The Changing Direction of Industrial CRE

The future of industrial CRE is strong, but advancing in a new direction, according to a report from Newmark and NAIOP.

CRE for advanced manufacturing is the wave of the future, while warehousing and distribution take a back seat, the report finds. It predicts new construction related to the high tech, automotive, energy and biomanufacturing sectors will add 6% to 13% to the nation’s existing manufacturing space within the decade. And the U.S. will not be the only beneficiary. Canada and Mexico, as well as U.S. cities along the border with Mexico, will also see significant growth in these sectors.

“Since 2020, over 300 major manufacturing facility announcements have been made across North America, representing approximately $400 billion in pledged project investment, at least 210,000 new proposed jobs, and a minimum of 250 million square feet of new development over the next decade,” the report stated, calling this “a watershed moment”.

The projected growth is being driven partly by the Biden administration’s push to spur a revival of manufacturing in the U.S. and to encourage reshoring and nearshoring following the economic disruptions caused by the Covid pandemic. The administration’s three landmark pieces of legislation each contained billions of dollars in incentives to accomplish this goal. The Infrastructure and Investment Jobs Act provided $8 billion for subsidies and infrastructure investment to stimulate manufacturing especially related to electric vehicles and energy. The CHIPS and Science Act set aside $50 billion for semiconductor manufacturing and R&D, including $39 billion in direct incentives. And the Inflation Reduction Act directed $400 billion to help reduce greenhouse gas emissions and adopt clean energy initiatives. A later executive order provided $2 billion to expand domestic biomanufacturing.

Real private manufacturing construction spending grew at an annualized rate of 62% in August 2023. The computer/electronic/electrical subsector saw the largest investment of any sector on a per project basis, soaring to 56% by August 2023 – compared to just 10% in 2019.

The high-tech/digitalization and automotive/transportation sectors are expected to have the biggest impacts on manufacturing, the report said. That’s because they constitute the greatest volume of new projects and proposed jobs, as well as the largest project size as measured in square feet. They “have unique and complementary drivers that will propel further manufacturing growth,” the report said.

The growth is taking place in many states, but the South and Midwest especially are benefiting. “New manufacturing clusters are forming and existing clusters are expanding as a record number of new projects are either underway or set to break ground in the next decade,” the report found.

“The regions poised to benefit most from advanced manufacturing employment projections, development and attendant economic growth are predominantly secondary and tertiary markets with higher-than-average levels of preexisting advanced manufacturing talent, relatively lower-cost energy supplies and abundant, affordable land,” the report predicted. Nearly 50% of the manufacturing jobs announced in recent years are in 15 markets, both large and small.

Phoenix ranked first by number of manufacturing jobs announced – 15,466 (14 projects), followed by Atlanta – 12,713 (7 projects) and Austin – 11,465 (6 projects). Mid-sized metros also saw many jobs announced like Syracuse, NY – 9,000 (1 project) and Savannah, GA – 8,840 (2 projects) while micropolitan Brownsville, TN added 7,490 (3 projects) and Sherman, TX added 4,500 (2 projects).

“At the end of 3Q 2023, manufacturing construction reached 62.2 million square feet, a record high in data going back to 2003, representing 11.5 percent of the total national industrial pipeline (540 million square feet),” the report noted. “This comes as development for many other commercial real estate sectors (including logistics) wanes due to the slowing economy and difficulty in sourcing construction loans, especially for speculative construction.”

The multiplier effects of advanced technology projects will make their impact even greater, though the effects will be uneven. In addition to suppliers and related industries, other companies may move in.

The report cites the example of Tesla’s EV 10 million SF gigafactory and Navistar’s 900,000 SF EV truck production facilities in Austin. It attributes to them at least 3 million SF of warehousing/manufacturing absorption nearby. The plants have also spurred complementary companies to cluster nearby. And demand for multifamily, retail and hospitality space has increased to accommodate population and wage growth.

However, one challenge developers may encounter is opposition from some community groups or regulators to massive projects disrupting rural or small-town lifestyles.

Another major challenge for manufacturers in advanced sectors – in addition to their growing power needs and limited capacity — will be attracting or training the needed educated or skilled workforce. “Sourcing talent globally will also be critical in relation to attracting labor with specialty skill sets (as in certain semiconductor production processes). Immigrants account for about 40 percent of highly skilled workers in America’s semiconductor industry,” the report noted.

Fewer than one-third of announced projects have actually broken ground, suggesting that the development pipeline will keep growing. Most facilities will be owner-occupied or build-to-suit, though demand for leasable manufacturing space is growing. Speculative manufacturing space will remain an expensive and risky proposition.

Amidst all the excitement about the high-tech ahead, there is one cloud on the horizon. “It is unclear what changes might be enacted to existing federal programs following the 2024 election,” the report noted.