the misnomers is that much more traffic will flow through, but they forget that the canal [is] for two-way traffic.”

The rate structure for goods going through the Panama Canal has yet to be decided, causing some shippers to turn to the Suez Canal to avoid higher costs. “You have no barriers either on depth or height on container ships going through the Suez Canal. It is cheaper and the risk issues are not as dramatic,” Conway said. Cargo has a more direct route through the Suez Canal, through the Mediterranean Sea and across the Atlantic to East Coast seaports. Otherwise, cargo shipped from Hong Kong to West Coast ports has to be transferred to trucks or shipped through the Panama Canal to reach East Coast ports. “From Hong Kong to the East Coast, the Suez Canal is the most efficient route,” Conway said.

Hesitation over the effectiveness of the Panama expansion has eastern ports adapting to handle a larger flow of cargo. “Not only did they look at dredging but also all kinds of modern efficiencies like robotic cranes and better on-dock rail services to the ports that the West Coast ports do not necessarily have — especially in Southern California,” Conway said. East Coast ports have led port modernization, while the West has historically been hindered by labor unions that fear upgrades will lead to job loss. Further modernization is required in the wake of shipping consolidation. “We will probably go from four shipping alliances to three and probably from two dozen shipping companies to maybe 10 or less over the next three to five years,” Conway said. “So these shipping companies have been trying to figure out tech issues to deal with that consolidation.”

Population density also plays a factor, as services like e-commerce require faster last-mile logistics near consumers. “Most of this shift has almost nothing to do with the Panama Canal. It has to do with a majority of the population being east of the Mississippi River,” Conway said. Looking north, Canada experiences a similar clustering of the population around major eastern cities, an established network of both consumers and shippers that ties major port cities like Toronto and Ottawa to a continental supply chain. These ports are also close to established networks of transportation across the continent. “Rail is a more reliable form of ground transportation than trucking and, five of our seven Class I trains move north to south along the East Coast and the Great Lakes,” Conway said.

Eastern seaports have begun to leverage connections to intermodal hubs and shipping services. This has threatened trucking companies that depend on an overcrowded interstate system to move goods. “One of the challenges for the Port of Long Beach is that the trucking unions want to move everything by truck into the Inland Empire. You have traffic problems, you have slower turn times and you have all kinds of problems by moving goods from the dock by truck rather than having rail directly there. As rail becomes a more reliable option for cross-border shipping, new warehouses will crop up along these routes."

The power of industrial investment increasingly rests with retailers, who can affect the success of a port more than geographic location. By investing in logistics services, they can control everything from arrival at the port to delivery at the consumer’s doorstep. “The retailers are building their own supply chain,” Conway said. “They are owning it in order to guarantee fulfillment and delivery. They want to own the warehouse, the proprietary technology in the warehouse and the conveyor belt. They see that their future is the supply chain and it is e-commerce fulfillment. It is not the front retail store.”

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