KC Conway

Podcast: KC Conway, Colliers International

Panama Canal Dispute May Give Breathing Room For; Ports To Prep

A dispute between Panama’s government and a consortium of European engineering companies over the cost of the expansion of the Panama Canal may stop work on the $3.1 billion project to add a third set of locks to the canal. Although the expansion is expected to be completed by mid-2015, this could be pushed out further as work on the third set of locks could stop if the parties can’t come to an agreement over payment for an estimated $1.6 billion cost overrun, said KC Conway, chief economist at Colliers International. “The good news is that ports that aren’t post-Panama expansion ready will have more time to get ready. But the cost overruns will have to be paid by someone,” he said.

REFI: Can you give us a quick overview of where construction is on the expansion of the Panama Canal?
Well, we can keep holding our breath on a completion date. It seems like every time we get close to a real completion date, something creeps up. There were some delays last year that pushed it out to mid-2015 instead of the original target of 2014.
But there’s a new wrinkle– the multi-national engineering consortium that won the original bid for the design and construction of the locks has come back and said the cost to complete the project is $1.6 billion higher than their original bid. If they can’t settle the $1.6 billion cost overrun, work on the expansion will shut down in the next month.
The good news is that ports that aren’t post-Panama expansion ready will have more time to get ready. But the cost overruns will have to be paid by someone.

REFI: Has the market started to see an impact on the supply chain as a result of what’s been done so far?
We noticed that traffic coming through Suez Canal is picking up—it was up more than 5% for 2013—while container traffic through Panama Canal dropped 2.5% last year. Shippers were anxious that there would be new, higher shipping rates with the expansion of the Panama Canal and wanted to demonstrate that there is another path for moving goods. Shippers are using the Suez Canal as a hedge against higher rates in the Panama Canal and now construction delays, despite the security risks.

REFI: If there is a construction delay, will it help ports such as New York City that are struggling post Hurricane Sandy?
New York is trying to recover from Hurricane Sandy and it also has some labor shortages and software issues that need to be worked out. It has struggled and this has highlights there are other strategic options. The Port of Cleveland, for example, has discovered that rather than moving goods to Europe and Russia through New York and New Jersey, it can more efficiently move goods to those regions through the Great Lakes.
Charleston is working on a four-year dredging process, as is the port of Savanna and Miami is putting in new cranes. The construction delay could give some breathing room to the East Coast ports.

REFI:  We’ve been talking about ports with problems. But there are a lot of bright spots out there. The Port of Baltimore seems like it is in great shape.
Absolutely. Baltimore is actually the second East Coast port to be post Panama-Ex ready. The port has been strategically targeting businesses they think they can go after, such as the automobile business. Down the coast, Norfolk continues to be the fastest-growing port in North America and Charleston is hitting on all cylinders, with putting in its new cranes and working on its dredging.

REFI: What is the takeaway for commercial real estate investors?
Ports are not Las Vegas, things don’t stay there – so the business model is figuring out where are the class one rail connections and where are the inland ports. Those ports that figure out how to connect the supply chain to intermodal facilities in Atlanta, Dallas or Kansas City will have an advantage. Everything is moving to rail and intermodal and the quicker you figure out those linkages, that is the opportunity.