The document discusses how the expansion of the Panama Canal will allow larger "Post-Panamax" ships to transport goods more cheaply between Asia and the East Coast of North America. This is expected to shift manufacturing and distribution hubs away from the West Coast towards new intermodal ports on the East and Gulf Coasts that can accommodate the larger ships. Specifically, 21 potential new intermodal hubs across the US are identified that could see increased economic activity and job growth as a result.

1. The Post-Panamax Paradigm August, 2014
The July 2014 JVSC Insight noted that “the MACD chart below is forecasting lower interest rates”. That forecast proved 100% accurate – which is the reason we continue to publish these charts. They produce consistently reliable indications of interest rate momentum and direction. Let’s look at our mid-August charts and see where we’re headed!
The short term chart confirms downward rate momentum has accelerated. The MACD is well below the zero line with a red-over-black (negative) slope. August 6th was unique: T-bill rates evidenced a 176 bp gyration in a single day. It received NO press commentary. Nothing like that has ever been seen in these charts. HFT activity is suspected. The smoking gun? A very precise bottom triggered the reverse counter- trade: intraday rates dropped to exactly 2.30% before heading higher. The longer term MACD has also gone negative. We’re not “oversold” (RSI), so there’s no reason to anticipate a trend reversal at this time. “Risk-off” reflexives framed by darkening global realities are driving liquidity into Treasuries, thereby countering the FED’s QE tapering, scheduled to terminate in November of this year. Ironically, global military turmoil historically benefits sustainably-low US debt yield environments. Think of WWII. When investors remain alarmed, the FED can conveniently exit QE strategies without rate consequence.
Short Term
Long Term

2. The Post-Panamax Paradigm August, 2014
The Post-Panamax Paradigm
American transportation logistics and manufacturing economics are about to shift dramatically. The potential consequences extend beyond industrial assets; office, retail and apartment valuations will also reflect future regional shifts in US economic-geographic activity. This month, JVSC Insight explores what that future will logically look like – and explains where and why the Post-Panamax Paradigm is going to create winners and losers as America’s regional economics shift within this next decade.
What is “Panamax”? It’s the maximum ship dimension currently accommodated by the Panama Canal. By 2016, expansion of the Panama Canal infrastructure will enable ships of truly gargantuan cargo capacity to pass through the Canal into “deep water” East Coast and Gulf ports. These “Post-Panamax” ships can deliver cargo at cost savings 47% below current ship configurations because of their scale efficiencies.

3. The Post-Panamax Paradigm August, 2014
How big are these future ships? A brief intro to maritime terminology is helpful. A “TEU” is an acronym for Twenty-foot Equivalent Unit”. The standard 40’ shipping container used in the maritime industry equals 2 TEUs of cargo capacity (2,560 cubic ft.). Current Panamax ships have a load capacity of 5000 TEUs (2,500 containers). Post-Panamax ships will deliver 12,500-18,000 TEUs. Big.
Let’s translate that math into concepts. These new ships will be the length of the Empire State Building. They cost $200MM apiece to build. Their containers will stack as tall as a 20-story building. 18 million flat screen TVs will fit into a single ship! Computerworld says 34MM TVs were sold in the US in 2013. A single ship can now deliver 53% of America’s total TV purchases for an entire year. Wow.
Economics drive these proportions. These new ships will consume 50% less fuel per container than current industry averages, will travel at 19 knots (21.8mph) rather than 23 knots (26.5mph) and their emissions per container will be 50% less.
But there’s a catch. On average, Post-Panamax ships will draw 49 feet of water – which means you have to have a port water depth of at least 50 feet (to accommodate tides) so these behemoths don’t run aground.

4. The Post-Panamax Paradigm August, 2014
These 50” depths are known as “deep water ports” – with existing or pending locations (by dredging) shown in the map at left.
On the West Coast, three existing ports meet these requirements: LA-Long Beach, Oakland and Seattle. Because larger ships couldn’t get through the Canal, their cargos were unloaded and shipped from the West Coast across the US rather than sailing 5,000 miles around the Cape of South America. As a result, the Port of LA-Long Beach accounts for almost 50% of all shipped cargo entering the entire US! But only 23% of that cargo remains in Southern California. 77% of it is subsequently transported out of Southern California into the contiguous 48 states!
The cost of that subsequent transport across the US far exceeds the cost of ocean shipping. Rail is the cheapest land transportation followed by trucking (10x rail cost) and air (3x trucking).
Therefore, manufacturers, distributors and supplier want their raw materials and inventory to travel the longest distances possible by ship, next by rail and last by truck. Incorporating all these costs, the “breakeven” cost-equivalence line between shipping direct from Asia to the East Coast or to the West Coast (and
Average freight revenue per ton-mile (2006 $) Source: U.S. Department of Transportation, National Transportation Statistics, 2009.

5. The Post-Panamax Paradigm August, 2014
subsequently cross-country by rail and truck) is shown at right – that line hasn’t moved since 2004. But in 2016 it will move.
Logically a lower cost per TEU shipped from Asia will shift the Post-Panamax cost breakeven line WEST – more freight will be cost-effectively shipped directly into East Coast ports. (The exception will be perishable or time-critical cargos which will still be transited by air or truck).
These facts suggest several conclusions:
1. Deep water ports on the Gulf and East Coast will pick up the freight volumes currently being shipped cross-country. Post-Panamax logistics will deliver freight cheaper by sea than by rail originating from Port of LA-Long Beach. It’s estimated that the Canal expansion may re-route 35% of West Coast cargo volumes to East Coast and Gulf ports and logistics centers.
2. Manufacturing and distribution economics are driven by profit margins. Because competition caps product pricing, margin usually depends on cutting costs. By increasing ship distances and decreasing rail & trucking, the delivered cost of inventory & materials is consequently reduced.
3. Bigger ships won’t increase the width of US highway lanes or railroad tracks. Therefore, higher velocities of shipping within those modes will be needed to compensate their constraints. Infrastructure

6. The Post-Panamax Paradigm August, 2014
able to handle 2-3x increases in freight volume requires a 2-3x increase in efficiency to address that volume. High-capacity intermodal transfer infrastructures located in close physical proximity to the end- user customer are the ONLY way to accomplish this.
That third consideration brings us to a discussion of “Intermodal” logistics. This simply boils down to an evaluation of: (1) relative port proximity; (2) existing transportation lines and; (3) end-user demographics. Together with the deep water ports map, two more maps enable this evaluation.
The map on the left identifies the Nation’s Class 1 rail networks. The map on the right identifies the Nation’s “megapolitan” regions. According to CBRE, by 2040 these megapolitan regions will contain 66% of America’s total population. These demographic regions are where end-user consumers concentrate. The railroad nodes geographically closest to a deep water port and a megapolitan area will become key intermodal cargo hubs. What cities are revealed by this triune analysis? The US Government identifies them in the OSCAR (Ocean Shipping Container Availability Report). Including 3 OSCAR “omissions” at the bottom, there

7. The Post-Panamax Paradigm August, 2014
are 21 “high potential” post-Panamax Intermodal target locations in the United States.
These OSCAR hubs connect high import and export cargo velocities, raw materials, labor markets, customer MSAs and financial infrastructures (all but two FED Reserve Districts) with ports that process 75% of all US container movements. In this analysis, we are able to objectively define high-potential regions for economic growth and therefore, where consequent job growth is going to drive future US real estate demand.
Consider another factor in this analysis - where are these high potential Intermodal hubs located? With the exception of 3 sites - Seattle, NYC and Los Angeles, there is not a “Sexy Six” location to be found! Furthermore, half of these “high-probability” post-Panamax hubs are non-coastal. This is the shift we’re going to see. Deep water ports and the Intermodal hubs serving them are going to have to invest billions of dollars to prepare highway, rail, harbor crane, storage and transfer infrastructures for massive volumes of freight that will soon be offloaded from gargantuan Post-Panamax ships. That spells jobs. Lots of them!
And there’s also this to consider. Let’s say you’re a manufacturer. Perhaps you’ve been in Southern California because that is where most of your raw product/materials arrived on the West Coast. You then ship your products from SoCal to customers throughout the US. You’re now comparing the following Post- Panamax costs in considering whether to relocate to Charleston or stay in SoCal:
• Cost of living: what comparative payroll frames a living standard in each location?
• Municipal and State taxes, fees, utility costs, regulatory compliance
• Fixed facilities costs (to build or to rent) per SF
• Traffic congestion impacts on transportation costs;
• Access to high quality employee demographics
• Logistic proximities to major concentrations of your targeted customer base.
• Right to work vs. Union impacts on your manufacturing and transportation costs.

8. The Post-Panamax Paradigm August, 2014
If you decided that Charleston now makes more sense “Post-Panamax” after framing these considerations, what then? If it was a logical decision based on objective economics, you’re not going to be the only one making that move! Multiplied by thousands of similar manufacturer decisions, suddenly these Intermodal hubs are going to be filling with new jobs and lots of new people - living, shopping and playing in these same new regions of Post-Panamax high growth potential.
We’re already seeing this unfold. Consider Mobile, Alabama. Why did Thysson-Krupp build a new $3.7B manufacturing facility with 2,700 employees in Mobile? Why did Airbus acquire a 116 acre site on Mobile Bay adjacent to the Port of Mobile to assemble the A320 aircraft in a $600MM facility that will employ 1,000 people? Perhaps because the components and raw materials they need from Europe, Asia and South America can be shipped directly (therefore cheaply) to Mobile’s deep water port proximate to their new manufacturing facilities? Talk about cutting as-delivered transportation costs!
This trend is increasing. In July 2014, Boeing announced it will assemble the Boeing 787 in Charleston, South Carolina. Not Seattle. Why did Rolls Royce decide to build jet engine components shipped for assembly around the world in Indianapolis? Why is the second largest FedEx hub in the world also located in Indianapolis? Perhaps because Indianapolis is the most centrally located major city in the US with over 75% of all US businesses located within a 1.5 day trucking radius? Perhaps because Indiana is also #1 in the country in its concentration of total highway miles? This results in virtually congestion-free trucking and cost-efficient transit. Central Indiana also ranks in the top 10 States in total rail miles. That means congestion-free rail shipping. And Central Indiana also moves over one billion metric tons of air freight every year? Wow! Did Rolls Royce know that? You know they did. So do smart real estate developers and investors. Infrastructure is critical. Infrastructure always drives real estate values.
You can see why these Intermodal hubs are about to become future regional job growth and economic drivers. Regions that previously appeared rather “sleepy” are about to become surprisingly vibrant, economically resilient and dynamic. They will be the winners in this new Post-Panamax paradigm. The losers will also be defined by a Post-Panamax shift – those unable to sustain a compelling logistical cost, demographic and efficiency advantage over their new Post-Panamax alternatives. Valuations of apartment, retail, hotel and industrial assets will follow suit – for better or worse in these regions.

9. The Post-Panamax Paradigm August, 2014
The Post-Panamax economy and the Millennial demographic are already confounding conventional real estate investment mantras. Post-Panamax will enable superior future economic and demographic potentials in what were previously considered “Secondary” and “Tertiary” markets. Will those labels remain accurate in light of these shifting demographic and economic contexts? Facts are already refuting those perceptions. Mobile is already refuting those perceptions.
As a final case in point – let’s look at one more indicator of where “smart money” is now seeking opportunity in an evolving Post-Panamax scenario. Below is a chart showing total sales volumes of apartments in primary, secondary and tertiary markets. Look at 2014. What do you see? This is why Post-Panamax is going to be the next big thing in real estate over the next decade. Mind your TEUs.
Michael White is a national expert in real estate equity joint venture and entity-level capitalization, structured finance, development financing and complex multi-tier financing strategies. Experienced in both portfolio and fund executions, his professional acumen extends across multi-family, office, medical office,

10. The Post-Panamax Paradigm August, 2014
industrial, student housing, hotel, retail, and life-science assets profiles offering 30 years of real estate finance experience to clients on both coasts.