Will Reshoring Trigger a Manufacturing 'Supercycle'?
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.
“If you look at what’s happening with the Suez Canal and shipping tensions in the Red Sea, the (global situation) has only gotten worse, so if anything, I see the supercycle accelerating,” says Tran. “The re-shoring allows us to rely on our own infrastructure, money, and workers and have it all in one place. It’s a good thing for the U.S. and the international companies like Samsung, Toyota, and Hyundai that want a presence in the U.S.”
REDUCING GEOPOLITICAL RISK
Chad Griffiths, SIOR, partner with NAI Commercial Real Estate in Edmonton, Alberta, Canada, thinks one of the most critical components of bringing manufacturing back to North America is the CHIPS Act, which was designed to strengthen the U.S. semiconductor industry and reduce its reliance on foreign sources. The U.S. currently makes none of the world’s most advanced chips needed for defense and critical infrastructure, which endangers national security. The world’s largest chip manufacturer, Taiwan Semiconductor Manufacturing Company (TSMC), is based in Taiwan and produces around 90% of the world's chips. TSMC is now setting up shop in the U.S., investing $40 billion in a pair of computer chip factories being built in Arizona, with subsidies and tax credits from the CHIPS Act. GlobalFoundries, Intel, Samsung Foundry, and Texas Instruments are also building new semiconductor production facilities in the U.S.
“Nearly all of the advanced microchips and semiconductors are made in Taiwan right now, and with the geopolitical risks surrounding that, [it's important] to have a secondary supply system. The U.S. is looking to do that with TSMC, and that will ease concerns of geopolitical risk,” says Griffiths. Like Tran, he is enthused about the effect the reshoring trend will have on traditional manufacturing. “By bringing manufacturing back to North America, we don’t have to ship things across the ocean, so it makes it much easier to move things by rail or truck across North America without having those huge choke points—from low-production manufacturing all the way to advanced microchips and semiconductors."
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.
“We have seen a lot of activity in our markets,” says Baltazar Cantu, SIOR, industrial director in the Monterrey, Mexico office of Colliers. “A lot of companies that had a presence in Asia are relocating some of their production to Mexico to provide to the U.S markets, and a lot of Asian companies, mainly Chinese, are looking to be closer to the U.S.”
Cantu says that some Chinese companies had begun to relocate at least a portion of their operations to Mexico before 2020, but the trend increased dramatically after COVID-19 struck. Labor costs in China have been accelerating for over a decade, and the cost of shipping containers ballooned during the pandemic, so the cost of logistics has been the primary driver behind the moves.
He also stressed that not all manufacturing relocating to Mexico is labor-intensive and that some companies choose Mexico over the U.S. because of the well-educated workforce in cities like Monterrey. “One of the advantages that Mexico has is the cost of employing engineers is way lower than the U.S.,” says Cantu, who adds that one of his clients is contemplating moving its R&D operations to Mexico from the U.S. because it would save them 50% on engineering salaries.
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.
“Laredo is where Interstate 35 begins in the U.S. and stretches down through the Pan-American highway to Monterrey—the economic engine of Northern Mexico—all the way down to Central and South America,” says Madsen. “All trade comes up through this corridor, then up to Dallas, where it’s distributed from the Dallas Logistics Hub. If you talk to EDCs around DFW and Texas, as recently as 3-4 years ago, the largest deals they were chasing in their respective cities were all logistics in nature; now they’re all manufacturers.” Madsen says that the region is seeing an influx of solar and chip manufacturing and is “bullish on Texas and the Sunbelt states long term due to available labor and proactive government regulations and incentives.”
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.
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
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