Coming (Back) to America

[IMGCAP(1)] This is an HTML version of an article that ran in Real Estate Forum. To see the story in its original format, click here. Volvo Cars broke ground in late September on its first US-based production facility, a manufacturing plant in South Carolina’s Berkeley County that is intended to deliver 100,000 cars per year. The iconic Swedish brand’s $500-million investment will eventually support 4,000 jobs; its reasons for coming to this country illustrate some of the reasons that commercial real estate experts see a renaissance in US manufacturing. “We saw the fall, and now we’re going to see the rise, of American manufacturing, for several different reasons,” Michael Brennan, chairman of Brennan Investment Group, tells Real Estate Forum. In Volvo’s case, “They’re trying to achieve the technology and efficiencies that their luxury rivals like Mercedes Benz and BMW have achieved in the US, particularly the Southeast,” K.C. Conway, senior VP, credit risk manager and chief valuation officer at SunTrust Bank in Atlanta, tells Forum. The example set by BMW was of “particular interest” to Volvo, he adds. “BMW by 2020 is projected to manufacture more cars in South Carolina than it does in Europe.” In announcing its first US facility, Volvo cited Berkeley County’s “easy access to international ports and infrastructure”—thanks in large measure to an inland port developed by the Port of Charleston—”a well-trained labor force, an attractive investment environment and experience in the high tech manufacturing sector.” These luxury brands have plenty of company in the region, and not only from other car manufacturers. Like BMW, Michelin is based in Greenville, SC and expanded its operations in the Palmetto State in December 2013 with US10, a $750-million facility in Anderson to produce the world’s largest tires, mainly for export to overseas mining operations. The tire maker was already the largest manufacturing employer in South Carolina before opening US10. And in July of 2014, GE Aviation announced that it would expand its exiting Auburn, AL facility with a 3-D printing initiative, reportedly the first of its kind in the jet propulsion industry. It’s a far cry from a decade or two ago, when the headlines told of major US manufacturers sending jobs overseas, not bringing them back or adding them domestically. The Boeing Co., for example, made local news in early 2004 when it outsourced much of its parts-fabrication work from Auburn, WA to facilities in Turkey, Romania and South Africa. It would later build its 787 Dreamliner with more foreign-made parts than any other plane in its fleet, the Los Angeles Times reported in 2011. “Several years ago, when we talked to companies about doing potential sale-leasebacks, they would say ‘we’re not sure we want to do a sale-leaseback, because we’re not sure we’re going to keep our manufacturing here,’ ” recalls Gordon Whiting, managing director with Angelo, Gordon & Co. and portfolio manager of the firm’s net lease strategy. “ We had one tenant under a short-term lease and they were trying to decide whether they were going to enter a long-term arrangement,” Whiting tells Forum. “They decided not to, because they were moving as much of their production as possible to China. Several years later, I found out that they’ve moved most of their production back.” In a sign of the times, three years ago Boeing began building Dreamliners at a newly opened facility in North Charleston, SC. Before that first Dreamliner rolled off the line in North Charleston, though, Boeing learned an expensive lesson in the limitations of outsourcing. “We gave work to people that had never really done this kind of technology before, and then we didn’t provide the oversight that was necessary,” Jim Albaugh, then CEO of the Boeing Commercial Airplanes business unit, told a Seattle University audience in 2011, according to the L.A. Times. The extensive farming-out of work to both domestic and overseas vendors was largely to blame for a project that went billions of dollars over budget and three years behind schedule. WHAT’S BEHIND RE-SHORING A primary reason to ship manufacturing work overseas, especially to the Far East, is cost, specifically the cost of labor. In Brennan’s view, labor cost was the only advantage that Chinese suppliers offered US manufacturers, especially since wages had to be rock-bottom in order to offset the increased expense of logistics. During the depths of the global recession, many manufacturers saw that low cost of labor as one way of bringing expenses down far enough to stay in business, says Geoffrey Kasselman with Newmark Grubb Knight Frank in Chicago. And now, says Cushman & Wakefield’s John Morris, that advantage is slipping away. “At some point earlier this year, the average weighted cost of labor in US dollars became lower in Mexico than it is in China,” Morris, Chicago-based industrial lead, Americas at C&W, tells Forum. “So on average, from a labor perspective it’s now actually cheaper to manufacture in Mexico than it is in China. The labor arbitrage for manufacturing in China is gone.” It’s not only the increasing cost of labor in China that bolsters the case for bringing manufacturing back to these shores. “What happens if the labor costs in the United States are made moot by automated processes?” Brennan asks. “There will be a capital investment to make that happen, but if over time we don’t have labor as a significant component of our costs, then China’s uncompetitiveness becomes glaring.” He cites the rise of the middle class in China as the second reason that Chinese manufacturing will become less competitive over time. “Because they didn’t have a middle class constituency to sell things to, they had to sell things to the developing world and take a low price to overcome the cost of logistics,” says Brennan. “But if those contract manufacturers that make things for Nokia, Nike and other American producers now make thdem for a domestic constituency, they’re not going to be eager to go after the cheap, cost-sensitive business of United States companies. They’re going to say no to those companies, and they have already.” There’s another key factor boosting American manufacturers, Brennan says, and it’s the fact that “the cost of natural gas is cheaper than it’s ever been in recent history.” By comparison, “the cost of natural gas to European or Asian manufacturers is at least two or three times” what their American counterparts pay. The cost of natural gas in the manufacturing process is a significant part of cost of goods sold, he points out. This newfound strength is “showing up in the occupancy numbers of manufacturing buildings,” says Brennan. “It’s showing up in manufacturing expansions, and overall it’s showing up in manufacturing absorption in the US.” Not all of the domestic manufacturing uptick is due to re-shoring of operations that went overseas, says Dwight Hotchkiss at Colliers International. It’s also due in part to manufacturers now thriving who never offshored to begin with. Moreover, some industries are more likely to offshore manufacturing—and keep it there—than others, says Hotchkiss, president of brokerage services