How the revamped Panama Canal is a game-changer for North America

The revamped gateway between the Atlantic and Pacific is larger than ever, and so is its impact on the North American shipping industry.

When the $5 billion Panama Canal Expansion Project was completed a couple years ago — boasting wider, deeper lanes and an additional lane of traffic — it opened up opportunities for the world’s largest vessels to cross through and on to East and Gulf Coast ports. The expansion was historic, considering the original canal could handle ships with a maximum payload of 5,000 20-foot equivalent unit (TEU) container volumes and a maximum vessel size of 965 feet long and 106 feet wide.

Since then, those numbers have ballooned. In August of 2017, a 1,200-foot-long vessel with a TEU allowance of 14,863 broke records as the largest ship to voyage through the Canal, nearly three times the size of the previous maximum vessel cargo.

By the one-year anniversary of its enlargement, more than 1,500 of these larger “Neopanamax” vessels had traversed the 102-year-old Canal, according to the Panama Canal Authority. Today it sees an average of six Neopanamax transits per day.

This game-changing expansion is directly contributing to industrial real estate demand along North America’s East and Gulf Coasts, according to JLL’s 2017 Seaport Outlook report. The ripple effect is clear across the nexus of infrastructure and logistics services. Port leaders are working to accommodate larger ships by dredging channels, raising bridges and providing deeper berths. Meanwhile, logistics companies are seeking modern distribution space with strong intermodal access and truckers are noting an uptick in demand for outbound service from those Eastern ports.

Here, Walter Kemmsies, Managing Director, Economist and Chief Strategist for JLL’s U.S. Port, Airport and Global Infrastructure group, explains more about how the revamped Canal is affecting the North American industrial sector.

We have seen demand build across 14 key port markets, including Houston, Oakland and Miami, with warehouse and distribution construction activity levels now double what they were in 2015. While the West Coast is still a center of growth handling about half of the continent’s shipping volume, what’s really interesting is the major activity around the East and Gulf Coast ports.

There, momentum is directly linked to the Panama Canal expansion. Major ocean carriers are aiming to use fewer, larger and more modern vessels to make the flow of freight more efficient; being able to reach East and Gulf Coast markets by mega-ship through the Panama Canal is significant for them. But success also depends on what happens when the cargo gets to the port and how it’s carried along from there.

Consider, too, that volume growth in East and Gulf Coast ports is outpacing West Coast growth by 4:1, thanks to the expansion. In Houston, for example, where 5.2 percent of U.S. TEU volume now flows in (compared with 4.6 percent in 2010), industrial real estate availability has seen the biggest decline in the nation, with a 6.3 percent drop year-over-year. Rents here are up 36.5 percent since 2010, too — second only to Oakland, where rents have risen 39.4 percent.

Infrastructure improvements are underway across the seaboard, but there are still a few challenges that East Coast logistics leaders will need to overcome in order to properly handle Neopanamax vessels and the cargo they carry.

For starters, U.S. ports have been actively making way for these larger ships. But they will likely need to do even more, considering that shipping liners are expected to reduce the number of port calls now that they can send in the bigger ships — which will only add to the already fierce competition between regional ports.

Another core challenge will be to meet intensive new cargo flow by quickly, and smartly, ramping up supply chain infrastructure and real estate in and around the port. These days it is not as much about the ability to handle the larger vessels on the waterside but the ability to move the cargo inland effectively. One-size-fits-all, mega-site distribution centers are no longer the sole best option in meeting the challenges of customer service demand and urbanization, so a combination of more diverse industrial sites will be needed. More rail development will be necessary in the long run, and in the short run, we’ll need updated trucking and technology strategies, such as blockchain, to track and move cargo more efficiently.

Meanwhile, autonomous vehicles are on the verge of transforming the trucking industry — and therefore commerce as a whole. With driverless trucks like Uber’s sensor-powered truck enabling companies to transport goods around the clock, goods can be moved more efficiently than ever.

The shipping industry is in a time of flux, with mergers and changing trade agreements causing uncertainty. Already the industry leadership has shrunk from four major shipping alliances to three, which, combined, affect 90 percent of the world’s trade routes. These alliances are helping carriers stay competitive and reduce costs while disrupting the industry for terminal operators and tenants.

But as the results of the mergers unfold, control and travel routes are also likely to continue to shift. In the long run, industrial tenants could benefit if these larger shipping companies also offer larger sets of services such as more frequent departures and direct calls.

Additionally, inland road and rail infrastructure capacity is not increasing at the same pace as port infrastructure, so the congestion we are seeing now isn’t likely to disappear anytime soon. For now, it may make more sense to conduct logistics operations close to the ports.

Overall, we do expect to see more supply chain routes move to the East and Gulf Coast ports. But how soon the full potential will be realized remains to be seen. All members of the freight movement supply chain are still acting and reacting to others’ decisions.