#208 – Inside Our Industry – Manufacturing a Return – Will Reshoring Trigger a Manufacturing ‘Supercycle’?

Posted on | Inside Our Industry

SIOR, the Society of Industrial and Office Realtors, is the leading global professional office and industrial real estate association. Their Summer Edition of their 2024 SIOR Report-The Industrial and Office Magazine, included a great article that introduced us to a “manufacturing supercycle”, which we are sharing, in part, this week. A link to the full article is located at the conclusion of our post.

Manufacturing a Return – Will Reshoring Trigger a Manufacturing ‘Supercycle’?
Michael Hoban, Hoben Communications, SIOR Report. Summer 2024

Not long after the World Health Organization declared COVID-19 a pandemic, the fragility of the global supply chain was glaringly exposed. Worldwide shutdowns of manufacturing and distribution facilities, bottlenecks at ports and borders, workers falling ill from the virus, changes in consumer behavior, and strained trade relations between the U.S. and China combined to choke the flow of goods—from staples like food and toilet paper to medical supplies, appliances, and microchips.

Many North American companies recognized the inherent limits of overseas manufacturing dependency and began shifting production and manufacturing from overseas factories to domestic locations—a process known as “onshoring” or “reshoring.” In addition, many American companies are nearshoring, locating manufacturing in Mexico, which, in addition to being closer to the U.S. markets, offers a balance of cost savings and greater control over the production process.

The idea of onshoring is not new. U.S. companies began offshoring manufacturing in 1980, and by 2020, the manufacturing workforce dipped from over 19 million to approximately 11.4 million, according to the Bureau of Labor Statistics. Companies then began reshoring in 2010, as labor costs in China started to rise. By 2017, the U.S. brought back home about a million jobs. The pandemic-fueled supply chain issues have accelerated the trend to new heights. In a 2023 study conducted by Forbes, Xometry, and John Zogby Strategies, 82% of U.S.-based manufacturing executives reported they’d either moved overseas factories back home or were in the process of doing so.

With the resurgence of onshoring, combined with legislative measures such as the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and the CHIPS Act, all aimed at tackling supply chain challenges, there has been an explosion in manufacturing construction. Real manufacturing construction spending doubled from the end of 2021 to Q2 2023, according to a report by the U.S. Treasury Department, and construction spending on computer, electronics, and electrical manufacturing (a small share of manufacturing construction over the past few decades, but now a dominant component) has nearly quadrupled.

Manufacturing a Supercycle

“About 15 years ago, there was a lot of talk about trying to bring manufacturing back to the U.S., but I think it was the pandemic that helped us to realize that with all the issues with materials, costs, logistics, trade relations with China…reshoring just made sense,” says Tim Tran, SIOR, founder and president of real estate investment firm The Ivy Group in Fremont, Calif. He believes we have entered into a manufacturing “supercycle,” a new ecosystem that makes U.S. manufacturers less reliant on forces beyond their control, like geopolitical risk exposure, trade disputes, and yes, another pandemic.

Potential Issues for Reshoring?

While Griffiths believes that reshoring will be a huge boon for the supply chain in North America, he also sees several potential issues, beginning with the increase in the cost of goods. “There’s a reason that China is the world’s factory. They’ve become very good at making things at scale and doing it at a lower cost,” he says. “And the reason behind much of the reshoring occurring right now is that it’s subsidy-driven. Many of these companies and consumers still want the lowest product price, so it remains to be seen what [pricing] will look like once the stimulus dries up.”

In addition to cost, the reshoring boom has a number of commercial real estate-related issues. Last fall, Cushman & Wakefield released a report detailing the challenges facing reshoring, concluding that “while nearshoring and reshoring activities have increased from both businesses and governments, the sector is facing significant headwinds in achieving meaningful impact.” For starters, there’s a shortage of available manufacturing space in the U.S., with vacancy at 10.3% and only 80 million square feet of space currently under construction (as of September 2023)—half of which will be owner-occupied. Improvements to U.S. infrastructure are still in process, so many suitably large sites lack sufficient power to host manufacturing facilities. Manufacturers are also facing skilled labor shortages, particularly for advanced manufacturing.

Nearshoring Boosts Manufacturing in Mexico and Border States

In addition to the onshoring trend, the U.S. and Mexico are reaping the benefits of nearshoring. Mexico is the United States’ largest trade partner and offers a wealth of advantages for manufacturers. According to the World Bank, Mexico is transitioning to a knowledge-based economy, providing skilled workers and advanced industry-specific technology in aerospace, automotive, electronics, and medical devices.

One beneficiary of the growth in manufacturing in Mexico has been the border state of Texas. Conrad Madsen, SIOR, co-founder and partner with Dallas-based Paladin Partners, says that “massive investments” are being made in both DFW and along the border cities of Texas (Laredo, McAllen, El Paso) as a result of increasing trade between the countries. According to U.S. Census data, Laredo is now responsible for more trade than any other port in the country, and the city continues to invest heavily in its transportation infrastructure.

While the reshoring faces challenges such as potentially higher consumer costs, a lack of infrastructure, and skilled labor shortages, the potential to remake the entire North American logistics landscape can be a once-in-a-generation game changer.

Let the supercycle begin.

Full report.