Colliers International found something interesting in its most recent industrial report: Midwest markets are leading the way when it comes to industrial activity.
Colliers’ first quarter 2013 industrial report found that three of the top-five markets for net absorption during the quarter were Midwest cities: Chicago, which ranked first, Detroit (fourth) and Cincinnati (fifth). Los Angeles and Atlanta joined them.
According to the report, industrial net absorption was strongest during the quarter in the Midwest, a region of the country that saw 17.5 million square feet of industrial space absorbed. The South came in second, with 13.4 million square feet of absorption.
What’s behind all this industrial activity? In an interview with Midwest Real Estate News, KC Conway, chief economist for the United States with Colliers, said several factors worked together to account for the Midwest’s strong showing.
First, the country as a whole is in the middle of a manufacturing renaissance. Manufacturing is coming back to the United States in part because companies are worried about their patents not being honored in other countries. This has benefited the Midwest, a traditional center of manufacturing activity.
Secondly, automation has reduced the amount of labor that companies need to build their products. As labor costs decrease, more companies are finding it affordable again to return their manufacturing centers to the United States.
As Conway says, companies today can generally manufacture the same amount of product with a workforce that is 15 percent to 20 percent smaller than it was 25 years ago. At the same time, energy is reliable and affordable in the United States.
“We have the most reliable electric grid system. We have the cheapest forms of energy, whether a company uses natural gas or coal,” Conway said. “When you have a situation like that, you don’t have to move manufacturing around the world as much.”
And that, again, benefits the Midwest. More companies will locate in the Midwest if they’re not as tempted to send their manufacturing operations overseas.
Finally, the Federal Reserve Board during the last five years has enacted policies that have devalued the dollar. From a currency-exchange perspective, that also makes operating in the United States more affordable today for more companies.
The future looks good for manufacturing in the United States and Midwest, too, thanks to the expansion of the Panama Canal. This expansion project will double the capacity of the canal by 2015, allowing larger ships to move through the canal’s waters. This will reduce the importance port cities, meaning that more industrial activity can move away from such cities and toward inland markets, including those in the Midwest.
“This is a definite advantage to the Midwest,” Conway said. “Companies won’t have to bring everything to California and rail it across the country. They won’t have to spend as much time and money to get their shipments to the Midwest.”
All of these factors add up to what Conway calls a sustainable long-term trend of industrial growth for the Midwest.
And because the Midwest is already a hub for the automotive industry, which is thriving today, the industrial markets look poised for a long period of strength in this part of the country, Conway said.
“And it’s not just auto. The Midwest is also seeing a boom in medical-device manufacturing,” Conway said. “We are even seeing furniture manufacturing returning to the country. So the manufacturing renaissance is real and sustainable. That’s good news for the entire country, and especially for the Midwest.”