2024 Drivers of Change

Manufacturing’s path forward

At a glance:

Global supply chain disruptions are pushing many markets to reshore and nearshore solutions.
Credit and incentive programs are boosting emerging sectors in advanced manufacturing, clean technology, and renewable energy.
Construction costs remain at historic highs, driven by strong demand for key material types like concrete, alongside other major factors like state of inflation, rising insurance rates, and high labor costs.

Global manufacturing redefined – navigating supply chain shifts

Global supply chains are in flux. Here are just a few of 2023’s biggest disruptors:

Biggest disruptions to global supply chains in 2023

A multitude of factors are impacting market access to supply, creating uncertainty across the global supply chain and demand for reshore or nearshore solutions. Source: ISM, Bloomberg, Supply Chain Dive, Broker Notes, PR Newswire

Through these shifts, global supply chain interdependencies have been exposed like never before, calling forward opportunities to consider new operational methods for improved speed-to-market and cost savings.

As markets begin to consider new possibilities around production facilities and partnerships, it’s become apparent that faster production for all will be reliant on overcoming several key hurdles including:

Navigating the elimination of coal-fired plants and reductions in gas-fired and nuclear plants.
Factoring in labor disputes currently impacting robotics and AI development for greater automation and process efficiencies.
Solving for a decline in workforce availability as baby boomers continue to retire with fewer young people entering the trades.
Shifting focuses toward production of renewables.
Improving general access and speed to produce while accounting for continuing cost constraints, which has many markets considering the advantages to reshore or nearshore their production facilities.

"The drive (or importance) to diversify supply chains is guiding many toward more secure alternatives, moving away from the uncertainties of offshoring with its associated delays and longer timelines. Instead, there's a growing preference for reshoring or nearshoring solutions. These options not only bring production closer to our customers, enhancing speed and reducing risks, but they also offer the prospect of long-term cost efficiencies."

- Patricia Perman, Principal, Director of Client Operations, Industrial, Avison Young

"The drive (or importance) to diversify supply chains is guiding many toward more secure alternatives, moving away from the uncertainties of offshoring with its associated delays and longer timelines. Instead, there's a growing preference for reshoring or nearshoring solutions. These options not only bring production closer to our customers, enhancing speed and reducing risks, but they also offer the prospect of long-term cost efficiencies," shares Paty Perman, Principal, Director of Client Operations, Industrial at Avison Young.

Just how popular is reshoring becoming? According to a recent C-suite survey conducted by UBS Evidence Lab, 70% of respondents expressed near-future reshoring intentions. And in North America, nearshoring intentions are a key focus, with Mexico currently outpacing China as the biggest trade partner of the U.S. Switchgear, transformer and other electrical gear-based product remains delayed on a global scale as instabilities continue to bring delays for manufacturing and supply. There remains a high demand for these kinds of parts, notably for expanding battery and electric vehicle markets (see below for a snapshot of U.S. numbers from 2023, which, while slowing in early 2024, shows a rise in interest bolstering the need for increased supply. This is leading many to consider new production partners, such as Mexico, for electronics and electric vehicle production.

U.S. electric vehicle reach record-breaking sales in 2023

Within the United States, sale of electric vehicles has been on a notable rise, reaching record-breaking numbers at the end of 2023.

The current U.S. administration’s focus on cleaner energy is also the driver of Canada’s aggressive positioning and investments in electric vehicles and battery production facilities, including the retooling of automotive plants (Stellantis, Ford and GM in the Greater Toronto Area) to switch production from internal combustion engines to electric, as well as new battery manufacturing plants.

Globally, we are becoming well-positioned for growth in the electrification of transportation, benefiting from the reconfiguring of these supply networks, often positioned with help from critical incentive programs.

Development credits and incentives are influencing location decisions

Manufacturers are looking to programs that could help them gain access to the critical capital needed to operate in this era of elevated costs.

Last year, incentive programs led to big differences between current U.S. and U.K. acceleration of manufacturing facilities, with the U.K. lagging behind the U.S. in both manufacturing job growth and factory demand throughout the year. But with U.K. mandates calling for all vehicles to be electric by 2035, advanced manufacturing sectors that support electric vehicle production – such as gigafactories – will soon be on the rise to meet demand. And paired with current geo-political tensions driving production closer to home to avoid disruption, recent numbers show more favorable conditions for U.K. markets this year.

Manufacturing job growth and demand in the U.S. and U.K.

While the U.K started off 2023 lagging way behind U.S. markets, end of year numbers show markets evening out.

Similarly, Canadian markets are looking at opportunities to take their share of the emerging renewables market, and are already making a splash with hydropower, one of the cleanest forms of renewable energy. It already accounts for 60% of all electricity generated in Canada. Federal and provincial governments have been working hand in hand to provide a competitive and favorable landscape for EV giants to thrive worldwide, providing real competitive advantage, and we anticipate the opportunities will abound for Canadian, U.K., and U.S. markets.

Like it or not, government involvement and support is often critical for success at this stage.

“Where and what businesses should base their production operations on right now requires a mix of expertise, including knowledge of labor markets, transportation, supply chain, location-specific regulations, operational risk, taxes, and various development credits and incentives at a minimum,” shares Todd Ohlandt, Principal, Location Strategy at Avison Young. “All build toward what will be most advantageous for companies, communities, and local economies.”

In the United States, programs like The Inflation Reduction Act and CHIPs Act, for example, have been boosting emerging sectors in advanced manufacturing, clean technology and renewable energy sectors, with a large runway to support many more projects for years to come.

What can federal and state industrial policies like this support?

In a recent study, Avison Young looked at some of the biggest projects completed in the U.S. during the last few years (see graphic below) driven largely by developmental credits and incentives to assist company needs and demands.

Major U.S. projects driven by incentives

Above: The numbered locations on the map are the manufacturing projects with the ten largest credits and incentives awards, 2021 & 2022. The states are colored according to the projects in the second dataset.

“Across these projects, a few consistent themes emerged,” Matt Ryder, Principal, Location Strategy at Avison Young notes. “Some of the most successful manufacturing projects in recent history have stemmed from a mix of federal, state, and local government funding incentives, push for special considerations for additional allocations, a look beyond the obvious funding possibilities, and protections against clawback risk. They all also do one critical factor well: they start the pursuit of incentives and funding sources as early as possible.”

When combined, incentives are providing opportunities otherwise unmatched given current market constraints and economic considerations for investment in communities. In short, these funding sources are the right opportunity at the right time as they enable manufacturers to do more with less upfront spending.

"Some of the most successful manufacturing projects in recent history have stemmed from a mix of federal, state, and local government funding incentives, push for special considerations for additional allocations, a look beyond the obvious funding possibilities, and protections against clawback risk. They all also do one critical factor well: they start the pursuit of incentives and funding sources as early as possible."

- Matt Ryder, Principal, Location Strategy, Avison Young

Cost of construction and industrial inventory continues to struggle.

These cost savings are especially critical given the continued state of elevated cost of construction materials.

The last few years have seen historic rises in materials costs and delays in production of products, and while there has been broad optimism that costs may finally start to go down this year, the overall cost of construction remains high at the start of 2024.

While some products like coil and plate steel, concrete, and cranes are starting to stabilize in both price and delivery, the chart below demonstrates that the cost of construction in the U.S., as an example, remains at a historic high. The impact is felt similarly around the world.

Federal incentive programs are partially to blame, increasing demand for raw materials like concrete and driving costs further upward, but there are many reasons for continued rising cost of construction, including inflation, high labor costs, rising insurance rates, and even permitting costs.

What does all of this mean for industrial CRE?

While it’s unclear exactly when costs might lower and supply chains may stabilize, the promise of positive future returns remains enough to drive strong long-term optimism around investing in industrial right now, notably over less stable sectors.

With e-commerce forecasted to account for 41% of all global retail sales by 2027 according to Boston Consulting Group, investing in industrial space for projected future needs feels worthwhile, especially when paired with the opportunities available to capitalize and expand advanced manufacturing and emerging sectors through federal policies, credits and incentives.

Additionally, as countries continue to explore the benefits of shoring and moving production of goods much closer to home, emerging industrial markets interested in reshaping what, how and where we produce could see very bright futures ahead.

This article is part of our 2024 Drivers of Change series where we explore the factors impacting our cities and places, and propelling us forward to adapt, learn and take advantage of the opportunities they present. See all the 2024 Drivers of Change or subscribe to be notified when new Drivers of Change are released.