Disruptions In Red Sea, Panama Canal Causing Supply Chain Snafus That Bring Déjà Vu For CRE

Years after supply chain shocks rocked the global economy and just as skyrocketing costs and interminable delays seem like a thing of the past, it appears the worries and waiting games for developers and construction crews have returned.

A pair of pressing crises is creating bottlenecks at two crucial intersections for global trade, with receding water levels jamming up the Panama Canal and regional spillover from the Gaza crisis emboldening Houthi rebels in Yemen to fire at Red Sea cargo ships. These events once again underscore the fragility of globalization while threatening to disrupt commercial real estate and a potential recovery during an already-precarious year.

“What we're seeing is some pressure on our global supply chain, a significant amount, and the pressure is building,” industrial adviser and CBRE Vice Chairman Kevin Dudley told Bisnow. “It’s a cause for concern.”

Clear signs already suggest immediate and forthcoming supply shocks and cost increases. Globally, there have been huge leaps in the cost of shipping containers. Prices doubled in the first two weeks of January, according to the Freightos Baltic Index. For container ships bypassing the Red Sea, which handles 30% of global shipping traffic, taking the long route around Africa adds 10 days and $1M in fuel costs per trip, Reuters reported. 

The cost of shipping insurance has already doubled, said Anirban Basu, chief economist for the Associated Builders and Contractors, and the cost of materials will rise, especially steel. That means a large impact on nonresidential construction, because single-family homebuilding in the U.S. tends to rely mostly on lumber produced in the U.S. and Canada.

“This is affecting everybody, so it's very difficult for anyone buying construction materials to avoid these issues,” Basu said.

Basu said a shipping crisis could create inflation pressures that spill over into other aspects of financing. If the crisis puts enough upward pressure on prices for a long enough period, it could become an inflation worry. That might lead the Federal Reserve, which communicated the possibility of cutting rates, to be more cautious. Any resulting delay in rate cuts would, in turn, delay the relief that many owners and investors had been counting on and make the current wave of refinancing more expensive for many. 

“If they’re not going to cut as aggressively in 2024, that will, of course, impact project starts in 2024 and ‘25 as well,” he said. “That’s another layer of impact for contractors.”

No one has said this crisis is approaching the significant delays and economic shocks of the early pandemic, when numerous factors hit both the supply and demand side of the construction materials trade and led to unprecedented systemwide cost increases and delivery delays. Dudley said he doesn’t think cost increases, which have leveled off over the last six months, will get anywhere near where they were three years ago without something catastrophic taking place. 

The crisis is minor compared to the global shipping stoppages early in the pandemic, said J.C. Renshaw, senior supply chain strategist for Savills. It isn't a total disruption as much as it is adding transit time, which can eventually lead to wild fluctuations in the availability of materials, supplies, parts and electronics. When there is a little bit more scarcity, that can lead to a whipsaw effect of overcorrecting on inventory. That creates short-term needs for overflow storage. 

“This is a delay. This is rerouting,” Renshaw said. “It's not like the only possible opportunity has been cut off.”

But if this goes on for six to eight months, it could create upward pressure on inflation, Renshaw said. There aren’t clear indications of when these challenges may end, an issue industrial giant Prologis mentioned in its mid-January earnings call. 

The problems with the Panama Canal, caused by climate change, aren’t easily reversible, and the Biden administration has telegraphed that it is planning long-term action against the Houthis in Yemen, suggesting the Red Sea will be a risky route for the foreseeable future.

Plus, the unpredictability of these and other potential crises — tensions over Taiwan, for instance — have made construction analysts and supply chain specialists wary of what may come, including predictions that Saudi Arabia’s ballooning hotel construction could put pressure on suppliers and would add more challenges for builders. 

The immediate repercussions will be felt in real estate and construction risk management, said Barry LePatner, a real estate lawyer and construction expert. Architects, designers and contractors will need to continually factor in existing and potential shipping delays in their plans, projections and project analyses, which may impact financing and project timelines. 

Many of the significant infrastructure and manufacturing plants that have been funded due to subsidies and incentives in the Inflation Reduction Act and the Bipartisan Infrastructure Law will suffer from delays and materials cost increases, Basu said. That means slower development of battery plants and more expensive light rail construction covering less ground.

These new challenges come as demand is predicted to increase later this year. Dudley said there is pent-up demand from previous periods of supply chain turbulence, and more tensions now might cause a similar era of lost opportunities. 

“This is another reason for firms to simplify their supply chain, put production closer to the largest consumer population in the world and bring your supply chain back home now,” Basu said. “You can manufacture in the U.S. and ship to Europe without using the Panama Canal or the Red Sea. You can imagine this really means great things for the East Coast.”

That hasn’t necessarily prepared anybody for this crisis, Basu said. In fact, the severe drop in construction starts and activity through the beginning of 2023 has meant stockpiling, less demand and a “fair amount of complacency” around logistics and supply chains since the early pandemic crisis. 

Despite all the misgivings analysts noted about the current supply crisis, it is also clear that the wave of investment in domestic production and manufacturing is well underway. This series of setbacks for global shipping will likely catalyze and speed up the rate of reshoring.

“The diversification of the supply chain that's happened over the last seven years has made us really resilient, and I don't think that's going to stop,” Dudley said. “Is there an amount of conflict that as it gets piled on, it's going to be too much to handle? I guess we'll have to find out. But I do think that the supply chain will figure it out.”