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What Reviving America’s Manufacturing Could Mean for Real Estate – Propmodo

Bringing manufacturing back to the U.S. has been talked about for a while, but the push is finally beginning to get real momentum. Bolstered by continued investments from the Biden Administration, which is aiming to cut down reliance on foreign manufacturing, particularly in China, industries have taken steps to make it a reality. For the real estate industry, the movement represents big opportunities in the development of manufacturing facilities. 

But despite all the momentum for American manufacturing, a number of obstacles stand in the way of large-scale development of properties to support it, including labor issues and high land costs. If America can figure out the economics of rebuilding its industrial capabilities, it could keep the goal of reviving the country’s once booming manufacturing sector further from reach. 

Bringing it all back home

The U.S. is still a major player in manufacturing, with the industry representing 12 percent of the country’s economy. But since 1997, the number of manufacturing firms and plants in the U.S. has fallen by roughly 25 percent, according to Deloitte. After COVID-19 wreaked havoc on global supply chains, U.S. leaders realized just how critical domestic manufacturing is to the country’s economy and safety. Last year, the Biden Administration released results from an executive order that required government agencies to review vulnerabilities in the country’s supply chains. The resulting report identified four critical products the administration sees as vital to not only the U.S. economy but to national security as well: semiconductor manufacturing and advanced packaging, large capacity batteries like those used in electric vehicles, critical minerals and material, and pharmaceuticals and active pharmaceutical ingredients. 

Stephanie Wright, a visiting clinical professor at New York University’s Schack Center for Real Estate, told me that the tone of urgency around onshoring as a national security strategy stood out to her in the report. “This is the administration saying, ‘folks, when we look at some of the most pressing challenges we expect to face in the coming decades, we are not going to be able to address their solution through imports,’” said Wright. Add to that that the administration thinks it’s a “significant risk” that 60 percent of the world’s lithium production and 80 percent of the world’s cobalt production, two key inputs for high-capacity batteries, are concentrated in China. 

The country’s manufacturing sector got another big boost earlier this month when President Biden announced an executive order to push more innovation in biomanufacturing and biotech. The order earmarks $1 billion over the next five years from the Department of Defense to build infrastructure for bio industrial manufacturing and includes incentives for expanding manufacturing capacity. NYU’s Wright said we can expect to see the most significant expansion of manufacturing, whether it be from reshoring or foreign direct investment, in areas of high-tech manufacturing. In 2022, American companies are on pace to create 350,000 jobs created from reshoring and FDI, and three-quarters of those jobs will be in electrical equipment, chemicals, transportation equipment, and computer and electronic products, according to a recent report from the Reshoring Institute.

Manufacturing semiconductor chips at home rather than abroad has been a top priority for the U.S. The microchip shortage that paused the production of many products was a wake-up call for the importance of computing hardware in the modern production landscape. “We purchase 80 percent of the most sophisticated semiconductor chips from Taiwan,” U.S. Secretary of Commerce Gina Raimondo said earlier this year. “And so, if Taiwan were to say, ‘No chips to America,’ it would grind our economy to a halt almost immediately. And it would be a real national security problem.” 

The global chip shortage that had persisted for some time is starting to abate, but the worldwide market for chips is in a period of weakness, according to research and consulting firm Gartner. The industry had been firing on all cylinders, growing 26.3 percent between 2020 and 2021. However, semiconductor revenue is expected to decline overall in 2022, with growth expected to grow by only 7.4 percent. 

James Breeze is Senior Director and Global Head of Industrial & Logistics Research at CBRE and has seen the rise in chip production facilities in Phoenix, where he lives. Breeze said he is seeing solid growth in traditional midwestern hubs for manufacturing and big growth in Sunbelt areas that are pro-business and have lower taxes. “Every company is different and looking for something in particular: qualified labor, tax incentives, location incentives,” said Breeze. Not unlike warehouse development, areas near ports of entry and major interstate highways are the most attractive as well. “It’s not too dissimilar from warehouse, but companies are definitely looking for a different type of labor component—much more specialized and experienced. Power, water considerations, these are all things companies are going to be looking for,” he said.

Laying the framework

Over the summer, Brookfield Asset Management announced an unprecedented partnership with the world’s largest semiconductor chip maker, Intel, that will see the real estate giant fund a $30 billion expansion of Intel’s two under-construction fabrication facilities in Chandler, Arizona. The joint venture is one example of institutional real estate’s focus on high-tech manufacturing that requires significant space. Brookfield and Intel’s announcement came just two weeks after President Biden signed into law the CHIPS and Science Act, a bill aimed at boosting the country’s semiconductor supply chain and promoting more research and development of advanced technology in the U.S.

Along with Intel’s two upcoming plants in the Phoenix area, Taiwan Semiconductor Manufacturing Co. is building a $12 billion plant in north Phoenix that is expected to open in 2024. Other cities are looking to encourage advanced manufacturing in their region as well. St. Louis was recently awarded $25 million in federal grants that came from the Biden administration’s 2021 relief package. The bill set aside $1 billion to boost manufacturing, clean energy, biotech, and other sectors across the country. St. Louis will use the money to fund several projects, including the Advanced Manufacturing Innovation Center, a 130,000-square-foot facility that will be built in North St. Louis, near tech campus. New York state was awarded $63.7 million from the administration, which it will use to fund the development of lithium-based batteries. 

In New York, Governor Hochul recently signed legislation aimed at both encouraging jobs and lowering emissions in the state’s burgeoning semiconductor manufacturing sector. The Green CHIPS bill could provide up to $10 billion in tax credits for semiconductor projects over a 20-year period. New York currently has 76 semiconductor and electronics manufacturers across the state, and leaders are hoping to land a billion-dollar chip plant that would create thousands of jobs. New York City is making efforts to grow its manufacturing sector, too, especially in advanced manufacturing. The city currently has 233,000 manufacturing jobs, and leaders want to add more. In 2017, the New York City Economic Development Corporation launched a program to create more than 2,000 advanced manufacturing jobs over the next five years. 

Biomanufacturing and the greater life sciences real estate sector had a historic 2021, but the sector is now coming back down to Earth. Investors are still making big plays, though, like Breakthrough Properties, a joint venture of biotech investment firm Bellco Capital and Tishman Speyer, which raised $3 billion this year to buy and build biotech facilities around the U.S. and Europe. The venture’s portfolio already includes property in Boston and an under-construction R&D facility in San Diego. The biggest markets for R&D and biomanufacturing are Boston, San Diego, and San Francisco, but with the expensive cost to build in those cities, emerging life sciences markets elsewhere in the country like North Carolina, Seattle, and Houston are drawing a lot of attention. 

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What’s past is prologue

As efforts to bring back the country’s manufacturing sector ramp up across the country, what the facilities and developments that will soon rise as a result will look like and how they will be incorporated into neighborhoods is something developers, and city planners will be looking at closely. Today’s manufacturing facilities, especially more high-tech manufacturing, will look a lot different than relics of the past. Cleaner energy, and more attention to design and place within a neighborhood could mean that in some places, manufacturing facilities can coexist alongside residential, retail, and office space.

That’s the argument that Tali Hatuka and Eran Ben-Joseph make in their book, New Industrial Urbanism: Designing Places for Production, released earlier this year. In the book, the authors talk about places around the world where manufacturing facilities blend into residential neighborhoods and draw residents in rather than heavy industry pushing them out. “New Industrial Urbanism” is a concept they say is a new phase we are going through after many years of deindustrialization in cities around the world. “It suggests shaping cities with a renewed understanding that an urban location and setting give the industry a competitive advantage,” they wrote, citing the effects of clustering together companies, a skilled labor force, and universities.

Despite all the time and resources dedicated to reviving the country’s once-powerful manufacturing sector, there is a myriad of issues that cloud the vision so many government leaders have. Perhaps the most glaring problem is labor. While the ongoing labor shortage has impacted industries across the spectrum, for high-tech manufacturing, in particular, jobs in that area won’t be easy to fill in the current labor market, where the unemployment rate is currently 3.7 percent. Areas like semiconductor manufacturing require talent from university programs where international students make up an increasing share of graduates. But they’re not always here to stay. “We’re really excellent in this country at educating international students and then requiring them to return home,” NYU’s Wright said.

There’s also the challenge of steep land costs. Biomanufacturing is concentrated in areas with the largest research and development hubs, namely Boston and San Francisco, where land prices are some of the highest in the country. Biomanufacturing has a lot of buzz right now in the property markets, especially with President Biden’s recent executive order focused on the sector. However, there is currently not enough space that meets industry regulations called “Current Good Manufacturing Practice,” or cGMP,  to keep up with the development of new biologics. The regulations are set by the FDA to ensure products are safe, effective, and pure.

Growing the country’s high-tech manufacturing industry would not only help the U.S. cut down its reliance on overseas manufacturing, but it would also help better prepare the U.S. for climate change impacts, create hundreds of thousands of jobs, and continue to attract real estate investors, as it already has. Reviving key manufacturing industries could boost U.S. GDP by more than 15 percent over the next eight years, according to a report from McKinsey. However, from a real estate perspective, manufacturing faces some of the same headwinds that industrial development has been experiencing, especially with hard costs and tight labor pools. These kinds of facilities can often require significant build-outs to accommodate their needs, and land prices in the biggest life sciences markets are some of the most expensive in the country. Despite these hurdles, major real estate players are betting big on areas of manufacturing like semiconductor facilities and biomanufacturing. Brookfield’s joint venture with Intel was the first of its kind, and if the momentum around high-tech manufacturing in the U.S. keeps building, it probably won’t be the last.

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