The transition started to take shape in the third quarter of 2023. Friendshoring is increasingly changing the sources of containerized imports, moving them away from China and towards countries like India and Vietnam. As such, the more efficient route to get goods into the US is now moving to ports in cities, such as Houston, Savannah, New York, and New Jersey.

The impact of improved infrastructure

You may have noticed fewer “Made in China” labels on the products you buy – especially for fast-moving consumer goods like footwear and garments. As a result, East and Gulf Coast ports are improving their infrastructure. This means third-party logistic companies and shippers will be drawn to these areas.

We’re already seeing evidence of this. In 2021, a global container shipping company launched a direct Vietnam-to-US East Coast route. More recently, a Japanese container transportation and shipping company opened a weekly route from West India-to-the US East Coast ports.

Nearshoring also leads to more land-based shipping, which could be a boon for cities such as Dallas and Chicago. Both have intermodal terminals that are perfect for interchanges for rail and truck shipments. They also use multiple new freight rail lines from Mexico to Canada.

Why the shift?

Let’s look at the expansion of manufacturing activity in and near the US in the past 12 months and why it’s happening by looking at several drivers of nearshoring:

• The CHIPS and Science Act, which provides $53 billion in semiconductor-industry subsidies. Leading global semiconductor and microelectronics manufacturers have cited the act for their decision to expand in the US. New fabrication facilities also come with supporting component manufacturers, which usually build around the same areas. This creates a semiconductor cluster. Geographically, most of these new fabrication facilities are in the Sun Belt or near Gulf Coast ports.¹
• The Inflation Reduction Act, which increased subsidies for electric vehicles (EVs) by removing company caps on the number of cars that can be sold with tax credits. The act also introduced new requirements to onshore and friendshore the EV supply chain. Consumers can receive varying tax credits for new EVs. The credits depend on whether the vehicle, batteries, battery components and battery minerals were extracted in the US or countries with which the US has a free-trade agreement.²

South of the border

Mexico provides a manufacturing-based economy and a helpful free-trade agreement. Currently, more than 400 companies have expressed interest in moving production from Asia to Mexico. This has partially been reflected in a 30% year-on-year increase in foreign direct investment into Mexico in the third quarter of 2023.

US-China trade tensions

Amid China and US tensions, it’s hard to see a full recovery of the West Coast ports and surrounding markets. We believe the East and Gulf Coast ports will retain a large portion of their recently acquired market share. This would then drive demand for logistics and industrial real estate. However, we expect the logistics and industrials market to normalize in 2024, as supply is delivered, and some major third-party logistics companies reevaluate their space needs amid poor profit margins.

Where next?

How do all these incentives and nearshoring activities affect the US industrial and logistics market? Initially, we expect we will continue to see rapid development in border towns such as Laredo, TX, and Otey Mesa, CA. Nearshoring will eventually affect established intermodal transport hubs with existing infrastructure, including Chicago and Dallas. These will be fed by the multiple new rail freight lines connecting Mexico, the US, and Canada.

Nevertheless, landlords should take comfort that there will be more demand for industrials and logistics. The long-term fundamentals remain encouraging. True, rental growth probably won't be as spectacular as it was during the supply crisis. And we're also seeing some price softening due to near-term uncertainty. However, we believe these dynamics create an opportunity to pick up a few choice industrial assets for the long haul.

¹ The CHIPS and Science Act is a U.S. federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on August 9, 2022.
² The Inflation Reduction Act is a U.S. federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on August 16, 2022.

Important information

Projections are offered as opinions and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.

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