From gateway American cities to inland areas in Central Europe, industrial and manufacturing is making a comeback. With major developers constructing new buildings and repurposing existing properties, SIOR executives told GlobeSt.com during an exclusive interview inside the Presidential Suite at the organization’s 2012 Spring World Conference that cities across the country and beyond are seeing growth.
“The term is on-shoring, and it is a very real phenomenon,” said SIOR president Geoff Kreusser. “ Wages have been going up 20% a year in China and US wages have actually dropped 20% over the last four years for manufacturing,” explaining that transportation costs alone make it more feasible to manufacture goods in the States. “It does not make sense to make lots of types of products on the other side of the globe and bring them all the way back here,” he added. “The wages in Mexico have increased as well, but Mexico has also seen a lot of expansion. They’ve seen a substantial amount of auto manufacturing that used to be done in Korea and Japan, and they’ve been wanting to make the products closer to the US market.”
One of the other main drivers is intellectual capital, Kreusser said. “We are finding that US corporations are losing their patent protections in places like China, or even in Brazil,” he said. “There are all types of dealings where they don’t have full control like they do if they manufacture it here in the US. We are expecting this trend to continue. Last year, it created over 200,000 jobs, so it’s been one of the brightest spots within the US job sector.”
Industries such as renewable energy, oil & natural gas and online retailing are all taking major blocks of space in Pittsburgh, Houston, Dallas, Montana, North Dakota and the Inland Empire. But the one area that is still lagging is spec construction, Kreusser said. “We’ve seen very little in the last four years,” he said, due to difficulty to obtain financing. “The construction costs have continued to increase, but demand has been so strong for the large big box, like the 400,000 to 500,000 increments. The rates have gone up enough, the land values have gone up, and the Inland Empire is where all that started.”
Internationally, industrial activity in Poland and the Czech Republic has remained stable. According to data from Jones Lang LaSalle, industrial lease deals cover 1.69 million square feet of warehouse space, the highest amount recorded since 2008. “One of the strengths of the Polish market is that they were not accepted into the Eurozone,” Kreusser said. “Now they are the grand benefactor, and their economy is good,” he added. By year-end 2011, JLL says about 371,000 square feet of new space was completed, and vacancy dropped to 11.5% from 15% — a clear sign that confidence is back.
“Multinational companies feel safe making major investments in manufacturing and logistical facilities,” he said. “Those countries in central Europe service all of Eastern Europe because most multinational companies were cautious about making a mistake due to political unrest or property right issues.”
Office, on the other hand, has been a bit more uncertain, but fundamentals are beginning to improve. “There has been a lot of jogging in place and postponing decisions, but I think we are beginning to see in some of these markets that have more momentum tenants making decisions,” Kreusser said. “It is shifting, but only in a handful of markets where that trend looks like it is going to continue to expand. I expect it to expand in secondary markets soon, but tertiary markets are a little more unknown.”
In terms of the deals themselves, tenants are looking for shorter-term agreements and more flexibility. “The longer terms come in when they can’t find a building, or if they have a specialized requirement and have to go the build-to-suit route,” he said, explaining the concessions vary from market to market. “Some markets still have substantial concessions, but in a place like Inland Empire, there were two years ago and there aren’t now,” he said. “The concessions haven’t gone away in the markets that are doing well because the existing product is not there.”
Office markets to watch, Kreusser said, include Denver, San Jose and Charlotte, where growth in sectors like healthcare, technology and medical office are taking place. But overall he describes the American office market as uneven. “Things are returning, but it is still spotty,” he said. “It is inconsistent, and in some markets, there are three bright sides and two horrible speed bumps.”
In helping to lead the recovery through knowledge and networking, SIOR’s role, according to EVP Richard Hollander, is to explore new opportunities for new members and sponsors. In April, the SIOR board of directors approved a memorandum of understanding with the Industrial Asset Management Council (IAMC), an organization of corporate real estate directors, economic developers and service providers, calling for collaboration in education, research, in publications and other areas. IAMC, being the corporate real estate directors of major multinational corporations, will provide SIOR members with new opportunities in global markets.
“It is something we are very excited about,” Hollander said. “Our members are in the market everyday talking to occupiers and owners, so we bring that aspect of it to the table, and the corporate real estate directors, of course see the market from a very different perspective and they bring that to the table. There are a lot of opportunities to share knowledge and opportunity to work together on different initiatives.”