Trade policy does not exist in a vacuum. It is governed by a complex framework of obligations embodied in 14 free-trade agreements with 20 countries, the World Trade Organization, and other aspects of international law. According to the U.S. Department of Commerce, U.S. trade with free-trade partners represented nearly 70 percent of exports and more than 90 percent of all U.S. imports by value in 2017. Clearly, the trade policies that enable this global flow of goods are key to most U.S. industries, and commercial real estate is no exception.
This begs the question, what is the state of modern U.S. manufacturing, and how might it continue to impact trade and, consequently, commercial real estate? Modern U.S. manufacturing has been marked by shifts in production and the emergence of extensive and increasingly complex global supply chains that make manufacturing more efficient and make firms more globally competitive. This has prompted multinational firms to make significant investments in manufacturing facilities and logistics networks in the U.S. and across North America.
Still, certain trade risks have the potential to send disruptions through the manufacturing industry. For example, the implementation of trade barriers could fundamentally alter how, and from where, firms procure intermediate and final goods. This, in turn, could greatly increase the logistical complexities throughout global supply chains and substantially increase the costs of production and distribution. Even the threat of tariffs causes uncertainty and increases costs as supply chain network engineers must plan for alternative sourcing to insure against any possible disruption in production.
U.S. Manufacturing Resurgence
Over the past decade, U.S. manufacturing has witnessed a dramatic rebound. Thanks to a variety of economic and noneconomic location drivers that have evolved dramatically to improve U.S. competitiveness, more companies are seeking to invest and produce in the U.S. “Made in the U.S.” has become much more than a moniker. Increasingly, it is a key strategy for manufacturers seeking to bolster production and gain global market share.
Trade policy does not exist in a vacuum. It is governed by a complex framework of obligations embodied in 14 free-trade agreements with 20 countries, the World Trade Organization, and other aspects of international law. Further, as wages continue to increase overseas — particularly in China — it is becoming less cost-effective to manufacture goods outside the U.S. Clear U.S. advantages like innovation and R&D spending, as well as higher labor productivity, higher skill levels, and companies’ increased desire for shorter supply chains, add to the appeal of manufacturing in the U.S. Throw in lower energy prices, which help reduce the cost of not only creating goods, but also transporting them, and it isn’t surprising that manufacturers are finding that placing production facilities in the U.S. makes them more competitive.
This shift has been beneficial to the U.S. commercial real estate industry. In fact, for CRE, the U.S. manufacturing sector has witnessed steady occupancy gains since it hit bottom in 2010, with more than 181 million square feet of positive net absorption since then. As a result, vacancy rates for U.S. manufacturing facilities have fallen by 340 basis points during this period to a current level of 3.8 percent — well below the 10-year average of 7.3 percent. Meanwhile, manufacturing construction has rebounded too. The current average of 12.5 million square feet of new manufacturing product added per year is close to the pre-recession average of 12.6 million square feet. Since 2010, 62.5 million square feet of manufacturing space has come online in the United States.
When companies consider new locations to realign or expand their manufacturing capacity, manufacturers must weigh numerous factors. Which drivers are evaluated and how they are prioritized will vary according to a firm’s industry, existing locations and facilities, customer and supplier bases, major operating costs, technology levels, timing, and so forth. The United States is increasingly chosen as the destination for manufacturing investment because it often presents the optimal combination of these factors.
Over the past decade, the case to be made for the United States as a manufacturing base had less to do with its costs structure than the opportunity to access its customer markets, predictable operating conditions and infrastructure, and regulatory frameworks. Specifically, the United States has always offered the following desirable traits as tradeoffs against its higher structural costs:
- Direct access to the world’s largest consumer market;
- More advanced manufacturing technologies, superior quality standards, and higher productivity levels;
- Stronger intellectual property protections and transparent systems for health, safety, and environmental standards; and
- Significant raw materials and land resources to feed production.
Disruption in Production
The bottom line is that a growing number of companies are reinvesting in U.S. plants and equipment and relocating manufacturing facilities stateside. The growth has two sources: reshoring by U.S. companies that previously established or moved manufacturing overseas and foreign direct investment by companies choosing to establish U.S. manufacturing operations. According to a recent study by the Reshoring Initiative, the strongest reshoring has occurred in the transportation equipment, electrical equipment, and computer electronics manufacturing sectors. Transportation equipment is also the strongest subsector for foreign direct investment, followed by fabricated metal products and plastic/rubber products.
Clear U.S. advantages like innovation and R&D spending, as well as higher labor productivity, higher skill levels, and companies’ increased desire for shorter supply chains, add to the appeal of manufacturing in the U.S. Still, while trade policy carries risk implications to regulation, market access, and the movement of goods and individuals, it’s important to remember that disruptive technologies such as additive manufacturing and robotic process automation also continue to transform the manufacturing landscape by reshaping the production cycle. Businesses are being impacted by digital disruption as new entrants and existing competitors invest in technology to enable mass customization.
The automotive industry is a good example of an industry amid disruption. Electrification and autonomous vehicle technology are already altering automotive value chains. Increasingly, the new norm is a complex, horizontally structured clustering of design, technology, production, and service that is redefining how those products are created and delivered — and by whom.
In this period of accelerating change and digital transformation, pure cost-reduction strategies are being challenged. Companies are increasingly focused on activities with the greatest potential for creating value and identifying the talent that will enable them to create and deliver this value successfully. In this paradigm, the United States has an advantage.
The future of manufacturing will be about connectivity. As consumers demand more customization, markets will be micro-segmented, and competition will intensify. The ability to manufacture and deliver product quickly will become an even greater differentiator among firms. This will drive the regionalization of manufacturing near large centers of consumer demand.
Pressure to get products to market faster, cheaper, and better will increase. This will drive tremendous innovation in workflow, production lines, and simultaneous production, as “design, source, build, and assemble” all happen in seamless ecosystems of manufacturing clusters. Production will become super-automated and highly digitized. Real-time reporting, robotics, soft tooling, and additive manufacturing will revolutionize assembly lines.
In sum, the manufacturing of tomorrow, which will impact several U.S. industries including commercial real estate, will differ greatly from the manufacturing of today. We will have a variety of factors, including trade policy, to either thank or blame for that.