Is the Industrial Market Ready for a Reshoring Wave?

Article originally posted on Globe St. on September 22, 2022

Done carefully, “it can compete with low-cost countries such as China.”

As the advantages continue to erode for U.S. manufacturers operating in low-cost countries, interest in reshoring and near-shoring continues to climb. This is especially true in the age of COVID-19, with the pandemic’s near-crippling impacts on supply chains, including for logistics and distribution, according to a recent report from Yardi’s CommercialEdge.

“Moving back to the U.S. or near-shore destinations such as Mexico, Canada, or Costa Rica have distinct advantages—most notably shorter and easier-to-manage supply chains, improved communication, and reduced probability for disruption,” Yardi’s Doug Ressler tells GlobeSt.com.

“When done carefully, reshoring or nearshoring can deliver enough improved efficiencies (and hence lower operational costs) to compete with low-cost countries such as China.”

However, establishing a new supply chain—even in the U.S.—can be expensive and challenging, Ressler said.

“To be competitive and add value to their supply chain, logistics providers must contribute their own improved efficiencies and cost reductions to make the supply chain as agile and competitive as possible.

“Companies are pouring billions of dollars into new facilities and supplier agreements as they strain to secure needed raw materials,” he said.

The CommercialEdge report said that manufacturers that re-shore production will face a unique set of challenges.

“Not only will they need industrial space to manufacture goods, but logistics and distribution facilities as well,” Ressler said. “With a national vacancy rate of just 4.1%, space might be hard to come by.

“A tight labor market means that site selection will not only be dependent on infrastructure but also on labor pools.

“American labor costs are also much higher than places where firms have offshored manufacturing, meaning firms will explore automation solutions and likely increase costs for their products.

“Production and supply chains are complex systems that take years to reshape—reshoring is not a quick fix for firms struggling in the current global economy. We expect that reshoring will continue during this decade, albeit at a slow pace, and be a driver of demand for industrial real estate for years to come.”

A ‘Flight to Quality’ Emerges

Avery Dorr, vice president at Stonemont Financial Group in Atlanta, tells GlobeSt.com, “We are beginning to see a significant demand spike for warehouse space by domestic manufacturers from coast to coast.

“As populations increase in major cities across the country, the need for move-in ready warehouse space will only continue to grow. Manufacturers will seek out lower-cost markets with good labor fundamentals, convenient access to major transportation networks and local economic incentives.

“This flight to quality among manufacturers will mean that competitiveness for available land will only continue to escalate further, and developers will be forced to put more thought behind choosing locations that are attractive to these types of tenants.”

Seeking Multi-Purpose Facilities

According to the Reshoring Initiative, over 1,800 companies have re-shored production in 2021.

Chad Jacobson, COO, DAUM Commercial, tells GlobeSt.com that “this staggering number of re-shoring moves has contributed to the tight compression of industrial vacancy rates we have seen across the country in 2022.

Jacobson pointed to high-demand regions such as California’s Inland Empire dominating the sector at 0.8% vacancy in July 2022, followed by Columbus, Ohio, at 0.9%, and Los Angeles at 1.9%.

“To decrease costs and increase productivity, re-shoring manufacturers are seeking multi-purpose facilities in locations poised for long-term growth and expansion,” he said. “Competition for logistic facilities, warehouses, and distribution sites is steadily increasing as these manufacturers demand production space in close proximity to warehouses for storage and post-production distribution.

“Site selection factors are playing a strong role in which regions are being impacted most by the overwhelming industrial demand. The need for skilled labor, established transportation infrastructure, and availability of land for development is driving demand in regions such as California, Arizona, and Oregon—resulting in recent developments and expansions including the Taiwan Semiconductor Companies’ new manufacturing development in Phoenix expansion of well-established companies like Intel in the Silicon Forest region of Portland and rapid industrial expansion projects in the Otay Mesa submarket of San Diego.”

Despite the current pressure applied by increasing industrial demand, Jacobson said that growth is expected to move at a moderate pace.

“With unresolved disruptions and supply chain issues, new deliveries are coming online at a slower pace than demand requires. As a result, re-shoring operations are slowed, but consistent demand for industrial real estate will be stabilized over the next decade.”

Skilled Workers are Aging Out

Peter K. Billmeyer, SIOR, Co-Founder, Managing Principal of Bespoke Commercial Real Estate, tells GlobeSt.com that the challenges for U.S. manufacturers go far beyond just a CRE issue.

“When manufacturers started offshoring decades ago, the result was a sharp decline in vocational schools and students pursuing careers in the trades,” Billmeyer said.

“Instead, an irrational and misguided focus on everyone going to college permeated our society. This decades-old mistake is why we have massive labor shortages in skilled labor positions like construction and manufacturing.

“And now our skilled workers are aging out and a younger workforce is saddled with staggering student debt.”

Billmeyer said that “everyone loves the idea” of domestic manufacturing, but it was extremely challenging prior to the current industrial market conditions and now it’s even more daunting with labor and production costs and supply chain challenges where they are.

“Finding (and training) the next wave of skilled workers to run the complex machinery and create those beloved products is going to be expensive and will take time and money.”

Sustainability and Energy a Focus

Robert Hess, vice chairman of Global Corporate Services at Newmark, tells GlobeSt.com that labor and energy are perhaps the two most pressing and rapidly-rising global considerations for both manufacturers that are reshoring production and operators pursuing site selection for larger, more complex industrial projects.

“Many, if not all, of these reshored and foreign direct investment (FDI) opportunities coming into North America will result from companies looking for green energy and renewable platforms,” Hess said.

“These firms will likely be coming from countries where a focus on sustainability and energy efficiency is mission-driven and engrained in their sustainable development goals, which means they’ll expect access to power grids that can provide reliable, redundant and affordable electricity.”

US Manufacturing and Supply Chain a Problem

Andrew Zola and Juan Arias with CoStar Advisory Services tell GlobeSt.com that the higher US dollar will continue to reduce the competitiveness of US-based manufacturing.

They see continued supply chain disruptions cause a lack of availability of components for manufacturers and the US port/rail/highway infrastructure has exhibited its limits in the last few years.

“The US not only lacks a manufacturing workforce but also a supply chain one (truckers, warehouse workers); firms looking to reshore will need continued government incentives

“The infrastructure bill is good progress, but investing more specifically in industrial infrastructure (factories, machines, robots) would make a larger impact on U.S. cost competitiveness and on reshoring. In the long-run, subsidized industries will fail if manufacturing costs aren’t competitive.”

Near-shoring or friend-shoring remains a good option for manufacturers, attracting work that would otherwise come back to the US, Zola said.

“Although on-shoring is less competitive compared to alternatives (China/ASEAN Countries/Mexico), it does provide a hedge against supply chain disruptions,” Arias said. “Certain markets are better targets for onshoring because of lower operating costs (lower wages, energy costs, and state and local taxes).

“Many southeastern, Midwestern, and Texas markets have lower operating costs, making them attractive locations.”

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