The industrial market across the country is enjoying plenty of momentum, with companies’ demand for new industrial space seemingly unquenchable. But a push by companies to open more manufacturing facilities in the United States is only adding fuel to the hot industrial market.
During the earliest days of the COVID-19 pandemic, consumers were shocked to find plenty of empty shelves at their local grocers and retailers. At the same time, those ordering exercise equipment, electronics and clothing from Amazon and other online retailers noticed that these products were taking longer to show up at their doors.
Companies don’t want this to happen again. Because of that, many are bringing their manufacturing operations back to the United States.
What does this mean? Only that the onshoring of manufacturing back to the United States is providing yet another boost to the already sizzing industrial market.
Chris McKee, principal and chief development officer for St. Louis-based real estate development and investment firm CRG, said that the demand for manufacturing space in the United States has consistently been on the rise since the start of the pandemic. And it’s not just onshoring that is behind this. He said many companies are also modernizing their manufacturing base and are seeking newer, more modern facilities.
McKee said that this trend isn’t about to slow.
“There are more users in the market who are manufacturers than at any point in my 20-year career,” he said. “The manufacturing sector is one of the strongest sectors in the industrial market. It’s been picking up steam for the last 12 months and has some legs.”
Robert Smietana, vice chairman and chief executive officer of Chicago-based HSA Commercial Real Estate, said that his company is still mainly developing industrial warehouse space. But he, too, has seen an uptick in the number of companies looking for manufacturing space, too.
A good example? HSA has been working with HARIBO, the company that makes all those multi-colored gummi bear candies, on its first North American manufacturing plant that will open in Pleasant Prairie, Wisconsin.
“The idea just made sense,” Smietana said. “HARIBO’s customer base in North America is very large. They were shipping and manufacturing their gummi bears from 10 countries around the world to North America. it was time for them to open a facility here to help meet the demand.”
This facility will rank as the largest capital investment in HARIBO’s history.
“With this substantial investment, we’re strategically setting our business up for long term growth in the U.S., and we are looking forward to a bright future,” said Hans Guido Riegel, managing partner of the HARIBO Group, in a statement.
McKee pointed to two reasons for this increase in demand. First, companies are working hard to keep their products on store shelves. To help avoid some of the product shortages that the country saw during the early days of COVID, companies are committing to manufacture more of their products in the United States instead of overseas.
At the same time, companies want their manufacturing facilities to be closer to their customers. They also want more control over the quality of their products. Locating manufacturing facilities in the United States instead of in overseas locations helps companies meet both goals.
“What happened in China, with heavy-duty COVID lockdowns, took companies in the United States by surprise,” McKee said. “That is a big driver for this move. I also think part of it is the modernization of manufacturing. Companies that want to modernize their manufacturing processes are looking for space in the United States.”
“I hope this is a trend,” Smietana said. “It seems that having your manufacturing space near your distribution space near your customer has become more important. If you look at 20 years ago, companies were moving toward just-in-time deliveries and moving their manufacturing across the ocean. We’ve all found out during the past several years that this model is flawed.”
It’s also more cost-efficient for companies to manufacture products near their customer base, Smietana said. Even with labor being cheaper in many overseas locations, increased shipping and distribution costs make manufacturing overseas a more expensive proposition today. And as fuel prices remain high, these costs will only continue to rise.
“A lot of companies were looking at onshoring before COVID,” Smietana said. “The pandemic just reinforced their concerns. Right now, every manufacturer and distributor of goods is taking a hard look at their options, and many are considering moving their operations back to the United States.”
McKee said that this demand for new manufacturing space in the United States has been yet another boon to the industrial sector. Onshoring creates more demand, something that drives industrial development throughout the country.
Of course, more demand puts even more pressure on the construction and development industries. It’s still a challenge for builders and developers to get the construction supplies they need, with several key components still taking months to show up to job sites. Onshoring will only exacerbate these challenges.
CRG has faced this challenge, too, of course. But McKee said that the company’s integrated model – CRG acting as developer on projects, its construction firm Clayco building them and its in-house architecture firm handling the planning – has helped it keep projects on schedule, even when faced with supply and labor shortages.
“We are not negative when it comes to the shortages. It is what it is,” McKee said. “We are all facing this issue, and we are better suited than most to handle it. It is not something I stress and worry about every day. We focus on what we have to do each day to solve our customers’ problems.”
McKee said that while the shortages continue, there is more stability in the construction process today than there was last year and earlier this year. The shortages already rippled through several material types. Steel was the first material that became difficult to get. Then the industry saw shortages in insulation, roofing materials, roofing fasteners, electrical switch gear and concrete.
By relying on the integrated model of construction and development, though, CRG has been able to more efficiently navigate these shortages, McKee said.
“The issues in the supply chain have been significant for all of us,” he said. “And we don’t see these issues ending anytime soon. We have been fortunate, though, in that rents have continued to rise to support the increased costs of construction. If we get to the point where that stops, then we’ll see a significant downward pressure on construction starts.”
No end to the demand?
McKee said that the demand for industrial is highest in markets in which there are high barriers to entry, large populations or growing populations.
Demand remains high in the Northeast portion of the country, McKee says, because that slice of the United States has such a large population to serve. The Northeast also has high barriers to entry and long entitlement processes, with projects sometimes taking a year to complete. That makes this market extremely hot, McKee said.
The Southeast and Southwest regions of the country are experiencing strong population growth. Part of this is because people had more choices of where they could live during COVID. Many no longer had to live close to where they worked. This led to many people choosing the warmer temperatures of the southern part of the country. This booming population has led to a surge in demand for industrial space, whether manufacturing or distribution.
The Midwest is not a boom market, but it is still a strong region for industrial demand, McKee said. Industrial users like the Midwest because it’s easier to find skilled labor here. The Midwest is also a steadier market, not experiencing the same boom-and-bust cycles that many of the country’s hotter markets do.
“Most of the growth in demand in the Midwest is driven by a need for manufacturers and end users to be closer to their population centers,” McKee said. “There’s also a cheaper cost of living here. It’s easier to live in the Midwest than it is to live on the coasts. The Midwest has a lot going for it. It might not be booming like what we’re seeing in the Southeast and Southwest, but it still is doing tremendously well when it comes to industrial activity.”
As Smietana says, the hottest industrial markets will never be located in the Midwest. This doesn’t mean, though, that this region isn’t attractive to industrial end users.
He says that today, there is plenty of demand for industrial space in markets such as Columbus and Nashville. Smietana said that Chicago is always a strong industrial market and that Minneapolis, too, is seeing rising demand for industrial space.
“The Midwest has always been a steady-Eddie market,” Smietana said. “The highs in the Midwest are never as high as the highs in the coasts, but the lows are never as low.”
But what about rising interest rates? Is that one development that could slow demand for industrial space?
Smietana said that this is a possibility. But many companies realize that they have a need to open manufacturing facilities in the United States, even if interest rates here are higher today.
“I don’t think companies with these major plans are going to be wavered or hindered by these current economic headwinds,” Smietana said.
The strong demand for industrial assets means that it can be difficult for companies to find space in many markets. That’s led to a rise in spec industrial construction.
As McKee says, when users need the space, they need the space. It’s why so many are willing to move into industrial space that has already been built rather than wait through the build-to-suit process.
“There is no vacancy in many markets,” McKee said. “Users look and look and look and they struggle to find anything. Users must be very aggressive and make decisions about space quickly. They must take the space when it is available.”