Mitigating Risk for Mega Industrial Projects
by Josh Bays, on May 9, 2023 8:00:00 AM
Site Selection Group, a full-service location advisory, economic incentive and real estate services firm, has been on the front line of locating manufacturing investment in the United States for the past 16 years. During this period, we have seen first-hand how transformational macro factors such as the Great Recession, the COVID-19 pandemic, foreign armed conflicts, global isolationism and federal incentive programs such as the Inflation Reduction Act and the CHIPS Act have impacted industrial site selection.
The industrial mega site problem
It has been well documented that the United States has experienced a boom in manufacturing post-COVID-19. In a world where many companies are de-risking global supply chains and/or rushing to take advantage of federal incentive programs, domestic activity for industrial mega projects is outpacing the development of critical resources needed to make these projects successful such as labor, land, infrastructure and utility capacities. While Site Selection Group makes every effort to ensure our clients and prospective clients understand the current landscape, the topic of constrained critical resources cannibalized by the boom in mega project activity has managed to avoid national headlines until Reuters published this article in mid-April.
These are the main concepts from the Reuters article:
- Federal incentive programs with definitive expiration dates are driving unprecedented interest in the United States for large-scale industrial investment.
- This demand is principally represented by the semiconductor, electric vehicle and green energy sectors, all of which require exorbitant critical resources that include large land sites, robust utilities and mature transportation infrastructure.
- Because the federal incentives driving this demand are finite from a funding and timing perspective, companies in these sectors are aggressively competing against the element of time. Companies also expect these large-scale investments to become operational as soon as possible.
- The availability of mega sites with robust utility capabilities and adequate transportation infrastructure is severely constrained due to hyperactivity.
- Not many mega sites left in the marketplace can satisfy aggressive development timelines due to the need for utility and infrastructure upgrades, thus companies are having a hard time reconciling their timelines with reality.
Because this has been a problem for quite some time, Site Selection Group has monitored which investments states and electric utilities are making to be proactive in the development of mega sites. This article written by Beth Land, Partner at Site Selection Group, highlights some of these trends.
Given our perspective as one of the most active independent site selection firms in the United States, Site Selection Group would like to highlight additional nuances and concepts that are critically important for companies to understand as they embark on their large-scale industrial site selection projects. If these issues are understood, it will be much easier to craft a site selection strategy to mitigate risks.
Constraining factors that extend development timelines
Companies can throw money and time at most any development problem. But in a competitive marketplace where time equals money, it’s imperative to navigate the site selection process as quickly as possible. But unfortunately, it only takes one deficiency in a site or its utilities and infrastructure to ruin a company’s development timeline. Based on SSG’s robust experience, the table below outlines those current and “typical” thresholds where timelines can go awry.
For clarity, these constraining factors should be viewed as subjective. There are many sites that possess a good mix of characteristics required by mega industrial projects, but not many (if any) that possess all the requirements.
The United States is experiencing an understated electric generation crisis
Currently, there is unprecedented demand for overall electrical capacity in the United States. Further, aggressive corporate Environmental, Social and Governance (ESG) mandates mean a historic proportion of this demand is from renewable energy sources.
This demand is coming at a time when electric companies are being forced to shutter legacy facilities (mainly coal) but cannot bring renewable sources online quickly enough to fill the void. And while electric utilities are making substantive capital investments in renewable generation, many are finding it difficult to balance capital expenditures while also keeping rates low enough to be competitive.
This issue underscores the importance of deeply understanding an electric utility’s strategy and track record for offering a solution.
Mitigating workforce risks may result in extended development timelines
A qualified workforce is critically important to the success of these large-scale industrial projects. But because the market for viable mega sites is picked over, especially in areas close to population centers, projects are being pushed toward more rural sites that have a shot at achieving their timing objectives. Many industrial companies are choosing to pursue speed-to-market when weighing the tradeoff between workforce risk and the quickest path to operation.
For those companies betting on the long-term value proposition of a rural area, there are certain indicators that are critically important. These indicators include fundamental demographics, migration patterns, the path to adequate workforce housing, state and regional workforce development infrastructure, and public funding for training.
Approaching site selection for mega industrial projects with eyes wide open
Despite headwinds impacting development timelines, there are site selection strategies, born from experience, to mitigate risks. But just like with any investment, it’s much easier to de-risk when approaching something of this magnitude with your eyes wide open.
As previously mentioned, there are states and electric utilities making aggressive investments to solve this problem, but relief is a couple of years away. Unfortunately, there does not appear to be much support from the federal level at this time. “Folks are finding places to build. I don't think I've heard of one company abandoning plans to go forward because they're not able to find a site,” a White House official said in the article. As with many things, it’s critical for all stakeholders to recognize there’s a problem before adequate solutions can be implemented.