Ongoing supply chain disruptions stemming from the COVID-19 pandemic have caused American companies to consider reshoring production and logistics assets to U.S. soil. The Biden administration has openly supported these initiatives in its 2022 budget by proposing $600 billion in funding to support U.S.-based manufacturing jobs.
President Biden also established an official Made in America office by executive order in January 2021 to promote reshoring initiatives and encourage U.S. businesses to source domestically. While e-commerce continues to dominate the industrial real estate sector, onshoring efforts will also contribute to the growing demand for industrial space as more U.S. businesses begin turning reshoring plans into reality over the next few years.
Is a Manufacturing Renaissance Really Happening?
Business news outlets have been beating the manufacturing renaissance drum off and on for ten years or more. However, actual progress in returning production to the United States has been relatively slow. Until recently, obstacles to reshoring initiatives included:
- Cost. U.S. businesses spent several decades outsourcing production to China, Taiwan, Vietnam, and other Asian destinations for one primary reason: It was cheaper. Labor and operating costs in those countries have historically been much lower than in the United States. So much lower, in fact, that brands still found it cheaper to ship high volumes of many goods internationally rather than produce them domestically.
- Labor availability. As manufacturing moved overseas, the U.S. labor force adapted accordingly. Manufacturing jobs began to dwindle as fewer Americans went to technical and trade schools, and more went to college. Over decades, this left the United States with a much smaller skilled labor force than it had back in the glory days of American manufacturing.
Where cost once stood as the primary motivator for outsourcing, business leaders have begun to consider other priorities. As many as 83% of respondents to a Thomasnet survey of manufacturers reported intentions to reshore production. So, what changed?
Geopolitical activity and a global pandemic have altered the way that U.S. companies look at reshoring. A growing middle class has driven up the cost of Chinese labor. Meanwhile, hundreds of billions of dollars in tariffs on Chinese imports imposed by the Trump administration from 2018-2020 made China much less cost-effective than in years past. With these rising costs as a backdrop, the COVID-19 pandemic struck.
As Chinese production shut down and the global supply chain buckled, outsourcing companies at long last prioritized resiliency over cost. U.S.-based retailers and manufacturers began to see the flaw in putting thousands of miles between production assets and clamoring customers. Shortening supply chains in pursuit of resiliency and agility became the number one priority for thousands of American organizations. As a result, the long-awaited U.S. manufacturing renaissance has finally gained steam.
Made in America Needs Industrial Real Estate
Manufacturers and supply chain operators who return assets to the United States will require industrial property. Some of the factors that will influence site selection include:
- Infrastructure. Reshoring manufacturers will struggle with labor shortages, resulting in higher automation to enhance a smaller skilled workforce. As such, these companies will require industrial properties with good power and connectivity infrastructure that can accommodate heavy automation.
- Urban blight. Decades of outsourcing allowed thousands of U.S. factories to fall into disuse. Many urban industrial areas in America have succumbed to rot, pests, pollution, and crime. As companies seek to onshore their production capabilities, they may find they have to foot the bill to restore blighted industrial zones.
- The e-commerce sector now accounts for about 20% of all industrial real estate demand. Onshoring manufacturers will have to compete with booming e-commerce for ideal industrial properties.
- Existing business expansion. Made in America won’t just benefit returning manufacturers. It will also increase business for those who never left. As the government continues to require agencies to spend domestically and offer incentives for U.S. companies who do the same, manufacturers already located in the U.S. will need more space to accommodate growth.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.