Eric Von Berg - Newmark Realty Capital - 595 Market Street, Suite 2550, San Francisco, CA 94105 - for loan quote: 415 956 9922

June 3, 2013

Does Panama Canal expansion spell disaster for West Coast distribution buildings?

Will the expansion of the Panama Canal in December 2014 be a disaster for West Coast distribution buildings?
"Likely Not" said Curtis Spencer, President of IMS Worldwide Inc., one of the leading consultants to ports, shippers and big retailers on logistics strategy.

I attended a presentation by Curtis Spencer at the Spring ULI meeting in San Diego. His presentation countered much of the doom and gloom that is out there regarding the impact of the Panama Canal expansion on West Coast demand for distribution buildings.

He kindly agreed to allow me to share this with my readers. Click here for copy of his slides.

West Coast Competitive Advantages

Because of the large ships that can be accommodated, the Panama Canal expansion will drop sea cargo costs to the East Coast by 30%. IMS is telling their clients that much of the current cost advantage of West Coast shipping is absorbed by the railroads (that is why Mr. Buffet bought Burlington Northern Santa Fe Corp.) and they are predicting that after the Panama Canal expansion the railroads will drop their pricing to keep intermodal shipping competitive to most of the East Coast. IMS Worldwide estimates only a 1 in 10 chance that the railroads will stick to their current pricing and the West Coast will lose significant market share of the import/export business.

The recent economic downturn resulted in a glut of container ships. As a result the shipping lines shifted to a slow-shipping system. With excess ships sitting around, it cost them less to run their ships as slower speeds than to dock these ships. This resulted in such large fuel savings that IMS is predicting the industry will not shift back to maximum speeds even as shipping demand picks up. If slow-speed shipping stays the norm, the intermodal system used by West Coast ports to get product to the East Coast will still have about a one week advantage over the improved speeds after the Panama Canal Expansion to the East Coast.

West Coast’s Biggest Area of Concern

The International Longshore and Warehouse Union (ILWU) has a strangle hold on West Coast ports. The organized slowdown in 2002 in LA and Long Beach disrupted logistics for the entire nation. As a result, the union usually gets everything it wants. The typical crane operator in LA/Long Beach makes over $300,000 per year and is not required to punch in and out. A skilled operator can meet his/her weekly quota working about 20 hours a week.

Watch Mexico
Also, an important driver for increasing demand for distribution buildings in the US Southwest is the growth of manufacturing in Mexico. This demand growth is expected to continue due to the increased competitiveness of Mexican wages versus China:

See the attached slide presentation for details