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  • Jason Tuvia

Coronavirus Outbreak Could Slow Shipping Into Nation's Largest Industrial Area

The worsening coronavirus outbreak is reducing freight shipments into West Coast seaports like the Port of Los Angeles, and the real estate industry is watching whether the effects, combined with a prolonged trade dispute with China, could cut deeply enough into supply chains to slow booming U.S. industrial property demand.

Shipping container volume at the Port of Los Angeles, part of the largest U.S. port complex, slid 5.4% in January from the year-earlier month. But the coronavirus outbreak was just one of several factors, including the tariff and trade dispute and an ongoing shift of some freight shipping to East Coast ports, Port of Los Angeles spokesman Phillip Sanfield said. The port expects import and export volumes to remain low through February and probably through at least March, Sanfield added.

"There's been a decrease in overall trade volume and we may see that continue with the trade war lingering and now this unfortunate virus," he said.

Port of Los Angeles Executive Director Gene Seroka recently told the Los Angeles Board of Harbor Commissioners the January freight numbers confirmed his expectations that tariffs would continue to depress cargo volumes into 2020.

“The coronavirus, which prompted China’s central government to extend the Lunar New Year holiday, adds a new layer of uncertainty to global trade," Seroka added.

Chinese factories were closed into the first week of February, a week longer than usual following the Lunar New Year celebrations because of the coronavirus outbreak, with 42,708 diagnosed cases, including 13 cases in the United States, and 1,017 deaths, all in China, as of mid-day Tuesday, according to the World Health Organization.

U.S. manufacturers have shifted freight from China to Vietnam, Indonesia and other Southeast Asia countries over the past year in response to the trade disputes, further cutting into West Coast port volumes, Sanfield said. Some of that cargo is entering East Coast ports, and Los Angeles port officials expect that trend to continue as more U.S. companies look for alternatives to China for their supplies, Sanfield said.

But real estate industry professionals remain optimistic that barring an apocalyptic coronavirus pandemic with mass casualties around the world, "the nation’s commercial real estate markets are still likely to remain on solid footing, underpinned by slower economic growth," said Abby Corbett, CoStar managing director and senior economist. "Port activity could further weaken, but we’re too early in the progress of this virus to forecast that it will translate to significant changes in leasing volume."

Deaths in China have now outpaced the severe acute respiratory syndrome, SARS, outbreak that spread swiftly from continent to continent in 2003, resulting in more than 8,000 infections and hundreds of deaths. Economic growth in China dipped from 11.1% to 9.1% in early 2003 but recovered to 10% once the outbreak was contained later that year.

Although China’s contribution to the global economy was much smaller at 4% of global gross domestic product in 2003, compared to 17% today, the latest outbreak combined with the U.S.-China trade dispute since 2018 has so far had little impact on industrial real estate market conditions, which will be favorable to landlords in Los Angeles for the foreseeable future, according to Jones Lang LaSalle's ’s recent 2019 Port, Airport & Global Infrastructure Seaport Outlook.

While port activity influences demand, rents and pricing for regional and national logistics markets like Los Angeles and the Inland Empire, a drop in activity take months or years to trickle down to property markets, Corbett said. The outbreak could delay a potential recovery for the ports, but property markets don’t swing and react as quickly to the disruptions because they operate under long-term leases and business decision making, Corbett said.

While not underestimating the ripple effect the virus could have on global supply chains, Corbett said virus outbreaks are almost by definition a short-term contagion on trade compared with protracted trade disputes, said Corbett, who noted that the World Health Organization hasn't yet advised against restricting freight shipments with China.

Coronavirus has the potential to have a more detrimental economic impact on China than SARS because the country has increased influence over the global economy than 15 years ago, Corbett said.

"Any disruption in economic activity in China is a detriment to global growth. China now plays an integral role in global supply chains, and the U.S. imports a larger proportion of goods."

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