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Reshoring’s ripple effect has broad implications
- January 1, 2024: Vol. 11, Number 1

Reshoring’s ripple effect has broad implications

by Mason Waite

As evidenced in dozens of announcements of upcoming projects over the past two years, the United States is on the cusp of a manufacturing investment supercycle. Poised for sustained growth well into the next decade, this renaissance is being driven by an increased focus on reshoring, the implications of which are reverberating through the commercial real estate market. As the nation pivots toward domestic manufacturing, a phenomenon known as the “ripple effect of reshoring” is gaining momentum.

The indicators are compelling: Manufacturing space demand reached 19 million square feet at the close of 2022, with a significant proportion of businesses either relocating or planning to move their manufacturing operations stateside within the next three years. Further, spending on U.S. manufacturing construction has nearly doubled since the end of 2021, with development starts rising 211 percent between January 2019 and June 2023.

Federal and state policies have played a pivotal role in facilitating this resurgence. Billions of dollars in financial assistance have been allocated to companies transitioning to the United States, with a particular focus on emerging markets such as electric vehicles and semiconductors.

Arizona, a hotbed of investment, stands as a prime example of the far-reaching impact. TSMC’s decision to establish a chip manufacturing facility in Phoenix catalyzed a wave of announcements from related firms looking to expand or locate in the market. This influx of investment has the potential to redefine the economic landscape in regions fortunate enough to be at the epicenter.

The economic gains and employment growth associated with reshoring are multifaceted. For every direct manufacturing job, eight indirect jobs are created, amplifying the sector’s impact. Each dollar spent in manufacturing generates a $2.60 total impact on the broader U.S. economy, making it one of the nation’s most influential sectoral multipliers.

Beyond economic metrics, manufacturing plays a pivotal role in fortifying the nation’s role as a global superpower. Second only to China in terms of value, U.S. manufacturing contributes significantly to GDP and is set to grow at a compound annual growth rate of 3.05 percent through 2028, showcasing resilience in the face of potential economic headwinds.

Amid the growing emphasis on environmental, social and governance considerations, reshoring emerges as a sustainable practice. The practice not only allows companies to better manage their supply chains, reducing risks and improving overall cost and quality control, but the proximity to end-users reduces transportation times and distances, curbing carbon emissions and environmental impact. Moreover, companies operating in the United States are subjected to higher levels of regulation and transparency, distinguishing it from global counterparts like China, which still relies on pollutants like coal for energy.

However, this manufacturing resurgence brings challenges, particularly in the demand for appropriate industrial space. Manufacturing accounts for just one-fifth of U.S. industrial stock, the bulk of which is either owner occupied or was built prior to 2000. With manufacturing accounting for one in 10 industrial vacancies nationwide and the majority of the market composed of small firms, the need for modern, adequately sized facilities is acute. In such a competitive environment for space, a new wave of high-credit tenants is expected to emerge, likely driving up rent growth and reducing vacancy.

Maintaining these healthy fundamentals will deliver a promising opportunity for operators to experience strong portfolio performance and for investors to receive strong risk-adjusted returns, even in today’s turbulent economic environment. As the nation embraces its role as a manufacturing powerhouse, stakeholders in the commercial real estate sector must navigate this evolving landscape to capitalize on the promising opportunities that lie ahead.

 

Mason Waite is managing director of asset management at BKM Capital Partners, a commercial real estate fund manager and operator. Download the firm’s complete report, Reshoring’s Ripple Effect, here.

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