Every investor must understand the opportunities reshoring creates.
“Limit 2 per person.”
“Limit 1 per Checkout.”
It was common to run across purchase restrictions on “essential items” during the COVID-19 pandemic. And if a purchase limit didn’t apply, your plans to stock up on 30-roll packs of Kirkland’s finest 2-ply might have been foiled because it was out of stock. As you know, toilet paper wasn’t the only item in short supply. Carbon dioxide detectors, cleaning supplies, sriracha, lumber, and computer chips were just a few of the other products missing from shelves.
The COVID-19 pandemic taught us all a thing or two about the significance of supply chains. Reuters reported in August 2021 that the cost of shipping a single container from China to the East Coast had “climbed over 500% from [2020] to $20,804.” At the same time, ships sat waiting for days, and even weeks, due to port congestion, lockdowns, and labor shortages.
When you consider the average container ship transports 15,000 containers and those 15,000 containers end up at hundreds of destinations, it’s easy to see why thousands of businesses were missing inventory. Increased shipping costs. Increased fuel costs. Delays. The problem is compounded at an exponential rate just for shipping a single container!
The disruption of global supply chains led to a worldwide reevaluation of manufacturing and distribution strategies. One notable trend that emerged is the reshoring (also called nearshoring or onshoring) of manufacturing to the United States. Reshoring involves companies relocating their facilities from overseas back to the U.S.
The growth in reshoring is one that real estate investors ignore to their own detriment. Let’s see why reshoring is happening, the industries it affects, and the opportunities this creates for investors.
Why Reshoring Is Happening
There are four main reasons reshoring is occurring.
1. Supply chain resilience, diversification, and control. The pandemic exposed vulnerabilities in global supply chains with disruptions in shipping, shortages of critical components, and reliance on distant suppliers. According to the Kearney Reshoring Index, “79% of executives with manufacturing capacity in China have already moved part of their manufacturing capacity to the U.S. or plan to in the next three years.” Reshoring affords companies greater control and flexibility over their supply chains, reducing their risk of future disruptions.
2. Cost consideration. Labor costs in traditional offshore manufacturing hubs such as China have been rising steadily over the years. For example, labor costs in China now outpace those in Mexico. In many cases, cheaper labor overseas no longer outweighs the increased monetary cost and risks. Simultaneously, advancements in automation and robotics have further diminished the cost advantage of overseas production. Manufacturers who reshore production upskill their domestic workforce to oversee the advanced automation and robots that complete tasks previously executed by people. Reshoring enables companies to leverage automation while minimizing transportation and logistics expenses.
3. Quality and intellectual property protection. Some companies have experienced quality control issues, data security risks, and intellectual property theft when manufacturing overseas, specifically in technology. By reshoring, businesses can maintain tighter quality control standards, protect intellectual property, and ensure compliance with local regulations.
4. Reduced time to market (TTM). Time to Market (TTM) refers to the time it takes for a product to be developed, manufactured, and made available for consumers to purchase. Companies with reduced TTM have a competitive advantage, increased revenue, higher customer satisfaction, greater cost efficiency, and increased ability to adapt to customer demand. In the apparel industry, reshoring production helps companies cut lag time from their historic practice of ordering products three to five months in advance and hoping they sell.
What Industries Are Reshoring?
The interest in reshoring sparked by the pandemic has been perpetuated by the war in Ukraine and recent government incentives and federal policies (e.g., CHIPS and Science Act , Inflation Reduction Act, and bipartisan infrastructure bill).
Given the recent advancements in automation and robotics, companies partner technology with a domestic workforce to be more cost-effective and reduce their global supply chain exposure. In the first quarter 2023 S&P 500 earnings transcripts, talk of reshoring was up 128% from the same time last year.
Which industries are pushing this trend? According to the Reshoring Initiative 2022 Data Report, here are the top three sectors for reshoring production:
1. Electrical equipment. The top product in this category is the production of electric vehicle batteries. Federal incentives for electric vehicles have led to explosive growth in investments in EV batteries and charging stations. Job growth in this sector is up by 42%.
2. Computers and electronics. The Chips Act of 2022 made $280 billion available in new funding for the domestic research and manufacturing of semiconductors in the U.S. In addition, the demand for solar panels, robotics, drones, and chips continues to grow.
3. Chemicals. Pharmaceutical companies producing vaccines and treatments require reliable sourcing for chemicals. Renewable fuels and the production of batteries also require chemicals.
How Real Estate Investors Can Capitalize
The reshoring trend has led to job growth and will continue to contribute to employment opportunities in manufacturing jobs, research and development, and other supporting industries.
According to the U.S. Treasury Department, real manufacturing construction spending has doubled since the end of 2021. The St. Louis Fed reports that U.S. manufacturing added “roughly 1 million workers between 2010 and 2021.” The increase in domestic production and manufacturing job growth has a ripple effect on industrial real estate and other asset types. This all spells opportunity for the savvy real estate investor.
Southern and midwestern markets account for a combined 76% of jobs brought back due to the lower cost of land, labor, and skilled workforces. Reshoring has generated an increased demand for industrial space. The increased demand is driven by a few distinct factors:
1. Factory expansion. Companies reshoring their manufacturing operations require additional space to accommodate new production lines, equipment, and workforce. To meet this demand, industrial parks and vacant manufacturing facilities are being repurposed.
2. Supply chain localization. Reshoring involves clustering suppliers and distribution within reach of the customer. This localization necessitates the creation of industrial clusters or supply chain hubs near people across the U.S., leading to the development of new industrial spaces or the expansion of existing ones.
3. Modernization and automation. Companies adopt manufacturing technology and automation systems to make reshoring cost-effective. These innovations require space for the installation of robotic systems and flexible layouts.
4. Warehouses and distribution centers. Reshoring drives a need for the warehouses and distribution centers necessasry for the efficient inventory management that supports one-day or same-day shipping to customers.
Although the 2020 trend was to stock up on 2-ply, it’s looking like 2023 and beyond may be the time to stock up on industrial property. Unlike the pandemic, this looks more like a material shift than a phase.
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