Panama Canal Expansion: Who Wins? Who Loses?

Panama Canal Expansion: Who Wins? Who Loses? Curtis Spencer, IMS Worldwide, Inc. Jim MacLellan, Port of Los Angeles Kevin Burwell, Virginia Port Authority John Moseley, Port of Houston Authority Agenda Overview. Balance is the Word of the Day West Coast View Port of LA East Coast View Port of Norfolk Gulf Coast View Questions 2 NAIOP 2011. Do not reproduce or distribute without permission. 1

Keys to the Balance Slow Steaming Fuel Costs Environmental Concerns Time-to-Market versus Costs 3 Shanghai to North American Ports: Slow Steaming Effects 2000 & 2011 17 36 36 35 17 34 From China, it takes about 2 Source: weeks ShipmentLink.com to bring cargo (Evergreen) to the Sailing west Schedules coast and about 4 weeks to bring it in on the east coast. (2000) 4 NAIOP 2011. Do not reproduce or distribute without permission. 2

Shanghai to North American Ports: Slow Steaming Effects 2000 & 2011 Pricing as of June 2011 $1,200 $1,720 17 36 36 35 $3,082 17 $3,050 34 From China, it takes about 2 Source: weeks ShipmentLink.com to bring cargo (Evergreen) to the Sailing west Schedules coast and about 4 weeks to bring it in on the east coast. (2000) 5 Shanghai to LA Shipping Rates ($1,720) 40 Container (FEU) June 2010 to June 2011 6 NAIOP 2011. Do not reproduce or distribute without permission. 3

China to East Coast Shipping Rates ($3,082) 40 Container (FEU) June 2010 to June 2011 7 Millions of TEUs 9 8 7 6 5 4 U.S. Key Port Growth 2005-2010 LA NY/NJ Oakland LB Savannah Houston 3 Hampton Roads Tacoma Seattle Charleston 2 1 2010 TEUs annualized based on actual current TEU volumes. - 2005 2006 2007 2008 2009 2010* 8 NAIOP 2011. Do not reproduce or distribute without permission. 4

October 11, 2010: In short, it appears the recession has changed the picture considerably for the East Coast prior to the economic and trade recession, the canal was seen as a gamechanger for the East Coast, with studies forecasting an immediate shift in market share as soon as the expansion is completed. No longer 9 Competition for Inland Destination, the Battleground 10 NAIOP 2011. Do not reproduce or distribute without permission. 5

Today Population Centers Drive Demand 2006-2011 Cumulative Population Growth 66% of the U.S. population 75% of U.S. consumption Growing population base Population Growth in Major Metropolitan Areas 10% or greater 5% 9.9% 2% - 4.9% Less than 2% Source: Global Insight 11 East Coast-West Coast TEU Cost Line Equilibrium June 2011 Norcal +35% Cascadia +38% Great Lakes Horseshoe +10% Equilibrium Line June 2011 Atlantic Seaboard +12% Southland +35% Source: Global Insight I-35 Corridor +40% Valley of the Sun +81% Southern Gulf Coast Belt +31% Florida +52% 12 NAIOP 2011. Do not reproduce or distribute without permission. 6

Now- The West Coast View Jim Maclellan Port of Los Angeles 13 Competitive Challenges to U.S. West Coast Ports The Panama Canal British Columbia Ports Mexican West Coast Ports The Suez Canal Other U.S. Gateways 14 NAIOP 2011. Do not reproduce or distribute without permission. 7

The Panama Canal: 8 Key Factors 1. LA/LB Terminal Capacity 2. Connecting Infrastructure to LA/LB Ports 3. World Bunker Prices 4. Panama Canal Fees 5. Panama Canal Capacity 6. Intermodal Rail Pricing 7. Comparative Transit Times 8. Demographics 15 LA/LB Terminal Capacity There is not likely to be a capacity crunch for some time due to: moderation of consumer demand Chassis being removed from terminals may assist terminal capacity 16 NAIOP 2011. Do not reproduce or distribute without permission. 8

Connecting Infrastructure to LA/LB Ports Three Bridges (Precede Containerization) Highways (Dedicated Truck Lanes) Near Dock Rail Terminals (SCIG & ICTF) 17 World Bunker Prices Up from $ 540 to $ 670 There are normally cost savings for shippers of 6 16 % via the Panama Canal, but that was before the spike in oil prices Slow steaming increases transit time & this disadvantages the Canal 18 NAIOP 2011. Do not reproduce or distribute without permission. 9

Panama Canal Fees $ 5.25 Billion in Improvements Fees will need to increase to recover massive financial investment The ACP may be more interested in maximizing revenue rather than volume 19 Panama Canal Capacity They cannot transit vessels in excess of 12,000 TEU s 8000 TEU ships need to enter most East Coast ports at less than capacity Norfolk is the one East Coast port with competitive draft 20 NAIOP 2011. Do not reproduce or distribute without permission. 10

Intermodal Rail Pricing Railroads will probably not surrender market share to the Panama Canal Intermodal revenues are competitive with coal Railroads have cut intermodal services which were marginal They have invested in these services & they want to keep them It is vital that BN s SCIG & UP s ICTF go forward quickly (we need to keep their vital interests & investments aligned with our interests) 21 Comparative Transit Times 9 day longer transit time from Taiwan to LA/LB compared to the Panama Canal Is the buyer or seller financing this extended inventory period? 22 NAIOP 2011. Do not reproduce or distribute without permission. 11

Conclusion Shift to E.C. & Gulf will be gradual All water routes will gain modest market share Shares will shift within the West Coast U.S. East Coast & Gulf have long term draft & capacity issues Railroads (BN & UP) wish to reinforce their competitive position 23 British Columbia Ports Prince Rupert Vancouver The Role of the CN and CP Railroads 24 NAIOP 2011. Do not reproduce or distribute without permission. 12

Mexican Ports Manzanillo Lazaro Cardenas (Kansas City Southern RR) Punta Colonet Project 25 The Suez Canal South East Asia to New York & U.S. South East Shift of manufacturing growth to Vietnam India area The Young Tigers The Singapore Dividing Line Current Challenges & Future Opportunities 26 NAIOP 2011. Do not reproduce or distribute without permission. 13

Other U.S. Gateways Competition from other US Gateways (receiving Federal Funds): NS RR Heartland Corridor ($95 Million) NS RR Crescent Corridor ($105 Million) CSX RR National Gateway Corridor ($98 Million) Fort Worth, Texas ($ 34 Million) 27 The LA Gateway Advantage Most numerous & frequent services to / from Asia, Australia & the West Coast of Latin America Greatest number of destination ports of call Equipment availability Greatest number of logistics & distribution centers in the U.S. (660 million sq. ft. in 60 miles of the Port) Greatest number of specialist logistics service providers First Class rail links to the entire U.S. market Foreign Trade Zone 28 NAIOP 2011. Do not reproduce or distribute without permission. 14

Now- The East Coast View Kevin Burwell Virginia Port Authority 29 Mid-Atlantic U.S. Location The Port of Virginia is within a day s drive of two-thirds of the U.S. population 30 NAIOP 2011. Do not reproduce or distribute without permission. 15

The Port of Virginia Virginia Inland Port Norfolk International Terminals Newport News Marine Terminal Future CIMT APM Terminals Portsmouth Portsmouth Marine Terminal 31 31 Selected Distribution Facilities Using the Port of Virginia 32 NAIOP 2011. Do not reproduce or distribute without permission. 16

Channel Depth, Ship Capacity JA 38 ft 4,500 X TEU NY/NJ 42 ft Savannah Charlesto n 45 ft 8,500 TEU Norfolk 50 ft 12,500+ TEU Norfolk 55 ft (authorized) 33 33 CMA CGM Figaro 8500 TEUs Approx. 1,100 feet long 17 containers across Larger than a Nimitz-class aircraft carrier Second vessel in excess of 8400 TEUs to call at The Port of Virginia in 2010 Our channels and terminals can handle these vessels fully loaded unlike any other port on the East Coast 34 34 NAIOP 2011. Do not reproduce or distribute without permission. 17

Expansion of the Panama Canal $5.25 billion capital investment program to modernize and improve the Panama Canal $190 million channel deepening project began in 2002 $1.6 million project to redesign a third set of locks 35 35 Panama Canal Expansion New Locks Will Accommodate Post-Panamax Vessels 36 36 NAIOP 2011. Do not reproduce or distribute without permission. 18

Panama Canal Locks and Vessel Sizes Panamax 33.5 m (110 ) 32.3 3 m (106 ) ) 55 m (180 ) 12.4 m (39.5 ) 12.8 m (42 ) 49 m (160 ) 18.3 m (60 ) Post Panamax 15.2 m (50 ) 37 Suez Canal Port Said Mediterranean Sea Lake Timsah Bitter Lakes Overall length: 120 miles Width: 590ft / 622ft Max. permissible draft: 62ft The canal is sea level, no locks. Suez Sinai Peninsula 38 NAIOP 2011. Do not reproduce or distribute without permission. 19

Panama Canal vs Suez Canal Hong Kong, China Port of Virginia Panama Canal Suez Canal Via Panama Canal Distance: 11,021 nautical miles Via Suez Canal Distance: 11,705 nautical miles 39 Rail Gateway Serviced by Two Class 1 Railroads New on-dock rail yard at NIT Rapid ramping from vessel Faster service to inland points Expanded rail capacity 40 NAIOP 2011. Do not reproduce or distribute without permission. 20

The Heartland Corridor Chicago Cleveland Harrisburg New route is Double- Stack; eliminates more than 230 miles Operational as of Sept. 2010 1031 1,031 Miles to Chicago 28 Tunnels Require Modifications to Provide 20-3 Clearance Columbus 1264 1,264 Miles to Chicago Prichard Roanoke The Port of Virginia Heartland Corridor 41 Cargo Terminals Hampton Roads Harbor NNMT Future CIMT NIT APM Terminals PMT 42 NAIOP 2011. Do not reproduce or distribute without permission. 21

Future Craney Island Marine Terminal Phase 1 June 2025 Total Acreage: 220 Pier Length: 3000 ft. Depth: 52 ft. Cranes: 6 Capacity: 1.5M TEUs Cost: $1.2B 43 Virginia Island Port Five-day-a-week rail service between the VIP and the Hampton Roads marine terminals Within 1 mile of Interstate 66 and within 5 miles of Interstate 81 44 NAIOP 2011. Do not reproduce or distribute without permission. 22

How Much? All West Coast ports handle 25M TEU annually some of that will shift to East Coast ports Fun stuff with percentages: Total TEUS West Coast 5% 10% 20% 25% 25,000,000 1,250,000 2,500,000 5,000,000 6,250,000 Shifted Amounts to VA 15% 187,500 375,000 750,000 937,500 20% 250,000 500,000 1,000,000 1,250,000 30% 375,000 750,000 1,500,000 1,875,000 35% 437,500 875,000 1,750,000 2,187,500 45 Economic Impact? Study of the impact of the Port of Virginia done in 2008 On annual throughput of 2.1M TEU 343,000 jobs $41.1B in revenue $1.2B in state and local taxes How much more would 750,000 1.5M TEU do for Virginia? 2500000 2000000 1500000 1000000 500000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 46 46 NAIOP 2011. Do not reproduce or distribute without permission. 23

Now- The Gulf Coast View John Moseley Port of Houston Authority 47 Agenda Panama Canal Expansion Port Challenges Increase Vessel Sizes Increased Vessel Capacities Adequate Cargo Base Commercial Real Estate Growth Opportunities New Ports of Entry for Asian Imports Preferred Port Logistics Capabilities Port of Houston Capabilities IRE Costs Labor Business Environment IRE Market Logistics Infrastructure Security & Sustainability 48 NAIOP 2011. Do not reproduce or distribute without permission. 24

Panama Canal Expansion Port Challenges Increased Vessel Sizes Ability to Handle Large Vessels New Port Infrastructure Requirements Increased Vessel Capacities Ability To Handle Large Cargo Surges Landside Capacity (Terminals, Rail, Truck) Sufficient Cargo Base Ability to Fill Large Vessel Capacities Large Population Base (Local & Inland) 49 Panama Canal Expansion Port Challenges Post-Panamax Vessels New Infrastructure Requirements Channel & Berth Depths Height Clearances (Bridges) Facilities & Equipment (Post-Panamax Cranes) Port of Houston Ready 45 Main Channel Depth No Height Restrictions i 13 Post-Panamax Cranes 50 NAIOP 2011. Do not reproduce or distribute without permission. 25

Panama Canal Expansion Port Challenges Post-Panamax Cargo Surges Adequate Landside Capacity Marine Terminal Capacity Intermodal Rail Capacity Over-The-Road Infrastructure Capacity Port of Houston Ready Large Terminal Capacity (2,500,000+ TEUs/year) Largest Intermodal Rail Facility on Gulf 160,000+ lifts/year Extensive Over-the Road Network Capability Hundreds of Motors Carriers (Drayage, TL, LTL) 14 major Freeways; 3,000+ centerline miles 51 Panama Canal Expansion Port Challenges Cargo Base Requirement Sufficient Market Demand Local Population Base North American Inland Markets via Intermodal Rail via Over-the-Road Delivery Port of Houston Ready Large Local Population 7,000,000 people within 4 hours drive time 28,000,000 people reached for next-day delivery Over 9% population growth over next 5 years Large Warehousing & Distribution Center Base Wal-Mart, Home Depot, Walgreens, Dell, Office Max Intermodal Rail Access to all of North America 4 Local Intermodal Rail Terminals (served by BNSF, UP, KSC Railroads) Over-the Road Access to all of North America Most US Markets reached within 4 days drive 52 NAIOP 2011. Do not reproduce or distribute without permission. 26

Panama Canal Expansion Real Estate Growth Opportunities Commercial Real Estate Growth Opportunities New Ports of Entry for Asian Imports Will Open Gulf & East Coast Ports to new Post-Panamax Vessel Calls New Load Centers Established Larger Vessels; Fewer Port Calls Increased Diversion of West Coast Discretionary Freight to Ports Closer to Eastern Markets Port of Entry IRE Growth Import Warehouses (e.g., >250,000 000 sq ft.) Container Transload Facilities (e.g., long, narrow bldgs; high ratio dock doors; ample yard space) Related Logistics Infrastructure (e.g., container yards, truck terminals, etc.) 53 Panama Canal Expansion Real Estate Growth Opportunities Port Winners (Greatest IRE Growth) Ports with Superior Logistics Capabilities Preferred Port Logistics Capabilities: Competitive Costs Robust IRE Market Adequate Labor Supply World-Class Logistics Infrastructure Business-Friendly Environment Security & Sustainability Systems 54 NAIOP 2011. Do not reproduce or distribute without permission. 27

Panama Canal Expansion Real Estate Growth Opportunities Port of Houston Optimal Logistics Capabilities Competitive Industrial Real Estate Costs Lower Land Costs & Construction Costs than the US Average Land Cost1 Construction Cost Index1 $6.00 100.0 98.0 100.0 $5.00 $5.70 96.0 94.0 $4.00 92.0 $3.00 90.0 88.0 $2.00 $1.00 $2.50 86.0 84.0 82.0 86.9 $0.00 Houston USA 1 Houston IRE Land Cost compared to calculated US Avg. (per sq ft); Source: `Colliers (Q4 2010) 80.0 Houston USA 1 RS Means Building Construction Cost Data (2010) 55 Panama Canal Expansion Real Estate Growth Opportunities Port of Houston Optimal Logistics Capabilities Conducive Business Environment: No Corporate or Personal State Income Taxes Large Variety of Incentives (Tax Abatements, FTZ, Freeport Exemptions, Grants & Loans) Among Top States & Cities in Business Climate Rankings Site Selection, Fortune, Bloomberg, KPMG) Robust Industrial Real Estate Market: Industrial space occupancy growth of over 3% CAGR Over 474 million sq ft. of industrial real estate 56 NAIOP 2011. Do not reproduce or distribute without permission. 28

Panama Canal Expansion Real Estate Growth Opportunities Port of Houston Optimal Logistics Capabilities: Developed Logistics Infrastructure: World-Class Port Facilities with no Port-related User Fees Extensive rail infrastructure with 4 local Intermodal Terminals Rail & truck volumes provide competitive outbound rates & equipment availability Well developed highway system within 20 miles of Port Excellent North/South & East/West highway access Less Travel Delay Hours than USA Average Travel Delay Hours1 USA 185.5 Houston 144.3 20 70 120 170 220 57 Thank You! Curtis Spencer, IMS Worldwide, Inc. Jim MacLellan, Port of Los Angeles Kevin Burwell, Virginia Port Authority John Moseley, Port of Houston Authority 58 NAIOP 2011. Do not reproduce or distribute without permission. 29