U.S. Manufacturing Resurgence?
Exploring the Challenges and Factors Driving Onshoring and Nearshoring
This article is a part of the Maintain the Chain series that uncovers the latest supply chain trends and examines the impacts on industrial real estate.
|Occupiers: Finding Opportunity in a Tight Market.
The U.S. manufacturing market is tight, but opportunities for onshoring and nearshoring do exist. There is substantial development happening, driven by the private sector’s desire to manage supply chain risk and the government’s immense investment in various manufacturing industries. Occupiers need to be thoughtful about where to invest and expand operations to maximize the chances of success, with a focus on location analysis, supply chain optimization and scenario planning. The right real estate must be combined with the right infrastructure, incentives and labor supply.
|Investors: Thoughtful Investment for the Future.
Increased capital and corporate interest in expanding manufacturing in the U.S. and nearby countries will open doors for new development. Construction costs are still rising, and manufacturing development requires specific expertise and bespoke solutions for occupiers, so investors should be developing deep relationships with existing and potential occupier tenants. Depending on strategy, sector and long-term goals, capital may be best deployed into different geographies or sections of the supply chain.
Disruptions to supply chains across the world have been the norm over the past three years, bringing the impacts of globalization and the importance of well-functioning supply chains into sharper focus. Not just an operational or financial headache for businesses to contend with, the disruptions grew so deep that consumers also felt them acutely.
Both governments and the private sector became more aware of the economic, financial and social impacts that disruption to supply chains can have—especially in sourcing medical devices, vaccines and personal protective equipment (PPE).
In the wake of these interruptions, along with increases in protectionism that predated the pandemic1 and the increased emphasis placed on sustainable energy supply chains, nearshoring and reshoring considerations have intensified for businesses and governments alike.
So, what’s new?
- Businesses are proactively exploring new ways to diversify their supply chains—and in the U.S., a major component of diversification is manufacturing. Where are the products produced? How do we diversify risk in advance of another crisis?
- The U.S. government has also invested in and incentivized increased domestic manufacturing through the Inflation Reduction Act and the CHIPS and Science Act2. Certain industries that are core to national security or that are lynchpins of green energy are beneficiaries of these legislative initiatives.
Are these dual forces having an impact? To understand, we explore the current state of manufacturing real estate in the Americas today and the commercial real estate market’s response to the expected uptick in activity.
What is the difference between Nearshoring vs. Reshoring?
Reshoring is the practice of transferring a business operation back to the country from which it was originally located.
Nearshoring is the practice of transferring a business operation to a more proximate country. For a U.S.-based company, reshoring entails returning some operations back to the U.S., while nearshoring may involve moving manufacturing from the Asia-Pacific region to a nearby country, such as Costa Rica, Canada or Mexico.
Current State of U.S. Manufacturing
In 1990, about half of the manufacturing space that existed (47%) was owner-occupied, while 28% was leased to a single tenant, leaving the remaining 25% leased to multiple tenants.3 Today, the share of owner-occupied space remains close to that figure (at about 45%),4 meaning that many firms elect to invest in and build their own facilities. Still, this means that over half of the market for manufacturing space is made up of tenants who must consider specific space requirements and market conditions as part of the site-selection process.
When weighing the pros and cons of owning versus leasing manufacturing space, there are several factors to consider, including cost, as both the cost of construction and capital are elevated above pre-pandemic levels. There are also use-case and customization considerations. An owner is able to completely customize to their needs and not worry about rent increases, lease terminations or upcoming renewals.
Leasing, on the other hand, provides greater flexibility for growth—and depending on the deal specifics, can be a less-costly alternative. The weighted average lease term (WALT) for manufacturing space is approximately six years—slightly shorter than the 6.4-year WALT for warehouse/distribution space5—which could put owners at risk of lease turnover.
The flexibility of leasing is attractive to those looking to get their businesses up and running without having to wait to build a facility from scratch. In addition, with material pricing issues, delays at ports, material shortages and labor issues, building a manufacturing facility has become more difficult.
Site selection is a distinct challenge, as companies need to identify locations that can integrate into their supply chains, and also offer attractive real estate options and sufficient labor pools with the appropriate skills.
For tenants looking to rent existing space, site selection is made more difficult by a tight market with a current U.S. manufacturing vacancy rate of only 2%, which is less than half of warehouse vacancy.
In the U.S., there is approximately 6.7 billion square feet (bsf) of manufacturing stock, of which 4 bsf is rental space, or not owner-occupied.6 These CoStar figures for the U.S. largely align with data from the 83 markets tracked by Cushman & Wakefield Research, in which there is 3. 6 bsf of manufacturing (rental) inventory, accounting for a little over one-fifth (21%) of the total industrial rental inventory in those 83 U.S. markets.
Manufacturing inventory tends to be older, with nearly two-thirds of manufacturing stock built before 1990 and nearly three-quarters built before 2000. The top nine manufacturing markets each have over 100 million square feet (msf) of rental manufacturing space. Four are in the Midwest (Chicago, Detroit, Cincinnati and Milwaukee), three are in the West (Los Angeles, Phoenix and Oakland/East Bay) and two are in the Sun Belt (Dallas/Ft. Worth and Greensboro/Winston-Salem).
There are 20 U.S. markets where manufacturing space accounts for over one-third of the market’s existing industrial inventory, and manufacturing represents more than half of all industrial inventory in seven U.S. markets.
The most mature manufacturing region in the U.S. is the Midwest, accounting for about 35% of the country’s total manufacturing inventory (34% of leased inventory7 and 36% of leased and owned inventory8). In contrast, the Midwest represents about a quarter (27%) of all industrial stock.
Despite the Midwest’s historical dominance, the South is the fastest-growing manufacturing region in the U.S. today. Over the past 10 years, the South region has added over 100 msf of new manufacturing space.
The leased inventory has increased by 47 msf (4.1%) while the owned inventory has increased by 55 msf (6.6%) over the past 10 years.9
According to CoStar data, nearly half of all manufacturing space currently under construction is in the South. This amounts to 1.3% of current manufacturing inventory in the region, nearly twice the ratio of the Midwest (0.8%) and West (0.7%) regions. Of the nearly 80 msf of space under development, 20 msf is in the Midwest, led by Chicago with 3.9 msf and Kansas City with 3.7 msf. Across the Sun Belt, the largest pipelines are in Savannah (14.6 msf), Phoenix (6.6 msf), Dallas (1.8 msf) and Greenville (1.5 msf).
Interestingly, over a fifth of the U.S. manufacturing construction pipeline is speculative.10 It is likely that most of these speculative buildings will eventually be leased as shell leases, and the tenant will likely be responsible for building out their internal requirements.
Designing a speculative building for a manufacturer can be risky and costly if the owner builds too specifically to one type of user before leasing.
Spec-to-suit is likely the route of much of the speculative development.
Though the inventory of the manufacturing space is less than that of the warehouse/distribution sector, there has been an uptick in the manufacturing sector activity. According to a release by the U.S. Department of the Treasury, inflation-adjusted construction spending for U.S. manufacturing facilities has nearly doubled since the end of 2021, thanks to a supportive policy environment for manufacturing construction: the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA) and CHIPS and Science Act each provided direct funding and tax incentives for public and private manufacturing construction.11
The boom is mostly driven by construction for computer, electronic and electrical manufacturing—a relatively small 15% share of manufacturing construction investment dollars over the past few decades, but as of June 2023 accounted for a 56% share and is over 4.5 times what it was in December 2021.12
Manufacturing construction is one element of a broader increase in U.S. non-residential construction spending, alongside new building for public and private infrastructure following the IIJA.
Though nominal construction spending has risen consistently since the onset of the pandemic, much of this increase is driven by sharp rises in both labor and materials costs. Manufacturing space is more expensive to build,13 and only makes up 7.3% of the total square footage in the industrial pipeline.14 The increase in manufacturing space under development has been much lower (+16%) than the value of (real) investment (+360) revealing the complexities of these facilities. Investing in manufacturing properties is capital-intensive but will be necessary for significant long-term investment in supply chain resilience.
Like the uptick in construction activity, leasing activity for manufacturing space is showing new signs of life. Leasing volume reached 136.9 msf in 2022, the highest level on record. Moreover, this level is not just a little bit above prior leasing totals:
2022 leasing was 27% above 2020 levels and 42% above the 10-year pre-pandemic average.
While 2023 H1 is trending slightly lower than last year (when annualized)—at 118.1 msf—this is still a sizable uptick. Further, as much activity has recently been tied to owner-occupiers, 2023 still stands out as a strong year.
For those tenants leasing space, not only will tight vacancy levels be a challenge: rent growth for manufacturing space has ballooned in recent years much in line with trends observed for other industrial subtypes. From year-end 2019 to year-end 2022, warehouse rents rose by 55.0% nationally; manufacturing rents rose by a whopping 36.8% over this same time. (The other industrial subtypes grew by a less 23.5% [office services] and 18.8% [high-tech].)
The rate of growth in industrial rents is expected to slow generally, but many manufacturing occupiers will face similar challenges as their warehouse counterparts: with a 6-year WALT, marking leases to market rents or leasing new space at market rents will be (possibly significantly) more expensive than just a few years ago. Planning should start sooner rather than later.
Around the Region: Spotlight on Americas
MEXICO is a regional manufacturing powerhouse.
Across the seven largest Mexican markets, industrial absorption was 30 msf in 2022.
Over the past three years, Tijuana and Monterrey accounted for over 35 msf of absorption on their own. Much of this demand is driven by nearshoring activity, as 18 of the 25 largest industrial transactions in 2022 were executed by firms headquartered in the Americas.
COSTA RICA evolving Into Medical Device Manufacturing Hub
The capabilities of the sector have grown more sophisticated, as Costa Rica has evolved from its roots as primarily a location for parts and components assembly. Since the beginning of the pandemic, the total manufacturing production index has increased by 22%.16
The value of diagnostic equipment and therapeutic devices manufactured in Costa Rica has grown by four-times over the past 10 years, now accounting for 26% of the more than $5 billion in medical device exports.17
Challenges Impacting Reshoring & Nearshoring
The U.S. Needs More Manufacturing Space
Tight leasing market conditions will be an issue for occupiers who have not already secured their facilities.
Infrastructure Improvements are Necessary
In addition to struggles with power, the American Society of Civil Engineers (ASCE) gave the nation's infrastructure a grade of C-minus on its 2021 quadrennial infrastructure report card. ASCE says the U.S. is spending only half of what it needs to invest in infrastructure improvements to bring systems up to par and predicts an infrastructure funding shortfall of $2.59 trillion over the next 10 years.
According to ASCE, crumbling infrastructure costs every American household $3,300 in hidden costs a year, from lost time and increased fuel consumption while sitting in traffic jams, to extra car repairs due to poor road conditions. This poses a risk of significant economic losses to the U.S., and higher costs to consumers, businesses and manufacturers.
Certain Types of Workers in Short Supply: Need the Right Skills in the Right Locations
These projects and investments are creating new job opportunities, helping to lift manufacturing employment to 13 million as of midyear 2023, its highest level since 2008. That represents only a 1.3% increase from the same period in 2019, compared to a 3.5% increase in employment across all sectors. Taking an even longer look in the rearview mirror, manufacturing employment is down 4.5% from 200820 and 22.6% from 2001—the year that China was accepted into the World Trade Organization. Moreover, the lessening of post-pandemic tailwinds amid heightened macroeconomic uncertainty is likely to lead to a more restrained hiring environment compared to the past couple of years.
In August, the ISM manufacturing index remained in contractionary territory for the 10th straight month, with only two of 18 subsectors reporting employment growth during the month (the employment index declined for the 3rd straight month and has contracted for five of the last seven months).
The recent “boom” in investment has not necessarily translated to an outsized increase in jobs, and recent industry sentiment suggests a cautious outlook for a transformational shift in the manufacturing economy.
Overall trends aside, there are several pockets of manufacturing that provide some upside to the employment picture. The sectors that have added the most jobs since 2020 include manufacturing of motor vehicles and parts (75,800), pharmaceuticals and medical equipment (48,700), industrial machinery (16,800) and semiconductors (13,700).21 Although these industries make up less than 14% of total manufacturing employment, they are also where we have seen the largest capital investments in the wake of reshoring initiatives.
That correlation may seem obvious, but underlying this relationship is a complex interaction between capital and labor. For example, motor vehicle production has undergone a pronounced productivity slump over the past decade, meaning manufacturing requires more hours of labor to produce a given level of output. The same is true for industrial machinery.
This shift in the composition of U.S. manufacturing means that the typical U.S. manufacturing facility now includes a more diverse group of laborers, such as highly skilled scientists and engineers. This will encourage substantial competition for skilled labor that is already in short supply, which is a headwind for sustained expansion within these sectors.
Labor needs for manufacturing can be very specific, especially given the shift toward more high-tech products. There are natural supply constraints, given that manufacturing is among the fastest-aging labor sectors in the country,22 and a shift in the geographic locations where manufacturers operate presents additional hiring challenges.
Job demand on an absolute basis is strongest in California and Texas, with unique job postings at 24,000 and 17,000, respectively. The Midwest is the region with the largest number of job postings (66,000), which is up an impressive 28% YoY. This growth rate is only behind the Southeast, which increased 31% YoY and exceeds 44,000 in the middle of 2023.
Outside of established manufacturing hubs in these regions with a specialized labor pool, hiring may present an even greater challenge. In the semiconductor sector, the existing “hubs” of employment are dispersed across different regions rather than exhibiting any meaningful concentration in one area.
The implication is that with some of the recent large capital investments targeting areas outside of the established hubs for high-tech manufacturing, firms may struggle to find qualified employees without relying heavily on relocations and training programs.
Sectors Experiencing Recent Growth
Automobile production continues to be concentrated in “Auto Alley”—commonly considered to be the column of states on the eastern part of the U.S., from Michigan, Indiana and Ohio down through the Southeast to the Gulf of Mexico. The EV ecosystem’s manufacturing growth is similar to the broader manufacturing trend. The Midwest is the existing leader, but the fastest growth is in the Southeast, with foreign auto makers in particular locating most of their operations in the southern half of Auto Alley (i.e., Alabama, Georgia, Mississippi, South Carolina and Tennessee).26
While other sectors are heavily focused on supply chain reliability and risk management, pharmaceutical availability, which has a direct impact on the health and wellbeing of consumers across the U.S., remains largely offshore. Interruptions in the global medicine supply chain is cited by Johns Hopkins Bloomberg School of Public Health as a significant policy problem that illustrates the U.S.’s overdependence on other countries for APIs and some medications, leading to delays and shortages in the U.S.32
There are also financial concerns, as pharma industry supply chain disruptions could represent a potential loss of 25% of EBITA.33 According to Cushman & Wakefield data, life sciences lab space continues to be on a significant growth trajectory. Unlike other sectors that are geographically diversified within the U.S., manufacturing and lab space for life sciences and pharmaceuticals is heavily concentrated in key hub markets, such as Boston, New York City/Northern New Jersey, Raleigh-Durham, San Diego and the San Francisco Bay Area. There is currently 35 msf of lab and life sciences space under construction in the nine largest U.S. life sciences markets, which represents an increase of over one-fifth of current inventory.
One of the stated goals of the CHIPS and Science Act is to increase U.S. semiconductor production capacity through the investment of $280 billion. Most of that ($200 billion) is directed at scientific R&D and commercialization, but there is $53 billion earmarked for semiconductor manufacturing, R&D and workforce development and $24 billion allocated for chip production tax credits.29 Currently, seven U.S. semiconductor manufacturing sites, totaling over 750,000 sf, have been proposed or are currently under construction.30 These are geographically diverse, reaching from Ohio in the Midwest to Texas and Arizona in the Southwest and up to Washington in the Pacific Northwest.
Nearshoring: How Cushman & Wakefield Can Help
Cushman & Wakefield’s team of Supply Chain & Logistics experts can help businesses navigate the complexities of nearshoring using our Integrated Site Selection process. With our global reach and local expertise, we can help businesses unlock the benefits of connecting supply chain and real estate strategies.
For investors and developers, we can help identify opportunities to work with companies seeking to nearshore production and help to deploy capital in newly emerging asset classes and geographies.
1 It is worth noting that there has been an ongoing diversification of manufacturing since the early 2000s—especially for labor-intensive goods—as wages in China have increased significantly. Shifting manufacturing from China to Vietnam or India, as an example, is not necessarily “nearshoring” for a U.S. company, but it is another factor shaping the global manufacturing landscape that began prior to the pandemic but that has come into fuller focus over the past three years.
2 Summaries from the Bipartisan Policy Center are available for the Inflation Reduction Act and the CHIPS and Science Act.
3 Torto & Wheaton, AREUEA Journal, Vol. 18, No. 4, 1990.
4 According to data from CoStar, cross-validated with data from Cushman & Wakefield Research.
5 Cushman & Wakefield Research.
6 CoStar Group.
7 Cushman & Wakefield Research.
8 CoStar Group.
9 CoStar Group.
10 CoStar Group.
11 U.S. Department of the Treasury, https://home.treasury.gov/news/featured-stories/unpacking-the-boom-in-us-construction-of-manufacturing-facilities
12 Increasing from $23.6B to $109B. Note: Census data are reported on an annualized rate basis.
13 This is evident by comparing data on the square footage or physical volume of different types of CRE that are under construction against Census Bureau data (used by the Department of Treasury) on the value of that construction.
14 CoStar Group.
15 Ministry of Economy, Mexico
16 Organisation for Economic Co-operation and Development (OECD)
17 Cinde; Procomer; Duke University Trade Classification, 2022
19 Reshoring Initiative 2022 Data Report, https://reshorenow.org/recent-data/
20 Bureau of Labor Statistics, Moody’s Analytics, Cushman & Wakefield
21 As of June 2023.
22 Of the national workforce, 23% of workers are within 10 years of retirement age; among the manufacturing sector it is closer to 27%.
23 EV Volumes, ev-volumes.com
24 International Energy Agency, https://www.iea.org/news/demand-for-electric-cars-is-booming-with-sales-expected-to-leap-35-this-year-after-a-record-breaking-2022
25 CoStar Group
26 Federal Reserve Bank of Chicago, https://www.chicagofed.org/publications/economic-perspectives/2022/5#ftn32
27 McKinsey, https://www.mckinsey.com/industries/semiconductors/our-insights/the-semiconductor-decade-a-trillion-dollar-industry
28 Deloitte, https://www2.deloitte.com/us/en/pages/technology-media-and-telecommunications/articles/semiconductor-industry-outlook.html
29 McKinsey, https://www.mckinsey.com/industries/public-sector/our-insights/the-chips-and-science-act-heres-whats-in-it
30 CoStar Group
31 U.S. Food & Drug Administration, Drug Shortages: Root Causes and Potential Solutions (2019).
32 Johns Hopkins Bloomberg School of Public Health, The Pandemic and the Supply Chain (2020).
33 McKinsey, https://www.mckinsey.com/capabilities/operations/our-insights/emerging-from-disruption-the-future-of-pharma-operations-strategy