Archives for March 2023

More than half of American CEOs (55%) whose companies rely on manufacturing to produce and deliver their products recently reported plans to reshore some operations. Of those, 95% said they would do so in 2023, according to the survey conducted by Xometry, Zogby and Forbes in late December.

While not all those CEOs are looking to move operations to the United States, interest in bringing manufacturing closer to home has been growing, driving demand (and prices) for industrial space and creating new opportunities for commercial real estate brokers.

Identifying available land to build on or facilities suitable for retrofitting is just one challenge faced by manufacturers. This article explores reshoring trends and barriers, and offers insights from commercial real estate practitioners taking advantage of the growing business opportunity.

Reshoring drivers

Pandemic-driven supply chain disruptions put U.S. reshoring in the headlines, but it’s a trend that had been building for quite some time. Rising labor rates in China and elsewhere have negated the primary benefit of offshoring. Beginning in 2017, Trump administration policies that resulted in tariffs on Chinese imports, the renegotiation of NAFTA, and a reduction in the corporate tax rate prompted many U.S. manufacturers to consider bringing back some or all of their offshored operations. E-commerce remains strong, keeping pressure on global supply chains. Add to this rising geopolitical tensions, and it’s clear U.S. manufacturers have plenty of reasons to move manufacturing closer to their customers.

Still, reshoring is a long-term decision. Rosemary Coates, executive director of the Reshoring Institute, reports that industries across the board are rethinking their manufacturing strategies. “The decision-making process around location has changed,” says Coates. “It used to be all about where it was cheapest to operate. Now, it’s more strategic. Many want at least some part of their operation in the U.S. or closer to home.”

Evolving market niche

“We’re still in the early stages of reshoring,” says Peter Billmeyer, SIOR, co-founder and CEO of Bespoke Commercial Real Estate in Chicago. “It’s going to be six to eight quarters before we’ll see where this is going.” Most experts anticipate that reshoring will continue slowly over the next decade, given that production and supply chain systems do not change overnight.

In the Dallas–Fort Worth market, Conrad Madsen III, SIOR, co-founder and partner of Paladin Partners, reports a dramatic shift over the last several years. Over more than 20 years in the business, he has observed that most of the largest deals in the market were distribution in nature. “Today, eight out of 10 of the largest deals are manufacturing in nature,” says Madsen. “Moving back manufacturing to the states is happening on a massive scale.”

There is no universal set of norms for reshoring. “It’s all across the board,” says Madsen. “What is mostly coming back to the states are the more expensive goods. Much of the inexpensive manufacturing heads to Mexico, where the labor costs are significantly lower than in the U.S.”

William Holly, president of Patton Real Estate in Miami, agrees. “Higher tech and higher skill reshoring represent more value,” says Holly. “It’s a cost-benefit analysis, but there are groups that value timing over cost. Given the backlog in the supply chain, time is more valuable, and clients will pay more to have it faster.”

A Range of Critical Factors

Commercial brokers need to understand the complexity of reshoring to position themselves effectively as a resource. “There are many more attributes to be analyzed,” says Madsen. “Many brokers focus exclusively on lease rates, but water and electricity costs could be three or four times the rent amount.” Madsen notes that while domestic clients look at these factors, the reshoring client also considers moving costs and the investment timeline to break even. “It’s a much more complex analysis,” he says.

Labor is another critical factor in the analysis. “You have to know intimately what the client envisions as the profile of their workforce—e.g., high school or a higher degree—and look for a location that can deliver that labor pool,” advises Billmeyer.

Madsen moved a client’s 600,000-square-foot manufacturing facility from one Dallas–Fort Worth location to another to be closer to a better-skilled labor source. “While moving was expensive, they signed a 10-year lease and took advantage of incentives from the local township,” Madsen says.

Engage with economic development boards

Economic incentives are frequently at the center of reshoring decisions. “Some companies that contact us for reshoring assistance have already decided on a location, while others are open to anywhere in the country,” says Coates. “We identify potential locations based on requirements and then visit the top two or three to meet with economic development boards. We ask for recommendations for commercial real estate developers and brokers, who are key to the selection process.”

Local communities are latching onto reshoring opportunities, and brokers are directly involved. “EDBs love manufacturing because it means a significant number of jobs and will offer incentives—including, if possible, deals on electrical and water, which can be a huge factor,” says Madsen. “There are so many levers they can pull, and we will leverage multiple communities to compete against one another to create the most advantageous deal for our clients.”

“There are no blanket incentives,” says Laura DiBella, deputy secretary of commerce for Enterprise Florida, a public-private partnership of state business and government leaders. The value of each opportunity is based on targeted industries, wages, the company’s current location, and other metrics. DiBella advises commercial brokers interested in reshoring to keep abreast of shifts in the trade lanes to capitalize on newly created opportunities. The Reshoring Institute is one source of market information, as are some global logistics consultants.

Holly maintains close ties to Enterprise Florida. “Sometimes, a reshoring company will already have a broker relationship. Don’t expect a trade group just to hand you a deal,” Holly says. “You need to establish a relationship and provide value. Find how you can be a resource to them, and be prepared to take the long view—especially with global transactions.”

Build-to-suit versus retrofitting

As industries compete for industrial space, the high cost and lack of ready-to-build land make older existing facilities more attractive. John Steinbauer, SIOR, president of Steinbauer Associates in Miami, reports that “older facilities are being occupied very rapidly, with prices doubling over the past five years.” Madsen sees a future where big-box retail and shopping malls are retrofitted for manufacturing. “It’s all about location and access to labor, which some vacant big-box sites offer. The key is getting the city to rezone these sites for industrial users,” says Madsen.

“It always comes down to math,” Billmeyer says. “Retrofitting is expensive, but some out-of-the-box solutions are presenting themselves. For example, an old Sears with existing mechanicals might win in a cost-benefit analysis over building new, which is even more expensive.” Billmeyer notes, however, that manufacturing may require a different footprint or have unique needs associated with loading docks.

Signs of industrial market moderation

While industrial vacancy rates remain low in most areas, there are signs the market is moderating. Cushman & Wakefield reports the under-construction industrial pipeline fell below 700 million square feet in the fourth quarter of 2022, and the average industrial asking rental rate climbed only 1% from the third quarter, a fraction of the 18.6% year-over-year increase. Similarly, asking rents for warehouse and distribution facilities rose 21.6% annually but only 0.6% in the fourth quarter.

Steinbauer sees the moderation in the South Florida market. “Although the industrial market is very good, there is some subleasing where companies are downsizing due to economic uncertainty,” says Steinbauer. “There’s a feeling of instability, and companies looking to reshore overseas operations are hitting pause to see what happens with interest rates.”

Still, projections for reshoring remain strong as the government works to increase U.S.-based production of essential manufacturing components such as semiconductors. Also, as automation becomes less expensive, it offsets labor costs and puts the U.S. on a more level playing field with competing markets.

Commercial brokers who understand the complexities of reshoring and can cultivate relationships with others in the reshoring ecosystem stand to benefit. In addition to economic development agencies, explore opportunities to connect with the global market through foreign consulates, trade offices, world trade centers, and international property shows. “You don’t have to travel abroad to leverage these opportunities,” says DiBella, “but you need to be versed in what is coming next.” Holly can attest to that. “Everyone understands global supply chain issues. It’s a complete change from a decade ago, and the reshoring and nearshoring trend is just getting started.”

Source: “Homeward Bound“

Tax Day can be a painful reminder of how much we have to invest in federal, state and local governments, though many of us are unaware of exactly what they give us in return. As a result, this creates a disconnect in the minds of taxpayers between the amount of money we should fork over on Tax Day (April 18 this year) – and how much we deserve in return.

Americans have looked at taxes with especially high scrutiny in recent years. In fact, 73% of people think the government doesn’t spend their tax dollars wisely, according to WalletHub’s Taxpayer Survey. We do know, however, that taxpayer return on investment, or ROI, varies based where one lives. Federal income-tax rates are uniform across the nation, yet some states receive far more federal funding than others.

Federal taxes and support are only part of the story, though. Different states have dramatically different tax burdens. This begs the question of whether people in high-tax states receive superior government services. Likewise, are low-tax states more efficient or do they receive low-quality services? In short, where do taxpayers get the most and least bang for their buck?

WalletHub aimed to answer that question by contrasting state and local tax collections with the quality of the services residents receive in each of the 50 states within five categories: Education, Health, Safety, Economy, and Infrastructure & Pollution. Our data set includes a total of 29 key metrics.

View Charts Here

Source: “2023’s States with the Best & Worst Taxpayer ROI“

The Real Estate Roundtable called on regulators to reinstitute a “troubled debt restructuring (TDR) program for commercial real estate that would give financial institutions increased flexibility to refinance loans with borrowers and lenders.”

Worry about liquidity in the industry is understandable. As GlobeSt.com has frequently reported, many projects are caught. Initial financing several years ago came under historically low rates and favorable terms. As the need to refinance comes up, many investors find themselves pressed by higher rates and lower loan-to-value ratios, which can make deals unviable.

“The approximately $20 trillion commercial and multifamily commercial real estate market is financed with $5.5 trillion of debt, 50.3% of which is provided by commercial banks (in general, conservative leverage when originated). Of that outstanding debt, approximately $936 billion of CRE and MF debt is maturing in 2023 and 2024,” the Roundtable said in a letter to federal banking regulators. The concern is that with rising rates, CRE borrowers may not have many options and might have to add considerable equity that could “be expected to result in significant job losses, small business closures, greatly reduced municipal revenue, countless bankruptcies and foreclosures.”

“At this critical time, it is important that the Agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models,” the group continued. “These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values. A deflationary spiral must be avoided at all costs. As recent events are only amplifying the contraction of credit, it is important for the Agencies to take measures to maintain sufficient liquidity levels and support positive economic activity.”

The paragraph underscores a troubling dichotomy facing the Federal Reserve, in particular. Silicon Valley Bank and Signature Bank were both closed by regulations after bank runs that left them unable to give depositors their money, and so insolvent. The increase in interest rates have undercut the value of long-term bonds that many banks hold, meaning they have lower assets than they had.

A new study suggests that this bond devaluation coupled with high amounts of uninsured deposits that fueled the Silicon Valley bank run exists in 186 other banks, any of which could find itself unable to survive an unusual high level of withdrawals because of two factors. And yet, the Fed is also rightly concerned that lowering interest rates or otherwise adding liquidity to the economy could spark more inflation, causing a different problem.

Source: “Real Estate Roundtable Calls for a CRE Troubled Debt Restructuring Program“

Colliers wonders if the “next great buying cycle” for office could be now.

It points to research by Revolution that notes that when lenders tighten, the four-year forward price change vastly outperforms.

“Think back to the early 1990s savings and loan crisis, the dot-com bust, and the Global Financial Crisis,” Colliers’ Aaron Jodka wrote. “Those who acquired assets during those periods saw strong outperformance in the years that followed.”

Not everyone would agree. Indeed, office investment sales have plunged amid the sector’s uncertainty.  Thomas G. Koelzer, partner, Tenant Advisors/CORFAC International, tells GlobeSt.com that office building values are declining, and that sellers and buyers are far apart in agreeing on values. “Many sellers have resorted to auctions to sell their properties since there’s not enough market data to support the normal sales channels.”

Furthermore, “more bad news is coming for landlords because the full pain of the post-pandemic office market hasn’t been felt, since many tenants still have time left on their leases. As these leases expire, many tenants will either reduce their size or simply not renew their leases. This phenomenon means a long-term (if not permanent) reduction in the demand for office space.”

Then again, Jodka may have a point. An informal survey of CRE experts suggests that there are some niche opportunities presenting themselves in certain markets and property types.

Small-Office Buyers Have Opportunities

Craig Tomlinson, Northmarq senior vice president, tells GlobeSt.com that office is out of favor with the investor herd, but that spells an opportunity for buyers willing to do their homework.

“The ‘bad news’ is derived from increasing vacancy and sublet space surrendered by large corporations in urban office towers and in leased corporate campuses,” he said.

“Large corporations, in general, have not mandated return-to-work, or have shifted to hybrid models that need significantly less space. Not so with the smaller suburban offices. Those buildings tend to be occupied by small or private businesses where the decision makers are onsite and want their staff presents too.”

Tomlinson said that suburban office 100,000 SF and less also tends to have a rent roll without a dominant tenant, diversifying an investor’s rollover risk.

“Smaller office buildings are more likely to be owned by private investors who may be more motivated to transact in a rising rate environment,” he said. “‘Big capital’ doesn’t like ‘small office’ because aggregation is a chore and so is management. That fact has created a real opportunity for buyers of smaller office buildings that will persist through 2023.”

‘Everything is Still Scrambled’

Manuel Fishman, shareholder, Buchalter who represents real estate developers and owners in the acquisition, sale, and financing of commercial properties, tells GlobeSt.com that when it comes to buying office assets today, the short answer is “no” for multi-tenant office and “yes” for single-tenant occupancy, triple net buildings, with a credit tenant.

“There is too much uncertainty for multi-tenant office, office occupancy, office demand, interest rate climate, and return on capital,” Fishman said.

“Everything is still scrambled, and assets are still not being written down to true value. Now is the time to fundraise for money and come up with a thesis for which segment of the market to invest in. The time to invest will be later.”

The Next Buying Cycle ‘Has Started’

Ed Del Beccaro, EVP/San Francisco Bay Area regional manager of TRI Commercial Real Estate/CORFAC International, tells GlobeSt.com that the next buying cycle for office has started.

“Higher interest rates, high vacancies are having various office ownerships receding their office portfolios both on the mom-and-pop and institutional levels,” Beccaro said.

“In some cases, owners are just going to sell to cut their losses as loans become due or major tenant leases expire who are not renewing over next year. In other cases, opportunistic buyers will look at buying older class and B buildings to convert to life science or housing or just tear down.”

Price Discounts Not Seen in 14 Years

Chris Okada, CEO, Okada & Company, tells GlobeSt.com that today, select asset classes in New York City’s commercial real estate market, including office space, are experiencing a decline in prices, reaching levels last observed in 2009.

“High vacancy rates due to remote and hybrid work models, high-interest rates, limitations imposed by rent stabilization and rent control laws, and economic uncertainty have led to this decline,” Okada said.

As a result, the number of office-related foreclosures, mortgage defaults, and deeds in lieu of foreclosure negotiations have skyrocketed in 2023,” he said. “However, due to the problems this sector faces, we have begun to see some incredible price discounts not seen in 14 years.

“With discounts ranging from 30% to 60% off-peak pricing, there are remarkable investment opportunities present in New York City commercial real estate, particularly in office space. Okada & Co. believes the next 12 to 24 months present opportunities for significant returns on real estate investments, possibly the most significant in a 25-year period.”

Erik Edeen, director of operations, Tri-State Investment Sales, based in Avison Young’s New York City office, tells GlobeSt.com that the office sales market in New York follows the “tale of two cities” narrative prevalent in the leasing market.

“Trophy/Class-A buildings with strong rent rolls can still be underwritten and financed while the lower quality buildings have a less certain future,” Edeen said. “While cap rates have expanded across the board, the more speculative and lower-end assets are finding difficulty in a market that’s sparse with price discovery.”

South Florida Is Thriving

Daniel Chaberman, Grupo Eco Developer, tells GlobeSt.com that South Florida is an attractive market for many forms of CRE.

“While most of the country and cities in the world are struggling, facing a recession or dealing with the consequences of COVID-19, we are on the opposite side of the spectrum in South Florida,” he said.

“The response to COVID-19 generated a large amount of migration of wealthy families from New York, Chicago, and the West Coast. We have been receiving a lot of businesses and many like Grupo Eco have relocated their headquarters to South Florida.

“And we are still seeing important businesses and firms relocating into the state. We are very positive about the transformation of the market here that started with COVID-19.”

Don’t Acquire Just Because Asset Looks ‘Cheap’

All that said, Mukang Cho, CEO and managing principal of Morning Calm Management, reminds readers of the volatility in the capital markets, which could make any purchase difficult.

He said the financing environment for real estate is difficult with lenders of all types continuing to deleverage and stay on the sidelines as they deal with certain issues, such as problems with their legacy portfolios or an inability to effectively finance their positions.

“Financing for office buildings as a whole remains dislocated if not broken,” Cho said. “This environment is different from the Great Financial Crisis and will reward the best ‘stock pickers.’ One cannot acquire office buildings indiscriminately just because they seem “cheap”; and just about everything will appear “cheap” compared to recent historic prices.

“Market fundamentals, the relative competitiveness of the underlying asset versus the market, nature of the existing rent roll, a sponsor’s expertise in operating office buildings – these things will matter more than ever as the capital markets will no longer bail out underperformance.”

Source: “Is Now a Good Time to Buy Office? Experts Weigh In“