Disruptions With Panama, Suez Canals Means Trouble for CRE

Issues with the Panama and Suez Canals just started heating up in the last few weeks, but they have the potential to dramatically affect the commercial real estate investment climate throughout the coming year and even beyond that.

John Chang, National Director of Research and Advisory Services, Marcus & Millichap, explained in a recent news video the firm produced that the net impact of these shipping disruptions has been a sharp increase in container shipping costs.

The cost of shipping a container from China to the US West Coast has increased by $1,000 in the last month from about $1,700 in December to about $2,700 in January.

“The very quick and significant increase in shipping costs has the potential to stall the broader trend of falling inflation we’ve been experiencing over the last 18 months,” Chang said.

This could affect commercial real estate in a couple of different ways, according to Marcus & Millichap.

“Just the threat of increased inflation pressure could cause the Federal Reserve to be more cautious in their rate policies this year,” Chang said.

Currently, Wall Street expects the Fed to reduce its overnight rate to somewhere in the 4% range by the end of 2024.

“But if shipping costs remain elevated for several months and those higher costs trickle into the price of retail goods, the Fed may be more conservative in their rate movements keeping interest rates higher for longer, and that of course could sustain higher lending rates and slow the recovery of the commercial real estate transaction market.”

The other effect of the renewed supply chain disruptions is that it reiterates the importance of reshoring and nearshoring manufacturing, Chang said.

The trend to bring more manufacturing back to the US has already gained significant momentum enhanced by the 2021 Infrastructure Law, the 2022 CHIPS and Science Act, and the 2022 Inflation Reduction Act.

These three initiatives put government dollars to work on building out major manufacturing and production capacity upgrades in the US, according to Marcus & Millichap.

Additionally, many companies have been boosting their manufacturing capabilities in Mexico, and several points of entry along the southern border are being upgraded to accommodate more traffic, Chang said.

“These changes will affect supply chain routes, warehousing needs, job creation, and housing demand,” he said.

“In other words, reshoring and nearshoring have the potential to dramatically affect all types of commercial real estate demand over the next several years, and the disruption of the flow of ships through the Suez and Panama Canals will reinforce and potentially speed up those reshoring efforts.”