The “New” Panama Canal

Completion of the Multi-billion Dollar Expansion

On April 1, 2016 the Panama Canal is scheduled to open for the passage of larger ships following the completion of its expansion. The Philadelphia port expects healthy gains as a result, supplementing the 8.79% increase in total cargo tonnage experienced during the first half of 2015.

Construction started in August of 2007 and was originally scheduled to be complete by 2014. After many delays and cost overruns of the original estimate of $5.2 billion, the newly expanded canal will accommodate ships that are one and a half times the current, pre expansion Panamax vessels and can carry more than twice as much cargo.

Container ships are measured by their cargo carrying capacity of Twenty Foot Equivalent Units (TEU). The expansion of the Panama Canal will allow for the passage of ships containing 13,000 – 14,000 TEUs, as compared to the largest container ships formerly able to traverse the canal carrying a mere 5,000 TEU’s.

According to the Washington Post, a new generation of vessels — the newest of which can hold upwards of 18,000 TEUs — carries 45 percent of the world’s cargo while only making up 16 percent of the world’s container fleet. It is anticipated that by 2030, post-Panamax vessels could represent 62 percent of the total container ship capacity.

panama-canalClick to enlarge.

IMPACT ON GLOBAL SUPPLY CHAIN

Since the expansion was announced, forecasters have been debating the impact it would have to the global supply chain, and more specifically volumes at East and West Coast ports. According to the U. S. Department of Commerce, in 2015 21.2% of all goods imported to the U. S., with a total value of almost $482 billion, were from China. In 2014, two-thirds of all imports from East Asia to the U. S. came through West Coast ports. The balance came through East and Gulf Coast ports predominantly via the Panama Canal. However, there was increased traffic via the Suez Canal, which is undergoing its own modernization.

The prognosticators tend to lean based on their individual bias. Those based on the West Coast feel the impact of the Panama Canal expansion will be minimal, while their counterparts on the East Coast believe the impact will be more meaningful to the current volumes and overall flow of product to the East Coast. What is undeniable is a shift towards the East Coast ports, which is already occurring. According to a recent BIMCO report, container traffic to the East Coast was up 12.6% year over year from 2014 to 2015; locally, the port of Philadelphia experienced its fifth consectuive year of double-digit cargo growth in 2014. At the same time there was nearly no change in U. S. containerized import traffic for West Coast ports. This is due in large part to the ILW contract negotiations that led to strife and lower productivity in early 2015. As productivity normalized at the West Coast ports and delays subsided, the positive monthly growth for East Coast ports tempered overall in 2015.

Redundancy within the supply chain has become crucial, with retailers and freight forwarders embracing a “four corners” strategy as opposed to single points of entry into the U. S. It is likely that volume growth on the East Coast will subside as many return to importing more of their product through the West Coast ports. However, some will continue to ship to East Coast ports and new growth will occur as a result of the Panama Canal expansion. While the expansion will reduce the cost of shipping to the East Coast, these savings are weighed against longer transit times from Asia. There are several routing options for goods coming from China. From Shanghai, the maritime shipping time is 14 days to the ports of Los Angeles and Long Beach as compared to 26 days to the port of New York and New Jersey via the Panama Canal or 28 days via the Suez Canal. The same trip from Shanghai to New York can be achieved in 22 days via a multi-modal route by shipping to the West Coast and using intermodal rail to New York.

“Between the 45 foot channel deepening project to be completed in 2017, and the Panama Canal expansion, the Philadelphia port expects a significant boost.”

EAST COAST IMPROVEMENTS

Given the trending shift to embrace an East Coast strategy as part of many organization’s supply chain and the capacity benefits of the expanded canal, East Coast ports and regions have rushed to make significant improvements to port and transportation infrastructure to accommodate the larger ships and shifting trade flow to the East. These improvements include new channels that provide the required 50’ draft for the largest container ships and construction of larger terminals with new cranes to accommodate the wider beams of the larger ships. In the most extreme case the Port Authority of New York and New Jersey is raising the roadbed of the Bayonne Bridge from 156 feet to 215 feet to accommodate the passage of larger ships as a result of the anticipated increase in traffic via the Panama Canal. The Port of Baltimore is undergoing significant rail upgrades to accommodate double stack trains.

While not all growth in East Coast traffic is directly related to the Panama Canal expansion, it was estimated in a report by the Boston Consulting Group, that East Coast ports could gain an additional 10% share due to the canal expansion. This would lead to a possible 50/50 split in the share of container traffic from East Asia to the U.S. by 2020. This shift will have a major effect on supply chains and ports will fight for customers delivering to the Midwest, including the major population centers of Chicago, Detroit, Columbus, and Memphis. This Midwest region accounts for nearly 15% of the U. S. GDP. Currently the balance, as it relates to cost and speed, between a preferred West Coast vs. East Coast port of entry is approximately 300 miles inland from the East Coast. Beyond that point, goods are typically brought in via West Coast ports and shipped via rail or truck. The movement of this line and ability for East Coast ports will have a major impact on the industrial real estate markets on the Eastern Seaboard.

Currently there are two East Coast ports that are ready to receive the new generation of Panamax ships — the Port of Virginia and Port of Baltimore. Ultimately, the ports that will likely experience the greatest impact are those that are closest to population centers in the Midwest and East Coast. While the Port of New York and New Jersey currently handles the most TEUs of any port on the East Coast at 3.2 million in 2015, a 9.2% increase over 2014, it was the Port of Savannah that grew the fastest at 20.4% to 1.6 million TEUs. However all of the East Coast ports experienced significant gains in 2015, according to a report by BIMCO. At the Port of Philadelphia a healthy 214,267 TEU’s were handled and containerized cargoes experienced a four percent increase from 2014 to 2015, when counted as metric tonnage, according to the Philadelphia Regional Port Authority (PRPA). “Between the 45-foot channel deepening project to be completed in 2017 and the Panama Canal expansion, the Philadelphia port expects a significant boost,” according to Harold T. Epps, Director of Commerce, City of Philadelphia.

IMPACT ON EAST COAST INDUSTRIAL MARKET

So what does the Panama Canal expansion and influx of new product to the East Coast mean for the industrial real estate market on the East Coast? More goods traveling to East Coast ports for distribution and fulfilment will drive up demand for facilities to house them. Import inland distribution centers that are away from the congested port areas and major population centers will be the likely locations for new distribution centers. Developers are already working to pursue sites to accommodate these facilities in places like Savannah, Charleston, Norfolk, and Philadelphia.

The canal operates 365 days a year, 24 hours a day. It transports about 4 percent of the world’s trade, of which 68 percent is destined for the United States.

As the distribution pathways change, expect the growth of intermodal rail to efficiently ship containers to the Midwest. An example of this is Dollar Tree’s new $104.4 million, 1.5 MSF facility in Cherokee County, South Carolina. The location was chosen specifically for its transportation infrastructure, including access to an inland port, and because they are shipping product into the Port of Charleston. Dollar Tree is the tenth largest importer in the U. S., bringing in more than 135,000 containers annually.

The Lehigh Valley and Central Pennsylvania are ripe to experience similar growth due to containers coming through the Port of New York and New Jersey. The port won’t be ready to receive the larger ships that are coming through the Panama Canal until late 2017 when navigational clearance under the Bayonne Bridge is complete. That hasn’t slowed developers from flocking to the region though. They are induced by growing demand for space, in part due to expected increased port traffic, as well as already historically low vacancy rates and significant year over year rental growth.

Mapping the Construction

panama-canal-chart
Click to enlarge.


MARK CHUBB is a Senior Managing Director in Colliers Logistics & Transportation Solutions Group. He specializes in industrial and logistics properties throughout the Northeast, specifically the Lehigh Valley and Central Pennsylvania, Southern New Jersey, Delaware and Northern Maryland. Contact Mark at: