In a series for CREATE Magazine this year, we’ve been exploring the interplay between transportation and real estate. Real estate pros who work in the industrial arena gain a competitive edge when they understand where products are manufactured and how the product travels to the retail or wholesale shelf.
The series covered intermodal supply chain considerations (Part 1), logistic supply hubs (Part 2), and original equipment manufacturers (Part 3). In the third article, we also looked at the potential impact of reshoring and 3D printing.
Key points from the series:
Speed of delivery and cost are most critical to the customer. Transportation costs to a supply-chain customer can be at least 60% of its overhead. Cost delivery is critical to product pricing to the end customer. Many supply-chain contracts will have penalties for not delivering products on time. These manufacturing penalties can include free products, discounted products or the right to send the product back to the manufacturer at their loss.
Intermodal access gives your client a broader range of cost-effective transportation solutions. Intermodal refers to the transport of goods via some combination of water, rail, air or highway.
Brokers need a grounding in the issues around transporting goods in and out of—and through—the country. For companies that produce in volume to obtain pricing advantage, ships offer both volume and cost efficiency. But brokers also need to:
- Be proficient in rail service and land near highways
- Have relationships with the port authority and municipal government on permitting
- Have access to ready-industrial sites near ports of entry to unload and store products
- Be knowledgeable on the related costs
To close the series, let take a look at how shipping has evolved in recent decades.
Every ship coming into the U.S. needs a port to unload. On a global basis, the Shanghai, China, port is the largest port in the world by TEU volume. TEU stands for “twenty-foot equivalent unit” and is the term used to define the capacity of a container ship. One 20-footlong container equals one TEU. Shanghai accommodates more than 45 million TEUs a year. Large retailers, such as Walmart, may use over 800,000 TEUs a year.
Shipping to the U.S. in bulk requires large ships. In the past, ships on average could carry 5,000–8,000 TEUs. They would load in Shanghai and deliver to the nearest ports in the U.S., which are the neighboring Los Angeles and Long Beach ports. From Long Beach, products were shipped by rail to the East Coast, or the ships would travel through the Panama Canal to reach eastern ports. The travel distance, according to Pro Logis, was only 13 days to Long Beach, whereas the costly route through the Panama Canal to New York City took 26 days.
The alternate route to the East Coast would be through the Suez Canal and across the Atlantic. However, from China, that route was longer and more expensive—and often subject to Suez Canal shutdowns from war or crisis.
The Challenge of Megaships
The slow, steady growth of the population over the years meant that the country needed more products. Although U.S. population growth has slowed in recent years, today we have 48 million, or 16%, more people than just 20 years ago. To keep delivery costs down, shipping companies manufactured larger ships that could carry more bulk products. As a retail customer, if you could order one ship of products rather than having three ships to carry the same bulk size, then it would be more desirable. So, in the late 2000s, megaships were built to carry 20,000–22,000 TEUs.
The larger ships added more issues for ports:
- These megaships couldn’t transport through the Panama Canal. The Canal was constructed in 1914 with two canals designed for the smaller ships of the day.
- Larger ships are denser (heavier) and sink lower in the water. You need ports or harbors that have depth.
- Large ships are taller, including the height of the pilot tower. Many of these ships cannot transport under bridges in a port area.
Because the West Coast ports could accommodate these large ships, the East Coast and Gulf Coast were losing out on business. The Los Angeles and Long Beach ports were bringing in approximately 40%–50% of all U.S. imports. The port business includes significant revenues generated from tugboat delivery to berth, ship parking at a berth, unloading ships, storing TEUs at port, trucks or rail coming into a port. These fees combined are known as drayage fees and can run $3,000–$10,000 per ship.
In 2014, the Panama Canal decided it needed to create a third canal. If a third canal were able to accommodate larger ships (not necessarily as large as 20,000 TEUs but larger than 7,000 TEUs), shipments could be made from Shanghai directly to the East Coast.
But the third canal presented new problems. The ports on the East Coast were behind the times, too. A large ship needs at least 50–55 feet of depth, minimum bridge clearance of 180–190 feet, and cranes large enough to reach the width of a ship to unload TEUs. One of the early megaships—the “Big Emma” from the Danish company Mærsk—is as long as the Empire State building is tall, approximately 1,400 feet. Today’s ships are even larger. One large ship may need 11 cranes. Each crane costs millions of dollars, and, if you have multiple berths, you could need 100 cranes. By comparison, Long Beach has 155 post-Panamax cranes and 350 berths. (Panamax refers to width and length specifications for get through the Panama Canal.) Then there’s the cost to dredge and raise the bridge heights or rebuild bridges.
To bring a port to state-of-the-art status takes years, and the cost is in the hundreds of millions of dollars. That cost might be borne by taxpayers or by the Port Authority, and it’s not clear until it’s built whether the port will get the shipping business to offset the investment.
Still, if the East Coast could deliver these ports of entry, then it would help the manufacturers get closer to their customer base and have alternatives in case a port was impacted by weather or a union strike.
New Infrastructure Boosts Distribution
The race was on to complete port reconstructions. And for the ports that were spending money on new infrastructure, demand also grew for nearby distribution facilities.
In demand were spaces as large as 500,000– 1 million square feet within a day’s drive of retail customers. Also in demand: areas near highways for truck delivery from a port or rail line. Trains can could carry more TEUs than trucks, and it’s cheaper to deliver by rail. Therefore, industrial users might need a warehouse with rail service, a more specialized need (think logistics hub).
During 2014–2022, I toured and researched many of West Coast and East Coast ports. The East Coast ports that stand out today as critical infrastructure include Savannah, Ga., Charleston, S.C., Norfolk, Va., Baltimore and New Jersey/New York City. Some of the smaller East Coast ports that I’ve toured include Miami, Port of Everglades, Fla., Philadelphia and Boston.
Some locations are too far from the major customer base to be considered major ports. These locations, known as “hinterlands” in the supply-chain world, serve a more decentralized and local market. Remember, the further from Shanghai a ship has to travel, the more expensive the delivery. Products bound for Portland, Maine, for example, might land in New Jersey and be transported by rail or truck to Newburgh, N.Y., home of millions of square feet of distribution space and located on east/ west, north/south highways to Maine.
While you may not need the history of how shipping has evolved in the U.S., it pays to know the basics and to understand your client’s distribution needs.
Does the company operate using a decentralized model, with multiple regional distribution facilities throughout the U.S., or a centralized model with one large facility that handles the entire country? Also, do you have the relationships in the supply chain to advise your client? If so, you can be the “go to” expert when it comes to helping clients locate industrial and warehouse facilities.
