What Manufacturers Should Know About the U.S. Industrial Real Estate Market
by Josh Bays, on Jul 23, 2018 3:03:54 PM
Companies that are manufacturing goods in the United States are painfully aware of the rising competition they face domestically. These competitive pressures typically come in the form workforce, support services and shipping, but this activity is also having a profound impact on the real estate sector and a manufacturer’s speed to market.
Site Selection Group, a full service-location advisory, economic incentives and real estate services firm, helps manufacturing companies identify the optimal location for their plants based on those site selection factors that will influence operational success. Those obvious site selection factors typically include logistics, workforce, business environment, infrastructure, utilities, regulatory environment, economic incentives and real estate.
However, an underrated factor that is heavily influencing location decisions is time. In a hyper-competitive landscape that has seen almost $4 trillion invested in U.S. manufacturing over the last two years according to Conway Analytics, almost all site selection projects face a speed-to-market concern. And the most effective way to alleviate this concern in the site selection process is for manufacturers to focus on existing buildings rather than spending the time it takes to construct a facility. Depending on facility complexity, this can save between six and nine months.
Typical real estate profile of manufacturing projects
The term “industrial real estate” is often casually used as a catchall for buildings that can support both production and distribution activities. However, the technical building specifications required for production uses are typically much more complex than those required for basic distribution. Often, facilities designed for production operations as opposed to basic distribution uses requires improvements to foundations, structural steel, utility capacity and distribution, and air movement. In summary, these facilities are more specialized — and expensive.
Another real estate trend that typically catches the casual industry observer off guard is the size profile of most manufacturing buildings. Although large mega manufacturing projects typically dominate the media headlines, reality is that the vast majority of manufacturing projects require a facility under 150,000 square feet.
Conway tracks manufacturing investment in the United States, and while not 100% comprehensive, their database is an accurate representation of activity. Based on project data they’ve assembled over the last 2 years representing 753 projects, the following chart shows the distribution of projects based on facility size.
The industrial real estate market is active, but not much help to manufacturers
It is hard to spend much time driving around a metropolitan area of the United States and not notice the construction cranes that dot the skyline. Industrial real estate construction, both total square footage and number of buildings, is at an all-time high.
|National Industrial Construction (Properties)
||National Industrial Construction (Million SF)|
Unfortunately, these construction rates are rarely able to alleviate the speed-to-market concerns of manufacturers. Most of this activity, especially speculative activity, is on behalf of the institutional investment community and is focused on large buildings (larger than 250,000 square feet) with basic specifications. Unless a manufacturing project is willing to compromise their specifications and be shoehorned into a multitenant facility, they are resigned to constructing their own facility.
Best real estate practices in manufacturing site selection
Although successfully finding an existing production facility is usually less than a 50/50 proposition, Site Selection Group does not recommend abandoning that strategy. When that needle in the haystack is found, it can have a positively profound impact on a project. However, Site Selection Group advises clients to run a parallel site selection process aimed at greenfield locations. It is cheap insurance against the prospect that a company will have to extend its project timeline to combat this competitive real estate market.