Jones Lang LaSalle study examines effects of Panama Canal expansion

As the 2014 deadline for the completion of the $5.25 billion Panama Canal expansion project gets closer, the ramifications it will have on supply chains and industrial real estate are abundant, according to the findings of a report issued by global real estate firm Jones Lang LaSalle (JLL).

In the report, JLL describes the Panama Canal expansion as a “global game changer” for myriad reasons, including:
-higher oil prices driving carrier lines to bring “Post-Panamax” vessels in anticipation of the 2014 opening;
-lower shipping costs per TEU as a result of larger ships transiting the new set of locks;
-the re-setting of trade routes as Asian companies gain better access to not only East Coast U.S. markets throughout the Americas but also across the Atlantic;
-shippers expanding options to alternative ports to mitigate risk and hedge against supply chain disruptions due to labor issues;
-Panama transitioning from a global transshipment point into a global logistics hub; and
-shipper changes in production and distribution strategies.

Another notable component of the Panama Canal expansion, the report noted, was that cargo could more viably reach the U.S. East Coast via all-water routes and then be transloaded west to demand centers in the Midwest as far as Dallas, adding that the previous demarcation line without an expanded canal was Memphis.

“There has been this invisible line running north and south around Memphis to which product destined for markets west of that have traditionally come through the Ports of Los Angeles, Long Beach, Tacoma, or Seattle. And markets east of that line have found opportunities coming through an all-water route through the existing Panama Canal,” said John Carver, head of JLL’s Ports Airports and Global Infrastructure Group (PAGI) . “And with this expansion project due to be completed in 2014, coupled with the new cost savings of the larger vessels going through the canal, that invisible line is gong to shift in a western direction as far as to Dallas. The gray area between Memphis and Dallas up to Chicago represents market share that is going to be fought for by the East Coast ports to trying and catch additional volume through their ports and the new model available post-2014.”

And for shippers looking to position their facilities and optimize their distribution networks, Carver explained there will be more viability in East Coast port options, which will open the door for real estate development and vertical facilities and transactional work in those areas on the Eastern seaboard.

This development, though, is not necessarily a threat to the Ports of Los Angeles/Long Beach, because that market will continue to grow from other trends in the industry and the 40 million person population base it serves within a one day drive of those ports.

“For cargo that is not as time-sensitive like consumer electronics or apparel, the opportunities to use East Coast ports as an entry point, are going to be much greater in the next three or four years,” said Carver. “The shifting from Memphis to Dallas is a ‘sweet spot’ that is up for grabs now.”
The report explained that the increasing ocean carrier practice of slow steaming to hedge against high fuel costs results in shippers trading slower delivery of raw materials and products in exchange for a reduction in shipping costs due to fuel conservation at slower speeds.

JLL pointed out that savings of up to 55 percent in fuel costs result in slowing transpacific vessels from 25 knots to 18 knots, which could be driven down further should fuel costs increase in the future.

What’s more, these slower transit times can result in a slower supply chain and the need for a larger amount of products stored on land, said JLL, and will mean that shippers will need to expand their space requirements to ensure they have ample inventory on hand.

“There is a trend where shippers are trading delivery time for cost savings,” said Carver. “They are willing to sacrifice cargo arriving from Asia, Europe, and other markets by up to five days for a significant savings in shipping costs. The trend 5-10 years ago was a just-in-time model…and that is anathema to warehousing and logistics because theoretically cargo would go on a vessel and right to a retail store and bypass warehouses to a large degree.”

But with slow steaming, Carver said it shippers are not going to move product as fast as before they need to have more inventory on hand to serve their outlets for retailers or enable manufacturers to have raw materials on hand for production.

The missing piece with the Panama Canal expansion as the 2014 deadline gets closer is a lack of ports equipped with 50-foot draft depth for Post-Panamax ships. The Port of Norfolk, Virginia has this depth and the Ports of New York/New Jersey and Miami also have projects underway.

In terms of increased industrial real estate development as a result of the expansion, Carver said that there has been a high level of interest from developers near the Panama Canal in trying to deploy development capital in coming out of the recession.

“There is a lot of interest in investing in port infrastructure and near ports, too,” he said. “Developers are closely watching things there to figure out where they should be building their next round of development.”

As an example, he noted that JLL is currently working on a 1,500 acre project in Chicago that is connected to the Panama Canal through East Coast ports and West Coast ports that reaches inland points in places like Kansas City and Columbus.

And there are also more RFP’s going out regarding manufacturing and logistics facilities in close proximity to the Panama Canal, too, he said.