The Panama Canal expansion—designed to double the shipping passage’s capacity—has loomed over the global logistics industry since 2006.
As the epic project finally nears completion (expected in mid-2016), major industrial real estate implications are coming into focus for markets across the United States.
For more than a century now, the Panama Canal has enjoyed a prime location at the crossroads of two oceans and two continents as the fastest all-water route between Asia and the Eastern United States. With lock expansion now nearing final stages, the higher-capacity canal will be well-positioned to stir up global maritime shipping trends—and in turn, demand for U.S. warehouse and distribution real estate.
What will this Central American thoroughfare’s new ability to accommodate today’s enormous ships – which account for 87 percent of the world’s commercial shipping fleet – mean for supply chains and industrial requirements? According to JLL’s latest Industrial Impact paper, the effects will ripple from U.S. coast to coast—and across the Pacific.
Real Views sat down with Aaron Ahlburn, Director of Research, JLL Industrial, who recently toured the Panama Canal region, to learn about the expansion and dive into how expanded locks will affect U.S. ports and the global shipping industry.
The expansion project has been delayed repeatedly. Is the end really in sight?
According to our sources, we have no reason to doubt that the lock expansion is nearing its final stages of completion. As part of JLL’s recent tour of the region, we met with the Panama Canal Authority’s Oscar Bazan. He admits that the project has had its challenges—but it appears to be on track for the June 30 completion goal. To see for yourself, I recommend watching this recent video released by the Authority that shows 97 percent completion.
How might this expansion affect supply chains and industrial real estate?
The impacts could be quite significant, from logistics site selection and location strategy to warehouse and distribution investment decisions. The expansion will boost speed-to-market to major U.S. ports of entry like New York and New Jersey on the East Coast by giving very large ships a cost-effective, all-water route by which to carry cargo from Asia.
With two-thirds of the U.S. population residing east of the Mississippi River, this new option will give shippers an attractive route to a large proportion of their customers. The expanded canal also puts into play more inland logistics markets in the middle of the country – ones that have the best connectivity by truck and rail from the eastern seaboard.
Some cost savings will emerge as the U.S. East Coast seaports continue to compete for trade. Already, many have invested in major infrastructure and capital improvements to welcome the new traffic. Overall, the expansion could allow for new economies of scale that help push down cost per 20-foot equivalent unit (TEU), the standard unit for a ship’s cargo carrying capacity, via Panama.
Does the rise in East Coast port activity threaten West Coast ports?
The West and East Coast TEU rivalry is likely to intensify as shippers weigh their new options on how and where their goods enter and leave the United States. Some analysts predict that as much as 10 percent of container traffic between East Asia and the United States could shift from West Coast ports to the eastern seaboard by 2020.
But the fact is, it is still fastest for cargo from Asia to be shipped to West Coast ports and moved eastward by rail or truck. West Coast seaports still dominate, particularly Los Angeles/Long Beach, although JLL’s recent seaports report shows major growth in New York/New Jersey, Savannah and Charleston, too.
How long will it be until we see the impact of the new Panama Canal?
Recapturing some of the Suez Canal (Egypt) traffic, which has until now been the only access point to the North Atlantic Ocean for the largest ships, will take some time. And it will also take time for shippers to reset their fleets so that larger vessels and/or services can take advantage of the newly expanded locks. At the same time, we are in the midst of global economic volatility, and slowing growth in many emerging markets will play a role that we cannot now predict.
The key takeaway is that demand will continue to rise significantly through 2016 for industrial property markets on both coasts—so long as they are closely linked with larger population bases and intermodal infrastructure.