Analysis: What the Baltimore Bridge collapse means for real assets

On March 25th, the 100,000-tonne container ship Dali struck the Francis Scott Key Bridge over the Patapsco River in Baltimore, Maryland, causing the bridge to collapse. The bridge will be rebuilt, but even the most optimistic estimates say this will take at least a year, and many think it will not be operational until 2028.

This affects crucial land and sea routes. The location is a critical node in the freight network around the Baltimore region and a major distribution point for the Mid-Atlantic region of the US. Previously, the bridge carried, approximately 5,000 trucks per day.

Ships coming into the Port of Baltimore passed under the bridge to reach container, bulk and roll-on/roll-off (ro-ro) facilities on the city’s waterfront. The port is the fourth-largest on the East Coast, handling some 71m ships in 2021.

Baltimore-based Realterm owns and manages more than $11bn (€10.2bn) in what it terms “transportation real estate and infrastructure assets that serve land, air, sea and rail networks”. Head of research Nathan Kane has therefore been focused on the wider implications for the sector it invests in.

Individual industry supply chains are being disrupted, most notably automobiles, he says. About a third of US auto imports – excluding Canada and Mexico – come through the Port of Baltimore. It is a major import centre for GM, Ford, Mercedes and Volkswagen. Kane notes: “Volkswagen are lucky that their ro-ro facility is outside the area affected by the bridge. Others are less lucky.”

Switching to other ports

It is likely there will be a switch in ro-ro traffic to other ports on the East Coast, such as Brunswick, or even to some on the West Coast. “In terms of the overall effect on other ports, it has to be considered what the facilities are in those ports and whether they have spare capacity. In this regard it’s fortunate that we are in a freight recession right now, especially compared to the somewhat manic situation two years ago.”

Record growth in shipping demand in 2021 and 2022 coincided with serious labour problems causing a fall in supply capacity. This led to significant price increases. “But in the last 12 months, revenues in general have fallen by something like 10%,” says Kane. “This should mean that there is capacity for additional traffic.”

There is no precedent to a port being taken out of action for a period of time and then returned. It is therefore difficult to predict whether it will be a temporary feature or will lead to long-term damage to Baltimore as a port.

However, Kane notes: “We did see something like this when the significant bottlenecks occurred at Los Angeles last year and there was a major switch to the East Coast because the West Coast simply could not cope with the weight of freight. A lot of that business has gone back to LA, but it is true to say that the East Coast remains net beneficiaries of the Los Angeles snarl up, especially the ports of Savannah and New York.”

He adds: “The longer the clear up, the higher the likelihood that other ports will be net beneficiaries. It is also true that many of the ports on the East Coast have invested significantly to ensure that their ongoing logistics pathway to Chicago and the Midwest is smoother than perhaps Baltimore’s is. Baltimore also has a significant problem with the size of one of its major exit tunnels which it is considering addressing.”

Implications for Baltimore real estate

For the Baltimore real estate affected, Kane fears “it may make occupiers more hesitant, causing some landlords to drop their rents”. But he believes the effect will be short-term.

There are good reasons for this. Baltimore has a very significant built-in advantage with its very deep channel. Otherwise on the East Coast only New York and Norfolk have the 50ft deep channels needed for the supersized ships increasingly used for transcontinental shipping.

Kane also notes: “It should not be forgotten that the building project will itself lead to significant demand for properties around what will be one of the largest infrastructure projects occurring in the US. Overall, this may mean that there is little effect on demand for space.”

He adds: “For investors, this is a very minor event which will not have national impact but only some limited impact in the Baltimore area itself. I don’t even feel that it will have that much of an impact on rents in that area and the disruption is only likely to last a year or so.”

What it means for broader trends

That may signify other important trends. The relatively small impact of the Baltimore bridge collapse demonstrates companies’ growing commitment to eliminate global bottlenecks.

Following the disruption to shipping from COVID-19, particularly in exporting manufactured products from China and the consequent snarl up in the port of Los Angeles, Kane says, “retailers pay a lot of attention to building flexibility into their supply chains and this has meant that they have increased significantly the number of alternative routes on both the West and East Coast that they’re able to use”. He continues: “We have seen demand for outdoor storage properties grow significantly, most especially in the last five years. This has translated through into double-digit rental growth. That flexibility will now come in useful.”

By contrast, it would be wrong to take the bridge collapse as evidence of an infrastructure crisis in the US. There has been some discussion about the role of the ‘dolphins’, the small pylons around the supporting posts which are there to prevent ships colliding with them. But as Kane observes, “you’re essentially talking about something with the force of the Saturn V rocket hitting the bridge. Dolphins would have played no part in preventing that.”

Nor will the collapse have any significant effect on transportation inflation. Transportation costs as a percentage of GDP have risen dramatically in the past two years from being fairly consistently in the range of 7% to 7.5% to more than 9% by the end of 2022. Recently that number has been drifting down.

If anything, the collapse may assist this. One of the biggest drivers for inflation had been rising labour costs after the pandemic. “Now we’re seeing that fall back a little,” says Kane. “What we might see after Baltimore is that some shippers will seek to avoid negative impact on their bottom line by seeking to make labour cost savings.”

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