EV Production Expands Opportunities for Industrial Developers
This past week, German car manufacturer Volkswagen AG announced that it planned to invest approximately $193 billion over the next five years on shoring up its business in China and the U.S., with $131 billion of that sum going toward the development of electric vehicles (EVs) and new digital technologies. Among the projects included in that five-year plan is the development of Volkswagen’s first battery plant in Canada, which would follow the decision to build a $2 billion factory producing all-electric trucks and SUVs in South Carolina announcer earlier in the month.
Likewise, another German car manufacturer, BMW, announced $1.7 billion in investments in production of EVs in the U.S. in recent months, including $700 million to develop a new high-voltage battery assembly plant in Woodruff, S.C.
Mercedes has also recently invested $1 billion in a battery factory in Alabama and is converting its nearby conventional SUV factory to EV SUV production.
These moves are part of a growing trend of foreign and domestic car manufacturers investing in EV production facilities and associated manufacturing plants in the U.S., opening up a potential opportunity for U.S. commercial real estate investors and developers.
The Biden Administration’s Jobs Act, CHIPS and Science Act, and Inflation Reduction Act (IRA) are supercharging a comeback in domestic manufacturing, especially around energy- and climate-tech products. Two of the areas benefiting most from IRA funding are electric vehicles (EVs) and EV batteries.
The IRA provides both tax credits for investments in clean-energy manufacturing facilities and loan guarantees for U.S.-based projects that utilize new or significantly improved technology or reduce greenhouse gas emissions.
In fact, with IRA allocating $370 billion for climate initiatives, demand for manufacturing space has escalated 100%, according to Silicon Valley-based Greg Matter, executive managing director and leader of the advanced manufacturing team with commercial real estate services firm JLL. “It’s been like pouring fuel on the fire,” he says. “I haven’t seen this much manufacturing activity in all of my 20 years in the industry.”
According to a Brookings report, automakers worldwide have committed to investing an estimated $1.2 trillion to electrification globally through 2030. A tally by consulting and data firm Atlas Public Policy, announcements of investments in U.S.-based EV, EV battery and battery recycling facilities by members of the automaker alliance totaled $128 billion in 2022 alone.
Major automakers are investing in building battery startup facilities because they want to be in close proximity to or own their supply chains, Doron Myersdorf, CEO of Israel-based StoreDot, a startup concerned with optimizing battery charging, told Crunchbase.
Overall, the Dodge Construction Index reported that manufacturing construction starts in the U.S. reached a record $41.6 billion between May 2021 and May 2022—a 161% increase over the prior 12 months. Colliers Industrial Research reports that there are nearly 100 manufacturing facilities greater than 100,000 sq. ft. currently under construction in the country. Eight of these facilities contain more than 1 million sq. ft. and are located in Texas, Tennessee, South Carolina, Ohio and Arizona, says Miami-based Stephanie A. Rodriguez, national director, industrial services, at Colliers.
Emerging investment opportunities
The ramp-up in EV and EV-related manufacturing activity to regionalize production and supply chains is creating a variety of new opportunities for industrial real estate developers and investors, especially in the Midwest, South and Southwest. Automotive manufacturing facilities create local networks of suppliers and ancillary manufacturers, as well as third-party logistics (3PLs) facilities that tend to locate adjacent to EV and EV battery plants, all of which provide opportunities for industrial investors, notes New Jersey-based Nick Kim, senior managing director, tenant advisory, at commercial real estate services firm Transwestern.
In Tennessee, the state’s Department of Economic and Community Development estimates that an additional $5.2 billion in capital investment will be generated on top of Ford Motor Co. and South Korea-based SK Innovations developing a $11.4 billion EV and EV battery manufacturing campus called BlueOval City near Stanton.
And in Austin, Texas, facilities that house parts suppliers and related manufacturers are locating near Tesla’s and Samsung’s advanced manufacturing plants. Tesla’s Gigafactory opened in the area last year to manufacture EVs. Samsung’s $17 billion semiconductor plant is under construction in Taylor, a hip small town on the northern edge of Austin. A joint-venture of Houston-based Hines and New York-based Galesi Group is developing 1.7 million sq. ft. of logistics and industrial space on a 150-acre site in Austin in proximity to Samsung’s semiconductor factory.
The partnership with Galesi Group, which owns hundreds of acres of land at Harris Branch in northeast Austin, is allowing Hines to expand its footprint in Austin, Laura Denkler, managing director at Hines, told the Austin Business Journal. She says that the first phase of this 1.7-million-sq.-ft. master-planned business park will include three class-A industrial warehouses totaling 315,000 sq. ft. to accommodate tenants with a need for 30,000 to 150,000 sq. ft. of space.
Additionally, Chicago-based CenterPoint Properties, a national industrial real estate owner/investor, has acquired two class-A buildings located in Innovation Business Park in Hutto, a small community adjacent to North Austin’s tech manufacturing hub. CenterPoint spokesman Mike Noonan says the presence of advanced manufacturing facilities in the vicinity was a major factor that played in the decision to acquire these assets.
These facilities, which include a total of 361,467 sq. ft. of warehouse space on more than 20 acres, are within a short distance of Samsung’s Austin plant and eight miles away from its new chip plant, which is under construction in Taylor, while the Tesla Gigafactory is 25 miles away.
Warehouse space of that quality is in short supply in Hutto, a small city in a growing population area that provides immediate access to SH 130 and proximity to labor and amenities not available elsewhere on the SH 130 corridor, said Rives Nolen, CenterPoint’s senior vice president of investments.
The assets’ design provides the ability to divide the space into leasable units of 70,000 sq. ft., the most desirable size among users here, added CenterPoint Investment Officer Justin Gallagher, who adds that the market is expanding and demand for space here is expected to grow.
Meanwhile, Dallas-based developer Jackson-Shaw is planning to develop a 67-acre business park near the Tesla plant and Austin-Bergstrom International Airport called ATX 130. The project will offer 602,400 sq. ft. of office, warehouse and distribution space, according to the Austin-American Statesman. Chicago-based Molto Properties has also announced plans for Blue Springs Business Park, which will include 600,000 sq. ft. of industrial space in Georgetown, which is just north of Austin.
Phoenix-based James Breeze notes that despite record low vacancies, only 26 million sq. ft. of manufacturing space was completed in the U.S. over the last year, or just six percent of total industrial space delivered, said James Breeze, senior director and global head of industrial and logistics research at commercial real estate services firm CBRE. CBRE recently launched a new global EV services line to meet the growing demand for EVs.
“We have already seen demand for manufacturing space significantly affect rents,” Breeze added, noting that at the end of 2022, the availability rate for manufacturing space averaged only 3.4% and asking rental rates for manufacturing facilities increased by a record 22.7% to $8.39 per sq. ft./per year net.
Overall, rents for both manufacturing and warehouse/distribution space have risen approximately 40 percent since 2018, according to Rodriquez, who said that continued demand for space in the industrial sector, coupled with a slowdown in speculative construction nationally, should allow rents to continue to grow, albeit at a slower pace than over the past few years.
What’s driving investment
Energy instability in Europe sparked by the war in Ukraine and persistent inflation are driving a surge in foreign automakers investing EV facilities in the U.S., according to Matter. A report from Site Selection noted that a recent survey of about 350 member companies of Germany’s mechanical engineering business association, VDMA, found that three-fourths of respondents intend to expand their U.S. business activities, two-thirds will increase their U .S. workforce and 37 percent plan to expand their U.S. production facilities.
Part of Volkswagen’s reason for focusing more on the more stable and predictable U.S. market, for example, is resiliency strategy, according to Rich Thompson, JLL international director of supply chain consulting.
A change in the federal tax code should also boost domestic EV production, as consumers can now only qualify for the $7,500 EV tax credit if the EV is assembled in the U.S., added Rodriquez.
Opportunities for developers
Current EV development activity is just the tip of the iceberg. Rodriquez notes that while manufacturers have stepped up leasing activity, most of them still want to own their own factories, which may provide build-to-suit opportunities for developers. “There are tremendous costs associated with building these facilities, so it typically makes more sense for the facility to be manufacturer-owned,” she said.
Large companies have their own real estate divisions contract directly with construction companies to build factories. Ford Land, Ford Motor Co.’s real estate company, for example, chose Detroit-based general contractor Walbridge to build Ford’s battery and electric vehicle manufacturing campus, called BlueOval City, on nearly six square miles near Stanton, Tenn.
But smaller manufacturers and ancillary suppliers do present BTS opportunities. Matter suggested there are new opportunities for speculative industrial development as well. Real estate services and advisory firm Newmark, for example, reported that demand for manufacturing space in the fourth quarter of 2022 represented nearly 20 percent of all U.S. industrial leasing activity.
Prologis, CenterPoint, Link Logistics and Panattoni are among industrial developers/owners that are leasing facilities to manufacturers, according to Matter. He noted that any modern industrial building can potentially be utilized for advanced manufacturing that flexibility is built into the project.
The primary differences between a manufacturing facility and a warehouse are the size of the office space and energy capacity, Matter said. Factories typically include 10% office space vs. 3% to 5% in logistics facilities and require a minimum of 4000 amps of electricity, while logistics facilities have a capacity of 2,000-3,000 amps.
Building industrial facilities for advanced manufacturing requires a higher initial capital investment than logistics use, according to Matter, but he notes that manufacturing tenants tend to invest millions of dollars in additional infrastructure in the spaces they occupy that adds value for owners. When they leave, things like solar panels, power upgrades, gas tanks, clean rooms and other specialized equipment are often left behind, which adds speed-to-market value for the next tenant that landlords can capitalize on with higher rent.
Site selection basics
The top Sunbelt markets for absorption of manufacturing space are located near ports of entry or distribution hubs with growing populations, including Austin, Jacksonville, Fla., Atlanta, Louisville, Ky. and Phoenix, according to Breeze. Rodriquez added that site selection for EV and EV-related manufacturing facilities has been centered on South Carolina, Texas, Georgia, Ohio, Kentucky and Tennessee.
The main drivers for locating manufacturing in these areas include availability of labor, proximity to major transportation hubs and infrastructure, and financial incentives provided by state and local governments. A business-friendly environment that expedites entitlements and permitting has been one of the most appealing factors for manufacturers because speed-to-market is the top priority in selecting a manufacturing site, according to Matter.
With exponential growth in EV sales anticipated over the next decade, their first- and second-tier suppliers and third-party logistics (3PLs) firms will likely increase their footprints in Southeastern and Midwestern industrial markets in the next two to five years, said Kim. “Many of those companies are leasing, as they don’t have long-term contracts with the manufacturers,” he noted.
The Newmark report noted that auto manufacturers are locating their EV production facilities near existing auto plants and converting combustion engine plants to produce EVs to take advantage of existing supply chains and skilled labor.mTo maximize efficiencies, EV battery manufacturers are putting their facilities in proximity to the EV plants they supply with batteries. LG Energy Solutions, for example, located its $4.4 billion battery factory in Toledo, Ohio, near the Honda plant, Matter said. As a result, there are opportunities for investors to develop facilities to house companies that provide support services to these factories.
Nearshoring boosting development
Opportunities for building manufacturing facilities along the U.S.-Mexico border are also likely to increase with electrification of the auto industry. The Brookings report noted that this transformation provides an opportunity to build an integrated and resilient North American EV supply chain underpinned by the United States-Mexico-Canada Agreement (USMCA).
Morgan Stanley Real Estate Investing already has about 2 million sq. ft in manufacturing developments rising along the border, and TPG Inc., CBRE Investment Management and Clarion Partners have either invested in property along the border or plan to, according to a Bisnow report, which noted that newly constructed space gets snapped up quickly in the area.