Exploring the Impact of Advanced Manufacturing on Commercial Real Estate Development: Trends and Insights

Welcome to the latest edition of the Riopel Real Estate Roundup, where we bring you the latest news and insights in the world of commercial real estate. In this edition, I will be discussing the latest trends in advanced manufacturing and how they are impacting commercial real estate development. We will also be looking at the CHIPS Act and how it is set to feed these trends. As always, if you're interested past editions of the Riopel Real Estate Round-Up can be found here for those interested.

So, let's dive right in.

Over the last several years, industrial real estate has been commercial real estate's darling. Recently, the surge in e-commerce and the onshoring of manufacturing have only added to the already high demand for industrial real estate. However, as we head into the second half of 2023, we are likely to see a tempering of these trends due to rising borrowing costs and economic headwinds. Regardless of the strong industrial sector fundamentals, it is expected that the industrial market will take a step down off the breakneck pace of the last few years, if it hasn't stepped down already. The Federal Reserve's inflation-induced monetary policy tightening is a major factor contributing to the changing economic landscape, which has put the prospects of a near-term economic slowdown and labor market softening into focus. Both investor and occupier demand remain high, but absorption, rent growth and sales activity are simmering down. Despite these headwinds, there are several notable trends benefiting the industrial development landscape which I plan to discuss further in this article.

As the global economic landscape continues to rapidly evolve, new technologies and changing geopolitical dynamics are shaping the way we live and do business. For commercial real estate developers, it's critical to understand these trends and prepare for their impact on future projects.

The Rise of Advanced Manufacturing & The Impact on Commercial Real Estate

Advanced manufacturing is a rapidly growing trend that is changing the face of manufacturing. This trend is being driven by a number of factors, including advancements in technology, rising consumer demand for personalized products, and increasing pressure to reduce costs and improve efficiency.

The rise of advanced manufacturing is having a significant impact on commercial real estate development. As manufacturers increasingly require high-tech facilities with specialized equipment and infrastructure, developers are being forced to adapt to these new demands.

One key factor in this shift is the need for large, flexible spaces that can accommodate a wide range of manufacturing processes and incorporate rapidly advancing technology. This has led to an increased demand for large, open floor plans and high ceilings, as well as the need for specialized HVAC and electrical systems to support advanced equipment. Another trend that is impacting commercial real estate development is the rise of onshoring, which refers to the practice of bringing manufacturing jobs back to the United States. This trend is being driven by a number of factors, including rising labor costs overseas, concerns about supply chain disruptions, and a desire to reduce dependence on foreign suppliers due to geopolitical pressures.

Due to these trends, new opportunities for the industrial sector have emerged with the focus on bringing production lines on U.S. soil and reducing reliance on imported goods. As consumers continue to adopt and embrace the convenience of online shopping, e-commerce supply chains will need to become more resilient. More than 90% of consumers expect a three-day delivery timetable, while about 30% expect same-day delivery, according to Urban Land Institute/PwC's Emerging Trends in Real Estate report. This means that demand for distribution space is unlikely to wane anytime soon. Therefore, tenants will continue to seek well-located Class A industrial space, and modern spaces with high ceiling heights and abundant truck docks will succeed.

Finally, markets' connection to global supply chains has been a differentiating factor in 2023. Industrial real estate properties in San Diego, San Antonio, and Detroit are among those expected to benefit from their proximity to U.S. entry points, while seaport expansion will pay off for markets like Jacksonville, FL, Philadelphia, Baltimore, and Charleston, SC.

In addition to the expectation that e-commerce and the need for distribution will continue to increase, another notable trend is the rise and continued evolution of advanced manufacturing.

Advanced Manufacturing for New Products

With the rise of new technologies, industries around the world are experiencing a transformation in the way they design, build and market products. The automotive industry is no exception. One highly touted example is the advent of electric vehicles (EVs) which has paved the way for advanced manufacturing techniques that are fundamentally changing the way cars are built and massive facilities are being constructed to meet demand. This trend is only further solidified by commitments to sustainability and policy decisions.

One of the most notable aspects of advanced manufacturing in the EV industry is the use of lightweight materials. Unlike traditional internal combustion engine vehicles, EVs rely on batteries to power their electric motors. This means that the weight of the vehicle is a critical factor in determining the range of the car. To make EVs more efficient, manufacturers are turning to lightweight materials such as aluminum and carbon fiber. These materials have a higher strength-to-weight ratio, which means that they can be used to build lighter vehicles that are more energy-efficient. This shift towards lightweight materials in the EV industry is leading to the adoption of new manufacturing techniques that enable the production of these materials on a larger scale. As a result, industrial buildings are adapting to accommodate the new equipment and machinery needed for the production of lightweight materials, and the industry is moving towards a more sustainable and efficient future.

Another important and innovative aspect of advanced manufacturing in the EV industry with the potential for widespread adoption and impact is the use of 3D printing. 3D printing allows manufacturers to create parts with complex geometries that would be difficult or impossible to produce with traditional manufacturing methods. This not only reduces the weight of the vehicle but also improves its performance and durability. The equipment needed for 3D printing is highly specialized, so industrial buildings are adapting to accommodate the new equipment and machinery needed for these advanced technologies. With the growth of 3D printing in the EV industry, there's potential of adoption in other industries and there is a significant shift towards a more sustainable and efficient manufacturing process that is poised to revolutionize the future of manufacturing and production.

Advanced manufacturing is also rapidly leading to the increasing adoption of automation technologies, which is also resulting in a significant transformation of industrial buildings. The use of automation technologies in the manufacturing process enables businesses to streamline production, reduce costs, and increase efficiency. Automated machinery and equipment can work continuously without requiring breaks, increasing production rates and reducing labor costs. With the advancement of technologies such as machine learning and artificial intelligence, automation is becoming even more powerful, allowing manufacturers to optimize production schedules and minimize downtime but incorporating these technologies into building design and construction is complex, expensive and often times a heavy lift during the development process. It will be important for developers to become highly efficient and experts in implementing these new technologies, particularly as the political environment continues to embrace sustainability on the on-shoring trend.

The CHIPS Act and the Future of Advanced Manufacturing

The geopolitical climate has had a significant impact on domestic manufacturing processes. One of the most notable examples of this is the ongoing trade war between the United States and China. The trade war has caused significant disruptions in global supply chains, which has made it difficult for manufacturers to source the materials they need to build their products.

The CHIPS Act, or Creating Helpful Incentives to Produce Semiconductors Act, was drafted as a response to the semiconductor shortage crisis. The legislation was signed into law in 2022 and is set to play a major role in the future of advanced manufacturing. It provides funding to support the development of new semiconductor fabrication facilities in the United States, with the goal of increasing domestic production and reducing dependence on foreign suppliers.

This legislation provides funding for semiconductor research and development, as well as incentives for companies to build new semiconductor fabrication plants in the United States. The goal of the CHIPS Act is to strengthen the domestic semiconductor industry and reduce reliance on foreign suppliers.

The CHIPS & Science Act directs $280 billion in spending over the next decade towards boosting the domestic production of semiconductors and has already resulted in major investments, such as Micron Technology's $100 billion commitment in New York, Intel Corporation's $20 billion chip factory project in Ohio, and Texas Instruments` $30 billion chip plant in North Texas. These massive projects and announcements not only bring incredible investment, but they certify a trend and bring catalytic projects to communities which will also undoubtedly spur surrounding development opportunities.

The semiconductor shortage has affected a wide range of industries, from automotive to consumer electronics, and has highlighted the importance of having a resilient and robust supply chain. The CHIPS Act will certainly help address this issue, but it will also have broader implications for the manufacturing industry as a whole, particularly in the field of advanced manufacturing and as on-shoring continues and impacts other industries beyond semi-conductors, there will be plenty of opportunity for industrial development to meet the demand.

Specifically, here are some ways the CHIPS Act could affect advanced manufacturing and commercial real estate development:

• Increased Investment in Advanced Manufacturing

The CHIPS Act's funding for semiconductor research and development will likely drive increased investment in advanced manufacturing technologies. This will lead to the development of new and more efficient manufacturing processes, as well as new materials and components that can be used in a wide range of products. This increased investment in advanced manufacturing requires new facilities or upgrades to keep up and this creates new opportunities for commercial real estate development, particularly in the areas with a strong manufacturing presence or surrounding the catalytic announcements like those discussed above.

• Localization of Manufacturing

One of the goals of the CHIPS Act is to reduce reliance on foreign suppliers and bring semiconductor manufacturing back to the United States. This push for localization of manufacturing could lead to a broader trend of companies bringing more of their manufacturing operations back home, particularly for products that are critical to national security or have long supply chains. Undoubtedly, this will lead to clustering of as companies tend to co-locate with their vendors and suppliers to further enhance efficiencies. Developers can benefit from identifying markets which are set up well to capture these clusters based on existing infrastructure, suppliers and access to materials.

• Shifts in Supply Chain Strategy

The semiconductor shortage has highlighted the risks of relying on a single supplier or a single country for critical components. The CHIPS Act's focus on strengthening the domestic semiconductor industry could lead to a broader shift in supply chain strategy, with companies diversifying their supplier base and spreading out their manufacturing operations across multiple locations and clusters. This could lead to increased demand for commercial real estate in areas with a strong transportation and logistics infrastructure.

• Acceleration of Industry 4.0

As discussed above, there's several technology which are rapidly being adopted in the manufacturing process and the CHIPS Act's focus on these advanced manufacturing technologies could accelerate the adoption of Industry 4.0 technologies, such as automation, robotics, and artificial intelligence, in the manufacturing industry. These technologies could lead to increased efficiency and productivity in manufacturing operations, but they could also have broader implications for the labor force and the need for skilled workers. This could lead to increased demand for commercial real estate in areas with a strong tech talent pool.

In summary, the CHIPS Act will likely have a significant impact on the manufacturing industry and could create new opportunities for commercial real estate development. Developers should be aware of these trends and consider how they can position themselves to take advantage of them. This could mean investing in properties in areas with strong manufacturing clusters or logistics infrastructure, or developing properties that cater to the needs of advanced manufacturing operations, such as high-tech office space or flexible industrial facilities. This is significant for commercial real estate developers, as these new facilities will require large, specialized buildings to house the advanced equipment and infrastructure needed for semiconductor manufacturing. This is likely to create new opportunities for developers in regions where these facilities are being built, as well as increased demand for skilled workers in these areas.

Preparing for the Future

So, what can commercial real estate developers do today to prepare for the future of advanced manufacturing? One key step is to stay ahead of the curve by investing in the latest technology and infrastructure needed to support these new trends in their projects. This may include investing in new HVAC and electrical systems, building large, flexible spaces, and partnering with other companies in the industry to develop specialized facilities.

It is also important for developers to stay informed about the latest developments in the industry, including new legislation like the CHIPS Act, which is set to have a major impact on the future of advanced manufacturing.

In conclusion, the rise of advanced manufacturing is changing the face of commercial real estate development, creating new opportunities and challenges for developers. These trends are benefitting from significant policy decisions from federal and local governments. By staying informed about the latest trends and investing in the latest technology and infrastructure, developers can position themselves to thrive in this new era of manufacturing. Thank you for joining us for this edition of the Riopel Real Estate Roundup, we'll see you next time!