What does a shift in U.S. manufacturing and import/export trends mean for industrial real estate, particularly near major ports?
BEYOND THE NEAR-term slowdown in global economic and trade growth, a number of trends indicate that U.S. imports and exports are likely to continue growing. This will impact economic activity and generate demand for real estate near U.S. international trade hubs such as Savannah, New Orleans and Tacoma. Since 90 percent of international trade is ocean borne, industrial real estate demand at or near seaports is likely to increase. Real estate located near intermodal hubs, particularly inland logistics centers, also stands to benefit.
It is important to understand that the effect of growing trade will not be homogeneous across all port and logistics center locations. Some areas will be driven by exports, others by imports and some by both. The infrastructure and real estate requirements of imports and exports are not the same. Imports require deconsolidation infrastructure such as distribution centers and cross dock facilities to move cargo from smaller international containers to larger domestic containers, since cargo coming off vessels needs to be unpacked and distributed throughout the U.S. Export infrastructure is focused on freight consolidation such as trans-flow facilities used to pack bulk commodities like soybeans into containers.
Critical Macroeconomic Trends
Since the early 1990s, the U.S. trade deficit has increased significantly. It currently averages about $40 billion per month. The chart below shows that the value of U.S. service exports exceeds that of imports by $20 billion per month. However, the U.S. runs a goods trade deficit of $60 billion per month. The goods trade deficit increased substantially between 1999 — when China formally joined the World Trade Organization, allowing it to increase exports to the U.S. — and 2008, when it peaked at the height of the previous economic cycle.
The total tonnage of goods and commodities exported by the U.S. actually exceeds the imported tonnage. However, the value per ton of U.S. exports is less than the value per ton of imports. This reflects a few key trends, a primary one being the shift of consumer goods manufacturing to offshore locations.
There are two reasons for the offshoring of manufacturing. The first is that labor is cheaper in emerging market locations. This is illustrated by the chart on the following page, which shows wages for a sample of developing and developed economies in 2001 and 2014. In 2001, China was one of the lowest labor cost economies in the world.
Since 2001, wages have increased substantially in China as a result of the increased value of the renminbi against the U.S. dollar and because local wages, primarily in the coastal provinces, increased substantially. Simultaneously, the ranks of the middle class in China increased significantly as workers shifted from low-paying farming and mining jobs to higher-paying value-added manufacturing and service employment. China currently has a substantial middle class, and economic growth there is increasingly driven by consumer spending as opposed to investment in plants, property, equipment and infrastructure. As the ranks of the Chinese middle class swell, it is becoming an increasingly important consumer market for multinational companies, which is the second reason why companies would offshore manufacturing to China: to be closer to these new end users.
Wages in other developing countries have not increased as much as they did in China. Anecdotal evidence indicates that U.S. importers have started to import from closer sources such as Mexico and Central America as well as Western Asia (India). Over the last several years, imports arriving at U.S. East Coast ports from India have increased substantially and are now second only to those from China.
U.S. exports, particularly to China, have also increased. These tend to be agricultural products, refined petroleum products and capital goods for industrial use. These exports reflect U.S. comparative and competitive advantages. For example, U.S. agricultural production is characterized by very large farms with substantial economies of scale that employ productivity-enhancing communication and satellite technology, resulting in lower-cost products. Refined petroleum and natural gas production increased significantly due to hydraulic fracturing, beginning in 2008, reducing U.S. energy costs substantially. Most countries use relatively more expensive petroleum to produce the petrochemicals needed for the manufacturing of plastics, a key material for the production of a wide range of consumer products, from autos to clothing to cosmetics and pharmaceuticals. The U.S. uses liquid petroleum gas, which is relatively cheaper, to produce these petrochemicals.
U.S. capital goods such as road construction equipment benefit from low-cost raw materials and technological advances in two ways. The production of the equipment is increasingly automated, which lowers the cost of production. Furthermore GPS technology is embedded in the products, which allows for more precise positioning of the equipment and, therefore, higher productivity.
Although the U.S. has offshored much of the production of manufactured goods, industrial production has continued to grow. The industrial production index has increased sixfold since 1950. Yet manufacturing employment has been flat, averaging about 21 million people on the payrolls over this period. The composition of U.S. manufactured goods has shifted from low-end consumer goods to high-end capital goods as mentioned above. The production of these goods, much like in the agricultural sector, is increasingly automated. In the U.S. financial system, capital borrowed to buy this equipment is cheap compared to the cost in emerging markets, while U.S. labor is relatively expensive. It should be no surprise that the U.S. manufactures goods that are not labor intensive but instead capital intensive, and that have a low raw material cost, such as agricultural products like grain crops and high- end capital goods like airplanes and technology-infused heavy construction machinery.
Implications for Industrial Real Estate
The import and export trade flows described here will require more deconsolidation and consolidation infrastructure near ports as well as inland logistics centers. Ports on all three coasts will benefit from these trends. However, it is likely that the U.S. Gulf Coast will see the greatest increase in demand for industrial real estate.