How a New Panama Canal Could Change the U.S. Economy Forever. Prepared by Cole Real Estate Investments

Transcription

1 How a New Panama Canal Could Change the U.S. Economy Forever Prepared by Cole Real Estate Investments July 2011

2 EXECUTIVE SUMMARY The New Panama Canal Could Change the U.S. Economy Forever A $5.25 billion construction project located exactly 1,743 miles south of Houston in Panama could potentially change the direction of trading routes and hence the logistics and supply chain industry in America forever. The expansion and opening of an improved Panama Canal alone would be a singular momentous event by itself when it opens in But there is a dramatic transformation now taking place in the world of logistics the coordinated movement of goods from manufacturer to consumer. Seemingly every component in the supply chain is undergoing change, including the fluctuating prices of shipping fuel and cargo rates, as well as rail travel versus trucking. This confluence of factors, led by the Panama Canal expansion, is leading to one common denominator demand for industrial real estate located near ports and newly developing intermodal facilities will increase in the years ahead. 1 Demand for industrial real estate located near ports and newly developing intermodal facilities will increase in the years ahead. 2 The New Panama Canal

3 A bit of history The Panama Canal Authority (ACP) broke ground in 2007 on the largest expansion of the 48-mile canal since its completion in 1914, when it took 34 years and just $639 million to build. The new project will add a third lane of traffic that will accommodate longer and wider ships with much greater cargo capacity by 2014, the 100th anniversary of the canal s original opening. Today the Panama Canal serves 144 trading routes around the world, but can only accommodate ships carrying up to 5,000 TEUs (twenty-foot equivalent units, a standard measure of cargo volume). Most older container ships were built to Panamax specifications, or the exact maximum size that fits through the canal. Modern container vessels, however, are built to post-panamax standards, capable of carrying 300,000 tons and more, which is too large for the canal. Half of the new ships on order are too large to fit through the canal, so modernization was essential for economic survival. Once it is widened, the revamped Panama Canal will handle ships of up to 12,000 TEUs. PANAMA CANAL EXPANSION Atlantic Ocean Current approach channel and locks New approach channel and locks Panama Canal Miraflores Lake Gatun Lake New approach channel and locks Current approach channel and locks Balboa Pacific Ocean Existing Lock System: 110' wide, 47' deep Ships up to 106' wide 39.5' draft New Lock System: 180' wide, 60' deep Ships up to 160' wide 50' draft Global trading starts to mend In advance of the canal s completion, global trade has grown substantially in recent times. Asia is the leading importer of goods into the United States, and the ports of Los Angeles and Long Beach handle about 40% of all container cargo traffic into this country. Import volume through the Ports of Long Beach and Los Angeles increased by 4% and 5.5% in May 2011 over May 2010, respectively. 2 By the same token, many East Coast ports are seeing more sizeable increases. For example, in April 2011, the Georgia Ports Authority said the Port of Savannah saw its second highest monthly volume ever with 260,035 TEUs 8.5% higher than April The New Panama Canal 3

4 Buoyed by an improved economy, the Port of Baltimore set a new record in its handling of container traffic for the 12-month period that ended in March 2011, noted Maryland Gov. Martin O Malley. 4 According to one prominent logistics industry veteran, A rising tide is definitely lifting all boats, so to speak. 5 Still a game changer? Prior to the onset of the recent economic recession in 2008, many industry observers believed the widened Panama Canal would be a true game changer for the entire U.S. economy. But years later, the revised outlook is somewhat murkier and not so certain, thanks to a fresh set of factors that have recalibrated expectations. Higher costs for shipping fuel, for example, have forced many cargo ships to slow their speeds in an effort to reduce fuel consumption and save cost. While many analysts are predicting a shift in distribution patterns in the United States, they are not so certain about the size of the shift. Also, major railroad companies are competing more aggressively against trucking firms, which has lowered overall prices for ground transportation. That fact favors West Coast ports to an extent, which rely on trucks and trains to move cargo to intermodal distribution centers in the American heartland and points farther east. On paper this water/land system is more efficient in terms of both cost and time for goods shipping to the East Coast. For example, it takes an estimated total of 25 days for cargo to travel by ship from Singapore to the Port of Los Angeles, then by train to New York City. That same cargo would take an estimated 36 days via an all-water route through the Panama Canal. 6 Cargo fees for shipping via all-water routes have been fluctuating in recent months, while railroad and trucking companies have held their prices lower to avoid losing market share. This is having an impact on logistics decisions. Of less import but nonetheless significant, is the notion that pirates could tip the balance of world trade, at least in the short term. The spate of Somali pirate attacks on ships coming through the Suez Canal (the primary shipping route for cargo moving from Asia/Singapore west across Africa to the East Coast of the U.S.) has increased insurance rates for shippers over the last year. As a result, many Asian manufacturers are once again favoring shipments across the Pacific to the Western U.S. 7 Building binge of billions Despite the challenges, Panama Canal officials expect to nearly double its existing shipping volume by While many analysts are predicting a shift in distribution patterns in the United States, they are not so certain about the size of the shift. Nearly all agree that more ships originating from prime Asian manufacturing centers like Singapore will bypass their traditional West Coast ports of call, using the improved canal to reach East Coast and Gulf Coast ports directly instead. But the shift in trade is expected to be more gradual over several years time. 4 The New Panama Canal

5 Many analysts predict that ports that expand now will be best positioned to capture additional market share when the canal is finished. That helps explain why ports on both coasts and along the Gulf of Mexico are spending billions of dollars to upgrade and expand their facilities in preparation for the potential growth in cargo business ahead. Developers of industrial properties located near ports are also quickly placing their bets on many top port markets. For example, they recognize that East and Gulf Coast ports are closer to the major U.S. population centers, with about 66% of the total population and 75% of the consumption base is in the eastern half of the country. Today the greatest concentration of logistics and distribution centers is in the Los Angeles market, with some 660 million sq. ft. of warehouse space located within 60 miles of the port. To capitalize on this presence, the Ports of Los Angeles and Long Beach are engaged in a 10-year, $7 billion capital expansion program. 8 Also in advance of the Panama Canal s expansion, a dozen East Coast and Gulf Coast ports are in the midst of an aggressive $10 billion expansion program. In addition to adding new container facilities and equipment, they are deepening their harbors to accommodate what they hope will be a floodgate of new cargo traffic, specifically from Asia, in the years ahead. To encourage the expansion push, the Panama Canal Authority is creating alliances with major East Coast ports, including the Virginia Port Authority, to share information about shipping and port trends to help them better align their services to shippers needs. Our partnership with the Virginia Port Authority is more important than ever, said Panama Canal Authority CEO Alberto Alemán Zubieta. As we embark on the next phases of the expansion project, data sharing and market studies exchange will continue to be essential elements of our collaboration. As the only U.S. East Coast port with the existing capability to handle post-panamax vessels, the Port of Virginia is prepared for the waterway s expansion. 9 Score one for Virginia, but nearly all East Coast ports are engaged in their own growth plans. The Port of Charleston in South Carolina, for example, has embarked on a 10- year, $1.3 billion capital plan for both existing and new terminals. The Port of New York and New Jersey is spending $3.1 billion to deepen its shipping channels and upgrade rail and road access, in advance of a projected doubling of cargo volume over the next decade. In Florida, Gov. Rick Scott has pledged $77 million to dredge the Port of Miami to 50 feet to accommodate larger ships that will navigate the Panama Canal in only a few years time. Not to be outdone in the building boom, Gulf Coast ports are also embarking on major investment programs. Located eight miles south of downtown, the Port of Houston is spending some $6 billion over the next 30 years to accommodate growth. That includes numerous construction projects the ongoing The New Panama Canal 5

6 Bayport construction project alone is projected to create 29,000 construction jobs by Even the nearby Port of New Orleans is developing a master plan with $1.14 billion of port projects to be completed by the year 2020, with $574 million of them slated for construction from 2008 to Striking out Retailers, too, are well aware of the Panama Canal s potential impact on U.S. trade, and are helping to drive port expansions, particularly in the Southeast. They are also continuing to diversify the number and location of ports that ship their goods, rather than relying on a single point of entry and exit. One issue playing to the East Coast ports advantage is a history of labor disputes at West Coast ports. Still fresh in many retailers memories is 2002, when 7,000 members of the International Longshoremen and Warehouse Union (ILWU) went on strike and West Coast port owners issued a lockout, effectively shutting down the ports for 10 days. That strike cost the U.S. economy an estimated $16 billion. 10 To be sure, retailers are keeping abreast of the Panama Canal s expansion timeline. There is little doubt that the port-related stoppage in 2002 forced many importers to broaden their port diversification strategy. A decade ago, the largest importers primarily had a single, or at most, a two-port strategy. That is no longer the case. Larger retailers have adopted a more diversified strategy, looking at four and sometimes five ports, to make sure that their freight is going to flow to the consumer. At the Port of Houston, both Wal-Mart and Home Depot have opened new distribution centers as part of their diversification strategy. Industrial developers have taken note of these retailers movements, adding 11 million sq. ft. of space in the Southeast Houston submarket with another 2 million sq. ft. now under construction. 11 To be sure, retailers are keeping abreast of the Panama Canal s expansion timeline. In March 2011, the Retail Industry Leaders Association (RILA) and the Panama Canal Authority led a select number of executives from America s largest and most successful retailers on an exclusive 3-day trip to Panama. Port properties offer challenges One significant factor in determining which U.S. ports will be future winners and losers is the physical availability of land, which is often a scarce commodity near major ports. That fact begs a good question for investors in industrial properties and retailers alike how close to the port do you have to be to be considered a port-related property? The short answer is, it depends. In Los Angeles a property located 75 miles away can still be considered port-related because it is the only place with available plots of land that are large enough to build the buildings that are needed. But in markets like Jacksonville and Norfolk, where there is no shortage of land near the ports, a property located 15 miles away could be appropriate for portrelated activities. 6 The New Panama Canal

7 At the Port of Tacoma in Washington, another major West Coast port, the lack of land availability is a major issue. Local real estate brokers say it is hard to find good, close-in land, but several major users have been successful. New industrial tenants, including IKEA, Whirlpool and Michael s Stores, are building larger facilities near the port with private building partners. And those boxes have attracted the attention of national developers as well as many smaller private firms looking for land to purchase. Conclusion The jury is still out on the short- and long-term impact of the widening of the Panama Canal once it is completed in In advance of the event, U.S. ports are positioning themselves for potential increases in cargo volume, investing billions of dollars to improve their facilities. Rail and trucking companies, too, are exploring cost structures and business models that will move goods more rapidly at reduced costs. Ultimately, companies importing goods into the United States in the future will have many more options when it comes to efficient, speedy delivery to consumers and siting of their industrial warehousing facilities. As the opening of the improved Panama Canal approaches, the entire U.S. distribution system will continue to change and adjust to this improved trading route. 1. Panama Canal Expansion: Who Wins? Who Loses? presentation by Curtis Spencer at NAIOP I.con conference, June 22, Ports of Los Angeles and Long Beach post decent May volumes, Logistics Management.com, June 16, GPA by the Numbers, Georgia Ports Authority, May Press Release, Maryland Port Administration, May 12, Panama Canal Expansion: Who Wins? Who Loses? presentation by Curtis Spencer at NAIOP I.con conference, June 22, Panama Canal Expansion: Who Wins? Who Loses? presentation by Curtis Spencer at NAIOP I.con conference, June 22, Marine insurance for shipping firms set to rise this year, channelnewsasia.com, Feb. 21, Panama Canal Expansion: Who Wins? Who Loses? presentation by Jim MacLellan at NAIOP I.con conference, June 22, Panama Canal Authority, April Martin Associates study, March Bisnow Houston Real Estate, May 19, 2011 The New Panama Canal 7

8 This paper or any part thereof may not be reproduced, distributed or in any way represented without the express written consent of Cole Real Estate Investments. Cole Real Estate Investments is the sponsor of a number of real estate investment programs. Cole Real Estate Investments is a trade name used to refer to a group of affiliated entities that provide external management services to the Cole-sponsored read estate investment programs. This paper contains forward-looking statements based on Cole s current expectations, estimates, forecasts, and projections and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. A number of important factors could cause actual results to differ materially from the forward-looking statements contained in the paper. Forward-looking statements in this document speak only as of the date on which such statements were made, and we undertake no obligation to update any such statements that may become untrue because of subsequent events. Cole Real Estate Investments 2575 East Camelback Road, #500, Phoenix, AZ P: F: WP_NEW_PANAMA (05-11)