Most industrial companies looking for new locations want to know how the recent disruption to the economic landscape will affect their site selection project. When possible, Site Selection Group, utilizes data and analysis to demonstrate meaningful trends to the companies with which we work. However, the real effects of these unprecedented times are difficult to capture real time in industry data as it often lags.

While a company such as Site Selection Group that is adept in complex data analysis finds this fact of life to be temporarily frustrating, we have obtained pulse on the current environment through our existing industrial project activity.

Based on our very recent experience working these projects, the following contains three statements, two questions, and one prediction that we have based on navigating various stages of the site selection process over the last few weeks.

Three statements based on recent project experience

1. Travel restrictions are suppressing project progress, and pent up demand is mounting

There are a fair number of industrial projects that maintained their steam through the COVID-19 crisis, specifically those in food production and e-commerce. In addition, there has been a recent uptick in project activity as industrials start putting the wheels in motion to implement their post-COVID-19 strategies. However, projects can only get so far before travel restrictions make it very difficult to get projects over the proverbial hump where companies are making final location decisions. Although there has been a shortage of recent location announcements, the number of projects gathering at the doorstep is growing by the day.

2. Industrial landlords are bullish on the market…at face value anyway

SSG has a number of projects in active negotiations with industrial landlords across the U.S. and Mexico. These landlords include the large publicly traded types down to regional family-owned firms, and everything in between. As of now, most are acting as if they are more bullish on the industrial real estate market than most industrial tenants would anticipate. Despite the lack of completed transactions over the last couple of months, market industrial rents have not dramatically corrected (if at all) as many predicted. However, we are seeing landlords make other concessions to preserve market rents that were atypical pre-COVID-19. These concessions include above average tenant improvement allowances, extended free rent and flexible lease terms.

3. Industrial consolidations are well underway

As many predicted, the COVID-19 crisis would focus the attention of many industrial companies on strategic cost-cutting initiatives. Now that COVID-19 has been a reality for close to four months, companies have had the time to stop reacting and start implementing proactive plans. Anecdotally, Site Selection Group has seen a material uptick in industrial consolidation projects in the marketplace. The root of consolidation planning centers on optimizing supply chains and workforce strategies while shedding inefficient operating practices. Given the complexity of these activities and fact that the full effects of COVID-19 are likely not disappearing in the short term, we anticipate this trend to continue for the foreseeable future.

Two questions that will be interesting to evaluate

1. Is this the perfect opportunity to re-tool the industrial workforce?

The lack of technical skill sets as required by industrial companies has been well documented. Clearly, this was a function of historically low unemployment rates right up until this crisis began.  But it was also driven by a combination of declining interest in manufacturing careers and the skilled trades with advancements and investment in manufacturing processes that made the skill required to work in a modern manufacturing facility much higher. Many communities made significant investments in advanced training facilities, specialized equipment and other resources to start countering that trend and better develop and train workers for new and advanced requirements.  While many regions were taking strides to confront the industrial workforce shortage, the biggest challenge SSG has seen time and time again was simply the lack of students in the training pipeline and a lack of retraining options for adult employees.  Now, with a lot of workers on the sideline (especially in potential underemployed occupations like retail, food service and others), there is a tremendous opportunity to put all that investment in training resources to work, to help upskill the un- and under-employed workforce. That can take many forms from very short-term “boot camps” to help people transition to entry-level jobs in distribution or manufacturing, all the way up through stackable credentialing to, over time, build a very highly skilled technical workforce. 

2. How much North American activity will be distributed between US and Mexico?

Many have predicted that the COVID-19 crisis will accelerate the unwinding (in part) of Asian supply chains as more manufacturing operations look to mitigate transportation and time risk by on- or near-shoring their operations.  Site Selection Group supports that view and believes that there will be more industrial project activity looking at North America in the near to long-term.

One big question is where those reshoring projects will land, and more specifically if the allure of potential operating cost advantages in Mexico will outweigh proximity to final customers and further transportation risk mitigation by locating in the United States. Based on Site Selection Group’s recent project activity, the divide is just about evenly split, with companies with at least some familiarity with operating in Mexico learning toward continuing to expand their footprints there, while those with no or limited experience south of the border typically deciding to grow on the U.S. side. Intimate knowledge of operating conditions in Mexico is critically important in a cross-border site selection analyses, as ultimate decisions can rest on a number of drivers from currency exchange rates, increasingly tight labor in border communities and further inland, differing benefits and tax structures, organized labor assessments, border cross times and costs, and geopolitical risks. 

One prediction that can have a profound geographic impact on industrial activity

1. The disparity in real estate opportunities between large and smaller markets will have a significant impact on project locations.

Up until the crisis began, Site Selection Group tended to see clients choose one of two types of location strategies. Some chose to operate in communities just on the outskirts of large markets, where there is favorable real estate availability, but also the safety in terms of workforce attraction, accessibility and supplier/logistics advantages that come with being in a larger market. The other group of clients tended to locate in mid-size tier 2 and 3 markets, where a smaller market afforded them an opportunity to be a “bigger fish in a smaller pond,” even if that meant subjecting itself to some workforce and accessibility risk. 

That latter group of companies was able to execute that strategy, in part because the public sector had filled the void of private real estate development that viewed the smaller markets as being too risky for speculative development. These public sector proactive investments were prevalent in infrastructure, site development and even vertical construction in some cases. Due to substantial industrial activity over the last couple of years, the inventory of quality real estate in these smaller markets was decreasing as it was hard to for proactive development to keep up.

Now, with state, municipal, utility and other budgets being cut either in the short- or long-term, the ability of these mid-size and smaller markets to invest in proactive site and product development is going to be much more limited. At the same time, as noted above, the major real estate development companies appear to be continuing to invest in larger markets. In summary, Site Selection Group anticipates a big disparity between the large and mid-sized markets as it relates to quality real estate product. If this trend holds true, speed-to-market concerns will push a disproportionate number of projects to larger markets.  

Let us know what you think!