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What Impact Will The Panama Canal Expansion Have On The Shipping Economy?

20 Jun 2016

The Panama Canal — the pathway that transformed international trade a century ago — is about to change international shipping again. In 2016, a long-awaited $5.25 billion expansion project at the Canal will be finished. Now more than 95% complete, the project features two new locks, widened and deepened channels, and a higher water level in Gatun Lake. Most importantly, the Canal will feature a new third lane, made to accommodate the far larger ships now being used to meet the growing demand for mass shipping from Asia to the United States.

Shipping is all about speed, reliability, and efficiency. Ships are getting bigger, and, like warehouses, the demand for more space and tonnage is greater than ever before. The more a shipper can move in one shipment, the more profit they can make. As a result, ports and canals everywhere must be retrofitted to meet the need for wider and deeper channels.

Once the expansion is completed, the Panama Canal is poised to offer Asian shippers a new route to get to the Eastern Seaboard. By 2025, double the tonnage that passed through the canal in 2005 will make its way above massive ships through the waterway connecting the Atlantic and Pacific Oceans. The expansion will give 14,000 containers a quicker path to U.S. ports on the Eastern Seaboard in the first year alone. Following that, shipping expansion is estimated to rise by 3% per year.

Roughly 30% of goods from Asia now pass through Southern California, after which they are transported by rail across the United States. The ability to move larger ships directly from Asia to the East Coast could drastically reduce per-unit expenses for fuel, crewing, and insurance for goods. Some studies have suggested that the Panama Canal expansion will shift 10% of East Asia container traffic from West Coast ports to East Coast ports by 2020. If this is true—and if the trend continues to grow—the local shipping, real estate, and broader economy in California could take a hit.

For the time being, West Coast ports have the competitive advantage, with better facilities and long-established routes. East Coast ports will need to undergo massive renovations to accommodate the new, larger ships that will now have access to the Atlantic from Asia. Already, several ports on the Eastern Seaboard and the British coast have begun to renovate: The port of Southampton can now handle such vessels and is expanding to accommodate more. Within the year, the port of Liverpool is expected to undergo a similar expansion.

Over the long-term, California’s ports face competition in the north as well. Warming waters in the Arctic could mean more accessible northern trade routes for an increasing number of months per year. The opening of the Russian North Sea Route and the Canadian Northwest Passage to commercial traffic could pose an alternative to the Central American route.

These trends are not new, but the urgency to address them is mounting. The demand that ports expand to accommodate larger, 1,200-foot ships has been steadily growing for decades, and the time to confront these challenges is now. The announcement that the Panama Canal expansion is over 95% complete, and is expected to be unveiled within the next eight months, should serve as a wake-up call to Southern California ports to improve efficiency, labor relations, and service. The factors deciding what ports become destinations of choice will be price, speed, and reliability.

Southern California ports must organize to meet the changing conditions of the 2016 international shipping industry. Southern California real estate investors should keep an eye on these trends. The success of local ports, one of the greatest drivers of economic activity in the region, will be a key determinant of future real estate values in a range of markets – from warehouses in the Inland Empire to multifamily apartments in the South Bay. Those who anticipate these potential changes in the market will be a step ahead. 

This blog is produced as a resource for real estate investors by the senior management of Hager Pacific, which includes David J. Hager, Adam Milstein, Robert Neal, and Jason Schirn.

About the Author: Jason Schirn
As HPP’s Chief Investment Officer, Jason Schirn is responsible for HPP’s acquisition program in which the firm seeks to acquire approximately 1 million square feet of industrial real estate annually. Since becoming a Principal in 2011, Jason has been actively involved in the acquisition of more than 35 properties.