Analyst: Eventually Nearshoring Will Impact All CRE

Nearshoring is a significant evolutionary trend driven by geopolitical forces, manufacturing costs, shipping costs, evolving shipping route risks, and logistics trends.

For the first time since 2002, the total annual imports from Mexico exceeded the total from China, reiterating the trend toward bringing manufacturing closer to the US.

While this trend could significantly affect industrial space demand across the US, John Chang, Executive Vice President and National Director of Research and Advisory Services, said the impact will be even bigger than that.

“It has the potential to profoundly impact all types of commercial real estate in markets all over the country,” Chang said in a recent research video by his firm.

“It’s an evolving longer-term trend that will likely play out over the next decade, but [the Mexico-China] significant milestone was just reached and a significant event that could accelerate the evolution of this trend recently occurred.”

He said that supply chain changes of this magnitude could influence where jobs are created and that would influence space demand for all types of real estate, housing, self-storage, retail, and almost every other type.

Rising shipping container costs and insurance rates are having a big impact.

Because of geopolitical conflict in the region, reduced shipping through the Suez and Panama Canals has put upward pressure on shipping costs, and that trend has continued.

Marcus & Millichap reported that the cost to move a container from China to the US West Coast has increased from about $1,700 in December, $2,700 in January. In February, the cost was up to $4,800 per container.

That’s an 184% increase or a $3,100 gain per container in just two months.

Shipping a container from China to the US East Coast is even higher.

It was about $6,700 in February, up by almost $4,200 since December.

Chang said those numbers are likely to go up even more following the Feb. 18 Houthi missile strike on the British-owned Rubymar container ship in the Red Sea.

“If the Houthi rebels effectively shut down the Suez Canal to merchant traffic by driving up the insurance costs for ships to use the canal, then moving goods from Asia to the US will go up even more,” he said.

Insurance costs for ships navigating the Red Sea have increased by 600% to 900% in the past two months, and businesses are adding that math into their equations.

In a survey last year, 42 supply chain leaders said their company was taking action to nearshore production, according to Marcus & Millichap. That’s up from just 11% in 2021.

Since the pandemic, companies have been weighing the costs and the risks associated with shipping cargo halfway around the world to the US from China and Asian manufacturing hubs, Chang said.

As a viable option, Canada and Mexico are prime options for companies to move their manufacturing closer to the US.

“Not only is putting cargo onto a truck or train and driving it to the US a lot cheaper than shipping it halfway around the world, but more importantly, supply chain resiliency and reliability may make the investment worthwhile,” he said.

Changes in the cross-border shipping volume numbers (comparing the first half of 2019 versus the first half of 2023) into Texas, Michigan, and Arizona are up significantly.

Meanwhile, shipping traffic through West Coast ports, including Long Beach and Los Angeles, has gone down.

Industrial property space demand shows the impact.

Space absorption since the end of 2019 in Dallas-Fort Worth has topped 115 million square feet, followed by 89 million square foot gains in Atlanta and Houston.

The Inland Empire filled 70 million additional square feet, followed by the substantially smaller Phoenix Metro which had 66 million square feet of space demand. San Antonio, a market with about 1/7 the industrial space of Dallas-Fort Worth, also had significant demand gains, absorbing 19 million square feet between 2019 and 2023.

Austin, which is even smaller with just 107 million square feet, absorbed 23 million square feet in those four years.

“This [shift] will be a protracted process likely spanning a decade or more,” Chang said.

“We’re starting to see the impact on the industrial side, but this is likely just to beginning.

“The supply chain evolution will likely only gradually influence other property types, but when you consider commercial real estate hold times, making a bet on where things will be in five or 10 years is the nature of the business.”