After years of anticipation, the Panama Canal expansion opened June 26th. The expansion, originally budgeted for $5.4 billion, was completed two years behind schedule and significantly over budget. With the opening of the canal’s third lane, ships carrying up to 14,000 TEUs will be able to cross, more than double the previous maximum. Despite the canal’s ability to handle ships this size, geological and economic issues will limit larger vessels from crossing in the short term. Panama is in the midst of a three-year drought, which lowered water levels in the two lakes that supply the canal. Gatun Lake is seven feet below norms, which means that pre-expansion ships cannot pass through the canal fully loaded, and cannot accommodate the new larger vessels. Consumer demand in geographical areas serviced by East Coast ports will be a key driver in the amount of cargo that passes through the canal. The expansion of the canal comes at a time of slow economic growth that could dissuade occupiers from increasing inventories and utilizing the full potential of these larger vessels. Anti-globalization is also taking root in the current political cycle. The most recent example is the Brexit vote in the United Kingdom. The 52-48 percent vote for the U.K. to leave the E.U. could be the beginning of increased isolationism and protectionism in the world. This year’s U.S. presidential election has taken on a similar tone, with candidates campaigning on an anti-free trade agenda that could slow imports if enacted.
Another factor that will delay the full utilization of the expansion are needed infrastructure improvements at the ports that include dredging projects in Savannah and Charleston, two ports looking to take advantage of the expansion. Charleston is working to deepen its harbor to 52 feet, making it the deepest harbor on the East Coast. An important unresolved infrastructure issue is the raising of the Bayonne Bridge. Shippers will look to the ports of New York/New Jersey to dock many of the larger vessels due to the ports’ proximity to a large population center; however, the bridge that connects Bayonne, NJ with Staten Island needs to be raised to accompany the larger vessels. According to a recent article in the Wall Street Journal, work is underway on the project but is delayed till late 2017. Until this is completed, larger ships passing through the Panama Canal will not be able to dock at the port’s three largest terminals.
A recent report by Boston Consulting Group and CH Robinson Worldwide Inc. predicts that 10 percent of U.S. container traffic will shift from West Coast to East Coast ports by 2020. This 10 percent is a fair prediction only if all infrastructure improvements are completed, and more importantly occupiers determine there is enough consumer demand to increase imports by this amount. If imports increase, it will be a demand driver for industrial real estate, creating more absorption, higher rents, increased speculative development, and additional interest from institutional REITs and foreign capital. Activity is already picking up in some East Coast port markets with Charleston and Savannah finishing Q1 16 in the top two spots in the U.S. for absorption as a percent of inventory. West Coast ports and corresponding real estate markets have little to worry about, however. Population in the western U.S. is projected to increase in the coming years. This demand driver combined with the West Coast ports’ naturally deep harbors and infrastructure improvements will keep inbound TEUs strong for the foreseeable future.