Panama Canal's Impact on U.S. Industrial Demand

Wednesday, June 22, 2016

It’s finally here. The moment all of us in the industrial world have been waiting for since 2007 when dirt (and water) started moving throughout the 48-mile long Panama Canal for its long-awaited $5.4 billion expansion. The first post-Panamax cargo ship is set to go through the expanded locks this Sunday, July 26, 2016. This is the first major expansion of the global shipping channel since it was opened in 1914, which is when about 1,000 ships a year began cutting through the isthmus and saving five days rather than venturing South around Cape Horn in South America. The expansion will double the canal’s cargo capacity. Today, roughly 15,000 cargo vessels a year, or one third of the Asia to America trade, take the eight-hour trek through the canal with the largest ships (longer than 100’) paying about $3,200 plus $72 per TEU (twenty-foot equivalent unit) to cross.

As the size of cargo vessels have grown, the need to expand the lock system was needed. When news began circulating through the industrial community about the expansion, the first thought was that bigger boats carry more “stuff” and, so now that more “stuff” can fit through the canal, East Coast ports would be in a perfect position to capture all of that “stuff.” Questions began circulating about at what port the big boats would arrive. They need at least 50’ of water depth, so port directors up and down the East Coast raced to dig their basins to at least 50. With close to $155 billion invested by 2020, according to the American Association of Port Authorities, the larger ships also need bigger cranes that reach across the wider beams so the East Coast ports rushed out to buy new cranes. In Miami, a one-half mile, $900 million tunnel was built to connect the port to the highway system so that all of the increased cargo coming in to the Port of Miami could better access the highway system. State and federal government funded almost all of the upgrades for these ports in anticipation of increased container traffic.

The “shift” from West Coast to East Coast ports actually started to happen in advance of the canal's expansion. The chart below shows historic TEU (those big, ugly shipping containers) volumes, with East Coast in orange and West Coast volume in blue. Although there was a shift from 2010 to 2014, that trend reversed, and West coast volumes increased in 2015. In fact, in 1993, the West Coast had 55.5 percent of North American TEU volume. In 2015, they had 55.4 percent, so, over the course of 22 years, there essentially has been no real major shift.

East Coast Versus West Coast TEU

Source: American Association of Port Authorities
West Coast Ports: LA/Long Beach, Oakland, Tacoma, Seattle, Portland, Hueneme, San Diego
East Coast Ports: New York/NJ, Savannah, Hampton Roads, Charleston, Everglades, Jacksonville, Miami, Baltimore, Philadelphia, Wilmington (DE and NC), Palm Beach, Boston

The main reason for the expansion of the canal is not to get more volumes through but rather how much goes through at one time. From a shipping standpoint, the larger post-Panamax ships are far more efficient to operate. The cost per TEU to put 15,000 containers on one boat instead of 5,000 on three separate ships is a very real savings to an international shipping company, especially given the current industry slump as we strengthen to get back to pre-global financial crisis (2009) trading volumes. In other words, the same amount of TEU volume should transit the Panama Canal, but it will just be in fewer boats. That in and of itself would lead one to argue that the billions of dollars spent on port upgrades was, perhaps, necessary in order to attract larger boats, but the number of containers may remain exactly the same. Bigger ships are expected to move more refrigerated cargo from South America as well as LNG (liquefied natural gas) from the U.S. to Japan, India and China.

There is however another angle that may mean more TEU volume for East Coast ports. The Suez Canal, which has been able to handle post-Panamax ships for a while now and currently handles eight percent of global trade (versus five percent through the Panama Canal) continues to gain market share. This month, the Suez Canal cut tolls by up to 65 percent for some trades aimed at competing with the expanded canal. The reason? Manufacturing has begun to shift farther west into mainland China. As it moves farther west, it is cheaper and faster to send ships through the Suez to hit Europe and the U.S. In fact, Maersk, the world’s largest shipping container company, said in March of 2015 that they will “stop using the Panama Canal to transport goods from Asia to the U.S. East Coast.”

Here’s the real question though: What are the implications of global logistics on warehouse demand and investment here in the U.S.? The answer is likely very little. Take a retail company like Target, Wal-Mart, Amazon, Home Depot, et cetera that needs to get goods to the American consumer in the Southeast U.S. It's likely they will have a large distribution center in Atlanta that services some smaller feeder warehouses throughout other highly-populated areas in the Southeast. Whether the goods from overseas come in via LA/Long Beach, Seattle, Savannah, Miami or Norfolk, the same amount of goods will get to that regional distribution center in Atlanta. What does the industrial investor care how or where the goods came in? Their concern is whether the goods are stored there, and it makes sense for the tenant to be there. Industrial investors care about where the goods are stored, not where it enters the U.S.

The Panama Canal expansion should be viewed as a great feat in global engineering and human technological advancement. In the coming weeks/months, there will no doubt be articles, videos and reports that talk about the future of global trade through the canal, and there will be no shortage of supposed experts opining on what it all means. Port directors will continue to court shipping companies (literal courtship!) in the hopes the larger ships will spend a few days at their port unloading goods bound for the U.S. consumer. If you are making investment decisions based on global logistics, be sure to follow the goods and seek to invest in areas where they are stored in warehouses, not necessarily where they enter the U.S.

About Marty Busekrus

Marty Busekrus is a director in HFF’s Miami office and is in charge of industrial investment transactions throughout the southeastern U.S. In this role, he is responsible for sourcing industrial opportunities by partnering owners with potential capital sources for joint ventures, debt solutions and/or buyers.

Prior to joining HFF in December of 2012, Mr. Busekrus was a senior associate in CBRE’s Private Capital Group and focused on the dispositions of office and industrial projects throughout Southeast Florida. Mr. Busekrus got his start in commercial real estate at NAI – Rauch Weaver Norfleet Kurtz & Co in Fort Lauderdale, where he specialized in investment sales and was the number one sales producer for two of the four years that he was there.

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