The Reshoring Renaissance: Propelling American Manufacturing and Industrial Real Estate

First published in the Colorado Real Estate Journal | crej.com

By Jeff Heine & Corey Murray

American manufacturing has navigated a tumultuous journey through globalization, technological revolutions, and shifting trade dynamics over the past several decades.? The trend of outsourcing production to lower-cost regions, particularly in Asia, contributed to a decline in domestic manufacturing, and leading distribution warehousing to be the primary driver in industrial real estate absorption.? However, recent years have seen a significant resurgence in reshoring – an initiative to bring manufacturing operations back to the United States.? The resurgence has been fueled by a confluence of factors such as geopolitical uncertainties, advancements in automation and artificial intelligence, new legislation, and a growing emphasis on supply chain resilience, signifying a potential turning point for American manufacturing and industrial real estate’s trajectory.??

The industrial real estate sector has experienced remarkable growth in the past market cycle, driven primarily by distribution warehousing.? However, manufacturing has seen a relatively quiet explosion in activity the past few years.? Joseph P. Quilin, CIO of Market Strategy at Merrill and Bank of America, claims that the U.S. is at the early stages of a “manufacturing supercycle”, attributing this surge not only to reshoring, but also to increased foreign direct investment by international firms building new manufacturing facilities in the United States.? Data from the U.S. Census Bureau backs this up, revealing $189 billion in spending on manufacturing facility construction, which is roughly triple the annual rate that we saw in an average year in the 2010’s.? See chart below.??

How might this trend impact the industrial real estate sector?

1. Increased Demand.? The resurgence in reshoring necessitates physical manufacturing spaces, which will continue to drive absorption for industrial real estate.? This promises to increase demand for expanding existing facilities, as well as the construction of new ones to cater to evolving production needs.??
2. Adaptation and Renovation.? Existing industrial facilities might witness significant transformations to align with modern manufacturing requirements.? This could entail infrastructure upgrades such as increased power service to a property, reconfigurations like increasing the clear height, or creating super-flat floors to allow the use of robotics within the facility.??
3. Geographical Rebalancing.? Reshoring initiatives might lead companies to reconsider the geographical distribution of their manufacturing facility, or facilities.? This reevaluation could result in a more dispersed or concentrated layout across various regions within the U.S.? So far, most announcements for new production centers have been located in the South and Midwest.??

Forecasts from entities like CoStar suggest that a significant uptick in high-tech manufacturing will drive absorption in the industrial market, with expectations of notable leasing activity between 2024-2026.? CoStar data is tracking more than 30 planned semiconductor, electric vehicle, and battery plants, predominantly targeting 2024-25 for commencing production, which will be mostly slated for locations in Arizona, Texas, Georgia, and the Carolinas.??

While reshoring might not always be the lowest-cost option, the imperative for supply chain resiliency and stability in uncertain political climates make it an attractive choice for consistently meeting customers requirements.? Reshoring promises advantages like improved time-to-market, enhanced quality control due to having a more constrained regional supply chain, and better ESG scores due to shorter transportation cycles and reduced greenhouse gas emissions.? Additionally, due to increases in artificial intelligence and automation, the calculus for off-shoring production is less attractive than ever.? As AI and automation continue to eliminate the need for low skilled labor – which was the primary driver in the offshoring movement to begin with – cheap labor advantages overseas will continue to diminish.? The more that companies utilize automation in their manufacturing processes, and the less they rely on low cost labor, the more it will make sense for them to reshore their manufacturing operations.?

Colorado has already witnessed announcements of high-tech manufacturing relocations or expansions.? For example, Meyer Burger, a Swiss solar cell manufacturer, unveiled plans to establish a new manufacturing facility in Colorado Springs, creating 380 jobs in the region. ? Colorado Springs also won the $600 million manufacturing expansion of Entegris, a leading supplier of advanced semiconductor components, citing the need to shorten their supply chain.? The shift is not only limited to high-tech manufacturing.? U.S. Steel decided to build its next-generation steel mill in Osceola, Arkansas, citing a commitment to meeting its customers supply chain needs while also focusing on sustainability.? The project will pursue LEED? certification, underscoring the sometimes political necessity of environmentally conscious manufacturing practices.??

While no doubt there are many factors at play here, legislation has also played a pivotal role in bolstering reshoring efforts, particularly in semiconductor and chip manufacturing.? Acts like the 2021 Bipartisan Infrastructure Law, the 2022 CHIPS and Science Act, and the 2022 Inflation Reduction Act, all aim to promote the production and procurement of U.S.-made products and components.? The CHIPS and Science act, allocating approximately $39 billion in subsidies for American semiconductor manufacturing facilities, has spurred initiatives by major players like TSMC, Samsung, and Intel to invest in new facilities across states like Arizona, Texas, and Ohio.??

In conclusion, the reshoring movement we are beginning to see is not merely a shift in manufacturing strategies; it is a transformative force reshaping the landscape of American manufacturing and the industrial real estate sector.? As reshoring continues to gain momentum, it promises to bolster the economy, create jobs, enhance supply chain resilience, and pave the way for a new era of innovation, progress, and prosperity on American soil.??

Jeff Heine and Corey Murray are both Senior Advisors at SVN | Denver Commercial, assisting owners of industrial real estate with buying, selling, and leasing in the greater Denver metro area.