After three years of disruption, international supply chains appear to be returning to normal.
The cost of shipping freight by sea or air has largely returned to pre-Covid-19 levels, container ships aren’t queuing outside major ports and businesses no longer cite “supplier delays” as one of their most pressing problems.
This does not mean, however, that it’s business as usual.
Fragmented politics and new strategic alliances
Over the past 20-plus years we’ve witnessed unconstrained globalisation. But the pandemic and geopolitical tensions have forced a rethink – and the focus is now on security and protectionism.
Governments are looking to drive domestic productivity while safeguarding strategically important sectors – be that energy, food, pharmaceuticals, or the minerals and technologies needed to support high-growth future businesses, such as semiconductors or electric vehicles (EVs).
The war in Ukraine and tense relations between the US and China has accelerated what the IMF refers to as “geo-economic fragmentation”.
Against this backdrop, “friendshoring” could be a key driver of supply chains, as industrial policy is deployed to help deliver domestic and foreign policy initiatives relating to energy security, new technology and the transition to net zero.
What does this mean for property markets?
These geopolitical shifts could have an impact on international capital flows into real estate markets. And they will also impact demand for specific types of commercial property, particularly logistics and manufacturing, across North America, Europe and Asia Pacific.
North America
Resilience has become a buzzword for supply chain managers in North America, but cost remains the single biggest factor in location decisions.
Although job announcements linked to nearshoring have risen in recent years – with these primarily relocating from Northeast Asia – many firms are still utilising overseas manufacturing and benefiting from cheaper labour.
Federal policy, highlighted by the Inflation Reduction Act 2022, could be shifting this balance though. US companies in sectors deemed strategically important, such as green energy, are being offered huge subsidies and tax breaks to relocate.
Similar incentives are provided through the CHIPS for America Act 2022, designed to reduce US reliance on imports of semiconductors from Taiwan and South Korea.
This stimulus is supporting a boom in the construction of manufacturing plants in the US. Firms such as TSMC, Intel and Samsung have announced plans to build semiconductor plants in the US and more than 20 EV projects are slated for completion by 2026.
Construction expenditure by manufacturing firms in the US
Source: Savills Research using Macrobond
But it swings both ways. If fewer Chinese goods are imported, for example, demand for warehousing and logistics in California could be hit. This could be to the benefit of Mexico, which apart from being geographically close is also, alongside Canada, part of the North American Free Trade Agreement.
Europe
The huge demand for industrial warehousing in Europe in recent years has been mainly down to the pandemic and the rise in online retail. Over the medium term, however, the security of supply chains and the need to invest in green technology will have a greater impact.
Europe, like the US, is now firmly in the game of “strategic competition” with the European Green Deal and European Chips Act aiming to double the EU’s market share of semiconductors.
Nearshoring may also create opportunities for real estate investment in Eastern Europe, particularly those countries strategically aligned to EU objectives and values, but benefiting from cheaper labour pools.
This emphasis on protecting supply chains will create a slow-burn ripple effect in demand for warehousing and manufacturing in commercial real estate markets. This is in contrast to the rapid surge in demand seen in recent years from the explosion in online retailing.
Asia Pacific
China remains the “world’s factory”, accounting for around 30 per cent of global manufacturing. It holds significant competitive advantage with its relatively mature infrastructure, high-quality workforce and deep integration into global supply chains.
However, rising labour costs in China mean it is not as cost-effective as it once was, particularly when domestic incentives to reshore are factored in.
There has also been a noticeable slowdown in foreign companies, such as Apple, establishing new facilities there.
Countries such as Vietnam and Indonesia could benefit if firms start to look for other low-cost production centres in Asia, particularly when it comes to labour-intensive and low-margin industries.
India also offers strong growth potential for commercial real estate investors in the future.
