Familiar shores: In a changing global marketplace, onshoring likely to remain an important industrial demand driver
A rendering shows early plans for two new Intel processor factories in Licking County, Ohio. (Credit: Intel Corporation) In a volatile and uncertain global marketplace, one U.S. commercial real estate sector has been a stalwart source of strength in recent years: industrial. With e-commerce sales continuing to climb, tenant leasing activity remains robust, which is allowing the sector to continue to see growth in rental rates and positive net absorption. In conjunction with ongoing e-commerce growth, a post-pandemic operational shift for many retailers to maintain higher inventory volumes has provided additional fuel for industrial fundamentals. There is a third—and perhaps somewhat underappreciated—factor that has been and will likely continue to play an important role in contributing to demand growth in the years ahead: onshoring. A growing number of U.S. and international companies moving to onshore their supply chain operations is expected to have significant ramifications for both individual U.S. markets and the broader industrial sector. Looking forward, the onshoring trend is anticipated to be one of the most important industrial demand drivers for some time to come, shaping the contours of the industrial market in a variety of ways. In that context, analyzing which markets, industries, and tenants will benefit most significantly from the onshoring trend is essential for decision-makers in the evolving industrial real estate sector. Trade trends level off MaCauley Studdard is managing director with St. Louis’ ElmTree Funds. There is a strong argument to be made that the globalization of trade has been the defining attribute of modern economies over the last several decades. In the 35 years prior to 2008, the percentage of the global economy attributed to international trade nearly doubled (increasing from around 30% to 59%). Today, international trade remains a key feature of the global economy. However, the extent of its influence has remained steady since 2008, with several factors contributing to slowing global trade growth. Increased demand for skilled labor; geopolitical uncertainty and instability; supply chain disruptions; fuel price increases; and unpredictability have all played a role in slowing down global trade. Another factor that cannot be ignored is the impact of higher wages in many international manufacturing hubs. In China, manufacturing wages have nearly doubled in the last decade alone. Without the appeal of an overseas production model that can no longer consistently deliver the advantages of reliable and cost-effective global production and transport, global trade growth has largely leveled off. Black swans and new perspectives Manufacturing industry dynamics can be added to the long list of things altered by the COVID-19 pandemic. Pandemic-related production and transportation disruptions caused shipping and production delays and transportation bottlenecks. Trade limitations caused by political and regulatory complications became more frequent, and supply chains globally were under constant strain. For manufacturers looking to reduce uncertainty and find ways to invest in a sustainable cost-effective production model, overseas manufacturing began to lose its luster. Many manufacturers subsequently concluded that the potential savings of a global supply chain model no longer justified the risks. Initiatives and incentives A number of incentives for domestic manufacturing operations remain in place. The global supply chain continues to be plagued by interruptions and unpredictable delays and challenges. There is persistent and perhaps sustained uncertainty in the global economy. Geopolitical volatility remains high and there is continued concern about the impact of sizable disruption in places like Ukraine and China. These are significant considerations that present a background state of uncertainty. Against that backdrop, manufacturers are looking to maintain greater control over their supply chain operations. A recent survey indicated that seven out of 10 manufacturers plan to continue reshoring or near-shoring their manufacturing operations. In addition, government initiatives and incentives are encouraging and rewarding onshoring and reshoring. The CHIPS and Science Act of 2022 and the Inflation Reduction Act both provide substantial new incentives for manufacturers to produce more goods domestically. The CHIPS Act provides $39 billion in U.S. manufacturing incentives and $13.2 billion in R&D and workforce development, and the Inflation Reduction Act funds a $7,500 EV tax credit for vehicles using batteries manufactured in the U.S. A long and growing list While the number of companies currently engaged in or committed to noteworthy onshoring or reshoring initiatives is long and growing, some highlights include: Intel : Building a $20 billion semiconductor chip plant in Columbus, Ohio. Walmart : Planning to spend $350 billion on domestically produced goods in the next decade. Hyundai: Building a $5.5 billion EV battery facility in Savannah, Georgia. TSMC (Taiwan Semiconductor Manufacturing Company): Making […]
