A combination of factors has created the environment for decoupling from China to a more decentralized and regional manufacturing system (i.e., nearshoring and reshoring). Shipping rates increasing tenfold in 2022 played a big part, but so has Chinese labor rates increasing 30 times from $46 per month in 1992 to $1,500 in 2024. The shifting landscape creates immense opportunities for real estate investors and developers who have their ears to the ground and can see the transition presently underway.
When the cost of shipping a container from Asia to America increased 10 times in 2022 the world economy momentarily shuddered. It was a wake-up call to all that the global supply chain was under near full dominion of China, and this exposed the vulnerabilities of relying on a single nation. The tenfold increase in shipping costs served as a stark reminder of the global supply chain's dependence on China, prompting many to advocate for diversification.
McKinsey's 2022 State of Fashion report addressed the impact of a tenfold increase in shipping rates on a fashion industry hooked on cheap Chinese imports. According to consulting firm Kearney, in 2022 shipping costs for US apparel brands rose to between $9 and $17 billion. The report noted that as shipping costs rose, the price of cotton increased by 40%, air freight costs soared by 50%, and labor and warehouse shortages further drove up the cost of doing business.
"Making supply chains resilient" became the rallying cry and the essence of what that meant was to reduce reliance on China. One critical challenge lies in the lack of readily available industrial real estate outside of China. The old manufacturing order involved unleashing China on the world to gobble up all the required minerals and inputs, and to use its vast army of workers to do the processing and assembling. Environmental and ethical concerns were ignored by consumers in the advanced nations in exchange for cheaper clothing and more frequent iPhone updates.
Mexico's nearshoring industrial real estate boom is one example of how nations can benefit from manufacturing decentralizing. Closer production means shorter shipping routes which usually translates to less volatility and costs. Cheaper labor rates are also likely to result. Chinese labor rates have increased over 30 times since the 1990s from an average of $46 per month in 1992 to $1,500 per month in 2024. To put the 2024 figure in context, today the same labor costs $270 in Vietnam, $400 in Thailand, and $3,300 in America.
Regional nearshoring hubs, such as Mexico in North America and Vietnam in Asia, could see a surge in demand for industrial real estate such as warehouses, factories, and logistics facilities. The old order logistics infrastructure centered around shipping Chinese-made products from port to customers' homes. Just-in-time inventory was the norm, and while it has many advantages, for real estate investors and owners it means tenants require less space. The new order logistics infrastructure will differ and be more robust and complicated. Expect to see land shortages, rent increases, and new development opportunities in those hubs. All things real estate investors and developers treasure.
There will be further opportunities in supporting infrastructure such as the expansion of transportation networks, energy grids, and waste management facilities. Minerals must be secured, mined, and processed. Timber, steel, and other construction and manufacturing inputs must be procured from sources as closeby as possible. Regions will compete for scarce resources and redundancies will be built into infrastructure plans. More pleasing news to real estate investors aligned to the new order framework.
The shifting landscape of global manufacturing will be disruptive, but it's crucial to also acknowledge the potential benefits. Changes are gaining momentum, and real estate investors who seize this opportunity stand to benefit substantially. Start your research, explore emerging markets, and connect with industry experts to position yourself for success in the new era of decentralized manufacturing focused on regional integration.
