Realistic Real Estate Strategies for Manufacturers
by Josh Bays, on Apr 20, 2022 8:37:58 AM
In the world of corporate site selection, the term “industrial” is a catchall that most use to describe both production and distribution activities. And if you’ve followed recent industrial real estate trends (or even just looked out your window as you drive around any metro area and notice all of the large concrete boxes that weren’t there 10 years ago), you’ll know that the market is hyper-active. However, once you start diving into the nuances of industrial real estate data, you’ll quickly realize that it is much more reflective of the distribution center market than of the manufacturing market.
That is not to say that the manufacturing sector has not been incredibly active in its own right. Whether it is Toyota, Intel, Ford, Texas Instruments, or the like, it seems as if a transformational production project is being announced in the United States every day. And if our business development pipeline is indicative of overall market conditions, for each large transformational manufacturing project currently in the site selection process, there are 10 or more solid mid-sized production projects currently trying to find a home as well.
We are routinely asked by our prospective production clients about the real estate market, and how it will impact their project. Site Selection Group, a full-service location advisory, economic incentives, and real estate services firm, proactively tracks all aspects of the industrial real estate market. Manufacturers can employ one of four real estate strategies as they seek to expand production capacity. Based on our experience and research, we have provided a brief market overview for each strategy.
1. Acquire a quality second-generation production plant
Acquiring a quality second-generation production plant aligned with your use in a quality location is the holy grail of site selection. When the stars align, it is the quickest and typically cheapest path to operations. Candidly, it is why SSG proactively tracks second-generation facilities in key industries such as food and beverage.
Market outlook: Extremely unlikely. Due to current economic conditions, manufacturing companies are not disposing of quality assets. And in the unlikely event, they are disposing of assets, they are typically in unfavorable locations or the assets are antiquated beyond the point of updating.
2. Retrofit the standard speculative warehouse
In most metro areas, developers are building speculative warehouses as quickly as the construction market will allow (See our research on the topic here ). While these “concrete boxes” can work for some light production and assembly operations, most specialized manufacturers find their technical qualities, such as utilities, construction specifications, etc., to be inadequate.
Market outlook: Likely. Although there are more buildings currently under construction than are actually completed in your average U.S. metro area, locking down one of these facilities is still attainable. But it is worth pointing out that these buildings are rarely for sale to occupiers, so if owning your asset is a priority, this real estate strategy is likely not realistic.
3. Construct a custom facility on a greenfield site
Due to the lack of second-generation plants and the issues noted above with standard warehouse buildings, constructing a custom facility on a greenfield site is the most common strategy for most manufacturing site selection projects. Although this strategy has the longest lead time to operations, it allows you to control your own destiny with regard to design, engineering, construction, and ownership. And the latter, ownership, is incredibly important to most capital-intensive projects.
Market outlook: Likely. Due to market activity, good sites in favorable geographies are getting picked over, but finding an adequate site in a mid-sized market is still attainable. While struggling to keep pace with demand, the public sector is still proactively investing in infrastructure to create products. That said, finding quality sites that are not developer-controlled on the periphery of larger markets (i.e. – Dallas, Atlanta, Phoenix) is unlikely. The competition for land in those hyper-active markets is as fierce as ever.
4. Build-to-suit leased facility on a developer-controlled site
As previously mentioned, the institutional development community is taking downland on the periphery of active metro areas at a record pace. If a production project can justify a reasonable return for developers, they’ll certainly entertain a build-to-suit lease scenario. But the more specialized those buildings need to be, and the less they max-out site coverage ratios, the less interest these potential build-to-suits will generate from developers.
Market outlook: Unlikely. Most developers take downland with the intent of maximizing their return. This typically means constructing as many buildings as can fit on a site. Additionally, some are very passionate about controlling the design and construction process which can be a “no-go” for many manufacturers. Although these opportunities are out there, they rarely work in practice.