Adapting to the new age of the megaship

Article by JLL Staff Reporter
Shipping port showing several cargo containers
Image credit: Shutterstock

After 110 million man hours and $5.2 billion of funding the Panama Canal’s expansion is finally open for business.

On June 26, 2016, one of the world’s largest container ships completed the first official voyage through the newly modernized Panama Canal. The uneventful yet historic journey capped a feat of modern engineering in which the canal’s locks were deepened and widened in a complex project kicked off in 2007.

For decades, the world’s cargo vessels have been growing ever larger and heavier, and the Panama Canal has been increasingly unable to accommodate them. The new locks will allow the Panama Canal to transit 87 percent of the world’s current inventory of cargo vessels—all but the very largest ships.

Clearly, the expansion is a potential game-changer for shippers, logistics companies and industrial real estate.

Bigger ships mean a bigger opportunity to reach U.S. consumers in a more cost-effective way —particularly those on the East Coast. That consumer promise is one that the Panama Canal expansion is expected to fulfill. The expanded locks create the opportunity to nearly triple the number of containers passing through the canal, creating a potential sea change in economies of scale for shipping cargo to major U.S. ports of entry on the East Coast.

What happens next? All parties in the global supply chain are paying close attention, including those who monitor the impact of real estate near East Coast ports.

“The longer-term impact of the Panama Canal expansion on import and export shipping strategies will be very interesting to watch unfold,” says Rich Thompson, JLL global leader, supply chain and logistics solutions. “Today’s global logistics environment is already incredibly complex and, for big retailers especially, very demanding as it is a constant challenge to achieve the most efficient and effective supply chain while keeping a focus on risk management considerations.”

For shippers, it’s been a long time coming

From route selection and vessel strategy to warehouse and distribution real estate, shipping companies are developing their post-expansion strategies. Corporate shippers have been anticipating the expansion for years.

“The Panama Canal expansion adds new variables into the global shipping math equation, providing potentially new advantages to utilize the all-water alternative to the Suez Canal for products shipped from Asia and destined for the U.S. East Coast and the Midwest,” says Thompson. “Although it will still be faster to ship cargo from Asia to the West Coast ports and transferred East by rail or truck, the Panama Canal expansion allows for new economies of scale by accommodating larger ships that can travel directly to East Coast ports.”

It is expected that the bigger ships will drive down the cost per container and further strengthen the Panama Canal’s appeal for shippers seeking to lower transportation costs as their goods travel to the East Coast of the U.S., notes Thompson.

With two-thirds of the U.S. population residing east of the Mississippi River, the expanded canal gives shippers a potentially more cost effective route to a large population centers and a viable alternative to West Coast ports. The expanded canal also puts into play more inland logistics markets—markets that offer the best connectivity by truck and rail from the eastern seaboard.

Port directors up their game

The West-East Coast rivalry is likely to intensify as shippers continue to seek lowest-cost options and mitigate risks associated with utilizing just one port, Thompson believes. As much as 10 percent of container traffic between East Asia and the United States could shift from West Coast ports to their eastern seaboard counterparts by 2020, according to research from The Boston Consulting Group and C.H. Robinson.

The industrial real estate landscape has the potential to shift, too; when incoming inventory rises, it has to go somewhere, and that means more demand for distribution centers within proximity or direct connectivity to the ports.

With prime warehouse and distribution space expected to remain highly sought after over the next few years, Thompson predicts that coastal markets offering the best interconnectivity to large population bases and intermodal infrastructure should see the greatest impact from the expanded canal.

Evolving shipment strategies, evolving real estate needs

Given the current sluggish economy and stable freight rate market, it may take time for new shipping strategies to fully emerge. Many U.S. ports still have a lot of work to do to accommodate mega-ships and it is still unclear as to how the financial benefits might work with the expanded canal.

Calculating how to best leverage the expanded canal is a complex calculation, balancing cost versus speed-to-market for products with limited shelf life. Along with that, having to estimate the impacts of port capabilities, congestion risk and the myriad other variables including risk management scenarios all must come into play.

Many questions hang over the industrial real estate markets associated with these potential supply chain network decisions. That being said, one thing is clear – as the economy improves so will the demand for products and distribution space, and ocean shipping will remain the most cost effective global shipping mode.

“Large corporate shippers, especially the big import and exporters, have or will need to diversify their risk and keep open multiple port distribution options. As the economy expands, so will the need to find cost effective distribution locations that are well connected to ports across the U.S.,” says Thompson.

Now that the Panama Canal expansion has (finally) opened, for many manufacturers and distributors, a forward thinking, smart distribution strategy is the key to survival.

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