West Coast not the best coast anymore

We’ve been calling the shift of logistics/industrials growth from the West Coast to the East and Gulf Coast markets for around a year now. But that transition really started to take shape in the third quarter of 2023. Friendshoring is increasingly changing the sources of containerised imports, moving them away from China and towards countries like India and Vietnam. As such, the more efficient route to get goods into the US is now moving to the ports of Houston, Savannah, New York, and New Jersey. If you live in the US, you may have already noticed fewer ‘Made in China’ labels on the products you buy – especially for fast-moving consumer goods like footwear and garments.

As a result, East and Gulf Coast ports are improving their infrastructure. This means third-party logistic companies and shippers will be drawn to these areas. We’re already seeing evidence of this. In 2021, Mediterranean Shipping Lines launched a direct Vietnam to US East Coast route. More recently, Ocean Network Express opened a weekly route from West India to the US East Coast ports.

Nearshoring is also leading to more land-based shipping, which could be a boon for cities such as Dallas and Chicago. Both have intermodal terminals that are perfect for interchanges for rail and truck shipments. They also use multiple new freight rail lines, spanning from Mexico to Canada.

Why the shift?

Let’s look at the expansion of manufacturing activity in and near the US in the past 12 months and why it’s happening.

First, there’s the Chips Act, which provides $53 billion in semiconductor-industry subsidies. Firms such as Texas Instruments, GlobalFoundries, Samsung, United Microelectronics Corp., and Taiwan Semiconductor Manufacturing Co. have cited the act for their decision to expand in the US. New fabrication facilities also come with supporting component manufacturers, which usually build around the same areas. This creates a semiconductor cluster. Geographically, most of these new fabrication facilities are in the Sunbelt or near Gulf Coast ports.

Another driver of nearshoring is the Inflation Reduction Act. This increased subsidies for electric vehicles (EVs) by removing company caps on the number of cars that can be sold with tax credits. The act also introduced new requirements to onshore and friendshore the EV supply chain. Consumers can receive varying tax credits for new EVs. The credits depend on whether the vehicle, batteries, battery components, and battery minerals were extracted in the US or countries with which the US has a free trade agreement.

South of the border

Mexico provides a manufacturing-based economy and a helpful free-trade agreement. Currently, more than 400 companies have expressed interest in moving production from Asia to Mexico. This has partially been reflected in a 30% year-on-year increase in foreign direct investment into Mexico in the third quarter of 2023.

Where next?

How do all these incentives and nearshoring activities affect the US industrial and logistics market? Initially, we’ll probably see continued rapid development and take-up on land borders, such as Laredo and Otey Mesa. Nearshoring will eventually affect established intermodal transport hubs with existing infrastructure, including Chicago and Dallas. These will be fed by the multiple new rail freight lines connecting Mexico, the US and Canada.

With the current China and US tensions, it’s hard to see a full recovery of the West Coast ports and surrounding markets. We think the East and Gulf Coast ports will retain a large portion of their recently acquired market share. This would then drive demand for logistics and industrial real estate. However, we expect the logistics and industrials market to normalise in 2024, as supply is delivered and some major third-party logistics companies reevaluate their space needs amid poor profit margins.

Nevertheless, landlords should take comfort that there will be more demand for industrials and logistics. The long-term fundamentals remain encouraging. True, rental growth probably won’t be as spectacular as it was during the supply crisis. And we’re also seeing some price softening due to near-term uncertainty. However, we believe these dynamics create an opportunity to pick up a few choice industrial assets for the long haul.