More than half of American CEOs (55%) whose companies rely on manufacturing to produce and deliver their products recently reported plans to reshore some operations. Of those, 95% said they would do so in 2023, according to the survey conducted by Xometry, Zogby and Forbes in late December.
While not all those CEOs are looking to move operations to the United States, interest in bringing manufacturing closer to home has been growing, driving demand (and prices) for industrial space and creating new opportunities for commercial real estate brokers.
Identifying available land to build on or facilities suitable for retrofitting is just one challenge faced by manufacturers. This article explores reshoring trends and barriers, and offers insights from commercial real estate practitioners taking advantage of the growing business opportunity.
Pandemic-driven supply chain disruptions put U.S. reshoring in the headlines, but it’s a trend that had been building for quite some time. Rising labor rates in China and elsewhere have negated the primary benefit of offshoring. Beginning in 2017, Trump administration policies that resulted in tariffs on Chinese imports, the renegotiation of NAFTA, and a reduction in the corporate tax rate prompted many U.S. manufacturers to consider bringing back some or all of their offshored operations. E-commerce remains strong, keeping pressure on global supply chains. Add to this rising geopolitical tensions, and it’s clear U.S. manufacturers have plenty of reasons to move manufacturing closer to their customers.
Still, reshoring is a long-term decision. Rosemary Coates, executive director of the Reshoring Institute, reports that industries across the board are rethinking their manufacturing strategies. “The decision-making process around location has changed,” says Coates. “It used to be all about where it was cheapest to operate. Now, it’s more strategic. Many want at least some part of their operation in the U.S. or closer to home.”
Evolving market niche
“We’re still in the early stages of reshoring,” says Peter Billmeyer, SIOR, co-founder and CEO of Bespoke Commercial Real Estate in Chicago. “It’s going to be six to eight quarters before we’ll see where this is going.” Most experts anticipate that reshoring will continue slowly over the next decade, given that production and supply chain systems do not change overnight.
In the Dallas–Fort Worth market, Conrad Madsen III, SIOR, co-founder and partner of Paladin Partners, reports a dramatic shift over the last several years. Over more than 20 years in the business, he has observed that most of the largest deals in the market were distribution in nature. “Today, eight out of 10 of the largest deals are manufacturing in nature,” says Madsen. “Moving back manufacturing to the states is happening on a massive scale.”
There is no universal set of norms for reshoring. “It’s all across the board,” says Madsen. “What is mostly coming back to the states are the more expensive goods. Much of the inexpensive manufacturing heads to Mexico, where the labor costs are significantly lower than in the U.S.”
William Holly, president of Patton Real Estate in Miami, agrees. “Higher tech and higher skill reshoring represent more value,” says Holly. “It’s a cost-benefit analysis, but there are groups that value timing over cost. Given the backlog in the supply chain, time is more valuable, and clients will pay more to have it faster.”
A Range of Critical Factors
Commercial brokers need to understand the complexity of reshoring to position themselves effectively as a resource. “There are many more attributes to be analyzed,” says Madsen. “Many brokers focus exclusively on lease rates, but water and electricity costs could be three or four times the rent amount.” Madsen notes that while domestic clients look at these factors, the reshoring client also considers moving costs and the investment timeline to break even. “It’s a much more complex analysis,” he says.
Labor is another critical factor in the analysis. “You have to know intimately what the client envisions as the profile of their workforce—e.g., high school or a higher degree—and look for a location that can deliver that labor pool,” advises Billmeyer.
Madsen moved a client’s 600,000-square-foot manufacturing facility from one Dallas–Fort Worth location to another to be closer to a better-skilled labor source. “While moving was expensive, they signed a 10-year lease and took advantage of incentives from the local township,” Madsen says.
Engage with economic development boards
Economic incentives are frequently at the center of reshoring decisions. “Some companies that contact us for reshoring assistance have already decided on a location, while others are open to anywhere in the country,” says Coates. “We identify potential locations based on requirements and then visit the top two or three to meet with economic development boards. We ask for recommendations for commercial real estate developers and brokers, who are key to the selection process.”
Local communities are latching onto reshoring opportunities, and brokers are directly involved. “EDBs love manufacturing because it means a significant number of jobs and will offer incentives—including, if possible, deals on electrical and water, which can be a huge factor,” says Madsen. “There are so many levers they can pull, and we will leverage multiple communities to compete against one another to create the most advantageous deal for our clients.”
“There are no blanket incentives,” says Laura DiBella, deputy secretary of commerce for Enterprise Florida, a public-private partnership of state business and government leaders. The value of each opportunity is based on targeted industries, wages, the company’s current location, and other metrics. DiBella advises commercial brokers interested in reshoring to keep abreast of shifts in the trade lanes to capitalize on newly created opportunities. The Reshoring Institute is one source of market information, as are some global logistics consultants.
Holly maintains close ties to Enterprise Florida. “Sometimes, a reshoring company will already have a broker relationship. Don’t expect a trade group just to hand you a deal,” Holly says. “You need to establish a relationship and provide value. Find how you can be a resource to them, and be prepared to take the long view—especially with global transactions.”
Build-to-suit versus retrofitting
As industries compete for industrial space, the high cost and lack of ready-to-build land make older existing facilities more attractive. John Steinbauer, SIOR, president of Steinbauer Associates in Miami, reports that “older facilities are being occupied very rapidly, with prices doubling over the past five years.” Madsen sees a future where big-box retail and shopping malls are retrofitted for manufacturing. “It’s all about location and access to labor, which some vacant big-box sites offer. The key is getting the city to rezone these sites for industrial users,” says Madsen.
“It always comes down to math,” Billmeyer says. “Retrofitting is expensive, but some out-of-the-box solutions are presenting themselves. For example, an old Sears with existing mechanicals might win in a cost-benefit analysis over building new, which is even more expensive.” Billmeyer notes, however, that manufacturing may require a different footprint or have unique needs associated with loading docks.
Signs of industrial market moderation
While industrial vacancy rates remain low in most areas, there are signs the market is moderating. Cushman & Wakefield reports the under-construction industrial pipeline fell below 700 million square feet in the fourth quarter of 2022, and the average industrial asking rental rate climbed only 1% from the third quarter, a fraction of the 18.6% year-over-year increase. Similarly, asking rents for warehouse and distribution facilities rose 21.6% annually but only 0.6% in the fourth quarter.
Steinbauer sees the moderation in the South Florida market. “Although the industrial market is very good, there is some subleasing where companies are downsizing due to economic uncertainty,” says Steinbauer. “There’s a feeling of instability, and companies looking to reshore overseas operations are hitting pause to see what happens with interest rates.”
Still, projections for reshoring remain strong as the government works to increase U.S.-based production of essential manufacturing components such as semiconductors. Also, as automation becomes less expensive, it offsets labor costs and puts the U.S. on a more level playing field with competing markets.
Commercial brokers who understand the complexities of reshoring and can cultivate relationships with others in the reshoring ecosystem stand to benefit. In addition to economic development agencies, explore opportunities to connect with the global market through foreign consulates, trade offices, world trade centers, and international property shows. “You don’t have to travel abroad to leverage these opportunities,” says DiBella, “but you need to be versed in what is coming next.” Holly can attest to that. “Everyone understands global supply chain issues. It’s a complete change from a decade ago, and the reshoring and nearshoring trend is just getting started.”