How nearshoring is shaping investment decisions

Not so long ago, very few Americans concerned themselves with something called the supply chain. But following three years of ongoing inventory disruptions of everything from baby formula to automobiles, the average consumer is increasingly aware of the process required to deliver goods to local retailers.

The reality for businesses is that supply chain disruption is a new pain point for consumers. In addition, supply chain vulnerabilities have become a matter of national security, as exposed by shortages of components like semiconductors and medical supplies during the pandemic. Rarely has an issue risen so swiftly to the top of national concerns.

The rush to address the problem

The ultimate solution to supply chain disruptions is to bring industrial production and manufacturing home – or closer to home. Reshoring implies returning physical investments back to U.S. soil, utilizing incentives and other fiscal inducement strategies. Nearshoring is an attempt to move these investments to stable, friendly countries closer to home where labor and production costs remain low. The dual efforts are mutually beneficial: Manufacturing and production investments brought closer to home through nearshoring generate associated reshoring investments in production, storage and logistics at home.

Investors, businesses and the government have all responded in an effort to reduce future disruptions. The construction of new manufacturing facilities in the United States has soared 116% over the past year, according to Dodge Construction Network. A January 2022 survey of C-suite executives reported that 90% of those surveyed said they were in the process of moving production out of China or had plans to do so. Undoubtedly, the biggest inducer to reshoring growth is the passage of the CHIPS & Science Act 2021 which allocates $280 billion in subsidy spending over the next decade toward the domestic production of semiconductors and supporting R&D efforts in new technologies such as artificial Intelligence, nanotechnology and quantum computing.

Where are the investment opportunities?

These subsidies, coupled with a continuation of global e-commerce demand and the growing demand to warehouse raw materials and manufacture goods domestically, are the driving focus of onshoring investment opportunities. This means that demand for warehousing and distribution space is anticipated to grow and will be located in markets with good transportation infrastructure.

Critical industries like semiconductors, technology, medical suppliers, automotive and aerospace have already proven to be prime reshoring movers. Capital goods firms that make machinery used to manufacture goods and products have followed closely behind and will continue to be a growing investment opportunity in the industrial sector. As companies seek to create competitive advantages by implementing eco-friendly business practices, additional investment opportunities are anticipated in green and sustainable logistics companies.

Investment in Mexico is clearly expanding, and it has quickly become the biggest beneficiary of nearshoring. The country’s close proximity, familiarity to U.S. businesses, and competitive labor rates are extremely attractive. In addition, Mexico possesses a reliable labor pool and has a long trade history with the United States.

A smart post-pandemic investment strategy in the industrial sector should focus on benefiting from both nearshoring and reshoring market trends. Key reshoring target markets featuring low vacancy rates and excellent supply and rent growth fundamentals are expected to provide excellent risk-adjusted returns. States that fall into this category include Arizona, Texas and the Mountain West markets - as well as New Jersey, the Carolinas and Florida.

What many considered to be a momentary adjustment, is now being recognized as a potentially permanent sea change in investments. In years past, China was almost universally the first option for any business considering building a new facility. Today, that option is almost off the table.

About the author:

Jonathan Civita is a principal of Madison Ventures+, which since 2021 has advanced investments in modern, large scale class-A industrial properties targeting manufacturing, warehousing and logistic users which include EV, semiconductor technology, aerospace and medical innovation. He can be reached at [email protected].

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