Nearshoring drives demand in US-Mexico industrial real estate and infrastructure markets

1 July 2023

Industries such as semiconductors are leveraging US policy incentives and lower costs in Mexico to regionalise North American supply chains, creating potential opportunities for private investors.

Shockwaves from the COVID-19 pandemic and heightened geopolitical uncertainty exposed the hidden fragility of supply chains across the world.

Facing labour shortages, inflationary pressures, constricted access to raw materials, congested global supply chains and increased exposure to tariffs, companies have come to realise that manufacturing products a world away from the end consumer can create additional obstacles and make operations more costly and less predictable. In industries ranging from semiconductors to automotive and consumer products, some businesses are rethinking their approach to manufacturing and considering whether production of certain products needs to be closer to their destination markets.    

In Thomson Reuters’ Global Trade Report 2022, which surveyed more than 200 global trade professionals, 78 per cent of respondents agreed that global multinationals should diversify supply chains by expanding their local sourcing or nearshoring their manufacturing.1

The shift to nearshoring has seen some North American corporates consider moving aspects of their manufacturing to Mexico, the US, and Canada. Bolstered by the United States-Mexico-Canada Agreement (USMCA), they are seeking greater control over production, facilities, labour costs, transport and energy strategy. Mexico is attractive because of its proximity to the US and Canadian markets, its relatively young and skilled workforce, wage cost advantages compared with some Asian manufacturing hubs, broad free trade agreements and lower transport costs.

The expansion of manufacturing in Mexico is having knock-on effects in the US Sun Belt, where states such as Texas, Arizona and New Mexico are incentivising companies to set up manufacturing for select processes that require highly skilled labour and interactions with broad vendor ecosystems. These states are leveraging positive policy developments, tax credits, worker skill training programmes and business-friendly initiatives to encourage companies to onshore certain key aspects of their supply chains. 

The transition from manufacturing certain goods in distant locations to closer sites, or generally diversifying supply chains, represents a significant shift for many corporates. To illustrate the implications and opportunities around this shift, we examine the current supply and demand dynamics in Mexican and Sun Belt industrial real estate, the state of transportation and logistics in the region, and how one key industry – semiconductors – is making use of production on both sides of the US-Mexico border to increase oversight, improve supply chain security and reduce overall costs. 

Demand growing for industrial space in Mexico, US border states

As more corporates opt to diversify a portion of their manufacturing away from East Asia and closer to North American consumers, demand for industrial real estate in Mexico and the southern US appears to be accelerating. Within the next five to ten years, we expect to see an interconnected web of manufacturing, assembly, warehouse and logistics facilities emerge as corporates seek to optimise their supply chains. 

Real estate investors, developers and financiers are beginning to grasp the potential for nearshoring and onshoring, but many are not yet fully aware of the underlying supply and demand fundamentals and opportunities inherent in the shift towards regionalisation. 

“We expect that the impact of nearshoring – in North America, Europe and elsewhere – will mean a reduction in the overall shipment volumes out of Asia compared to what would otherwise have been expected over the course of the next decade,”2 says Eric Wurtzebach, Head of the Americas - Real Estate at Macquarie Asset Management.

Nearshoring is going to be a much larger driver of industrial real estate fundamentals in the Mexico-US border region than many people are assuming today.”

Eric Wurtzebach
Head of the Americas - Real Estate
Macquarie Asset Management

US policy developments are also driving real estate demand. The Inflation Reduction Act (IRA) incentivises electric vehicle (EV) production not only in the US, but also in Mexico, to improve affordability for US consumers. “The IRA allows tax credits even if the car is manufactured in Mexico, because it is part of the USMCA trading bloc,” says Ernesto González, Division Director – Real Assets Mexico, Macquarie Asset Management. Tesla, for example, is developing a new gigafactory worth more than $US5 billion in the Mexican border state of Nuevo León,3 while Ford is increasing production of the Mustang Mach-E at its Cuautitlán plant.4 Also driving industrial real estate demand is the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022, which encourages semiconductor production activity on both sides of the border. 

There may be significant potential to build and invest in industrial space; across the US, only about 30 per cent of industrial facilities meet modern efficiency standards, and many facilities still aren’t compliant with the ESG (environmental, social and governance) parameters required by large institutional investors. In new and upgraded facilities in Mexico, developers factor in energy efficient features that multinational corporations, as well as institutional investors, have come to expect. “We are seeing the vast majority of global institutional real estate investors demand sustainable buildings,” said Simon Hanna, Chief Executive Officer, FIBRA Macquarie México. “Companies are looking to move out of older buildings into modern facilities that have a strong ESG profile, are LEED certified and have positive impacts to the community and investors.” 

Companies are actively seeking warehouse and logistics facilities for “safety stocking” in Mexico and the US to avoid supply shocks, according to Hanna. “Many learned the hard way during the COVID-19 pandemic that lean, just-in-time manufacturing left them exposed.” 

It is likely to be some time before the supply of industrial real estate properties catches up with demand. If this is the case, the shift towards nearshoring and onshoring should generate opportunities for real estate investors in the medium to long term. 

Transport infrastructure advances as nearby manufacturing grows

Mexico’s proximity to the US not only helps to reduce transportation and logistics costs, it also offers the chance to materially shorten delivery times. In the last 10 years, both the US and Mexico have been modernising and expanding transportation infrastructure to support cross-border trade. As more corporates advance their nearshoring or onshoring manufacturing strategies, we expect to see the continued development of transportation systems and supply chain infrastructure.

In March 2023, the US government's Surface Transportation Board approved the $US31 billion merger of Canadian Pacific Railway Limited (CP) and Kansas City Southern Railway Company (KCS).5 The merger – which creates North America’s first transcontinental railroad linking Mexico, the US and Canada – is expected to streamline the delivery of products manufactured in Mexico to target markets to the north. 

The Mexican government has continued to invest in transport and logistics infrastructure within its borders to boost economic development and expedite the transport of goods and resources. This year, Mexico added five highway private-public partnership projects to its five-year infrastructure program,6 and last year opened a highway connecting Badiraguato with Guadalupe y Calvo, providing a new link between Sinaloa State and Chihuahua State.7 These build on infrastructure projects completed in the last decade, including widening key highways in the northern border state of Coahuila, constructing multiple north-south bridges and expanding the Mazatlan-Matamoros trade corridor, a superhighway that connects the country’s east and west coasts.8

Transportation executives anticipate that 20 per cent of Asia-originating freight will move to closer-proximity markets by 2025, doubling to 40 per cent by 2030, according to a Deloitte survey.9 This movement of supply chains to locations closer to end-consumer markets in North America is expected to have an impact on businesses within the transportation sector.

As corporates relocate some operations to Mexico and the US, regional transportation infrastructure must evolve to meet ESG goals for their supply chains. Beyond risk avoidance and compliance, organisations are seeking ways to create long-term value by embedding sustainability across their entire operations. More than 90 per cent of an organisation's greenhouse gas emissions, and 50 per cent to 70 per cent of operating costs, are attributable to supply chains.10

Corporates striving to meet net zero targets will expect transport routes to be designed and constructed with the aim of mitigating environmental impacts. In 2022, Mexico also pledged to double green energy capacity by 2030,11 potentially creating attractive opportunities for private sector investors.

“We expect that private capital will be essential in the energy sector, as current levels of public funding are not sufficient to deliver the generation required to meet demand for sustainable and environmentally conscious energy solutions for the transportation industry,” comments Andrea Isoard, Vice President in Macquarie Asset Management’s Real Assets division in Mexico. Macquarie Asset Management is currently evaluating a range of renewable energy investment opportunities across the country.  

Re-engineering the semiconductor supply chain

The semiconductor industry is a case in point of a critical sector using onshoring and nearshoring to gain supply chain security. We saw in the COVID-19 pandemic that offshoring much of the world’s semiconductor manufacturing to Asia ultimately put supply chains at risk, prompting both manufacturers and US policymakers to look to both onshoring and nearshoring as a long-term solution. 

In recent decades, manufacturers allowed production to go to low-cost regions like Asia in an effort to reduce labour costs, which led to a concentration of supply. It wasn’t really globalisation, it was a concentration, with production capability moving into specific regions.”

John Doering
Senior Vice President,
Specialised and Asset Finance
Commodities and Global Markets                   

With chip demand set to continue rising due to megatrends that include remote working, the growth of artificial intelligence (AI) and soaring demand for EVs, semiconductor manufacturers are deconcentrating supply chains and opening manufacturing facilities in the US and Mexico. Their goal is to move production closer to end consumers, reduce the possibility of future disruption and better address supply/demand imbalances. 

The CHIPS and Science Act represents a significant step forward in expanding and rebuilding semiconductor manufacturing in the US. The Act allocates $US52.7 billion to help strengthen and bolster research, development, manufacturing, and workforce development in the industry. “The US federal government is also looking for state and local governments, along with the private sector, to invest, so the total level of investment is likely to far exceed $US52.7 billion,” says Doering.

This unprecedented level of government support is providing incentives for major chip makers to invest in new manufacturing facilities in the US. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip manufacturer, is on track to begin producing microchips by 2024 in its Arizona factory, with construction of a second factory also underway.12 Tim Cook, CEO of Apple, recently confirmed that all Apple products will use TSMC chips made in Arizona.13 Micron Technology, Intel, Samsung, GlobalFoundries, and Texas Instruments have also announced plans to build semiconductor manufacturing facilities in the US within the next decade.14

Government grants are not designed to cover 100 per cent of the build cost, however. “There's an expectation in the US that the federal government will provide 25 per cent, state and local governments should provide 25 per cent, and then the private sector should come in with the other 50 per cent that's needed to fund these projects,” comments Don Trent, Senior Managing Director, in the Semiconductor and Technology team within Commodities and Global Markets. “We've had a lot of discussions with our clients in terms of how we help secure funds, as well as provide that supplementary funding that they're going to need from the private sector.”

Macquarie also provides semiconductor businesses with help managing and investing their cash for better returns so that they address the long build times for new facilities.

US policymakers envision utilising Mexico as part of a broad North American ecosystem that will include manufacturing, testing, packaging and assembly.10 The goal is for companies manufacturing in the US Sun Belt to use Mexico for supportive functions in the supply chain, some of which may be labour-intensive. Firms such as Intel, Skyworks Solutions, Texas Instruments and Infineon Technology are already in Mexico and continue to build capacity in the microprocessor R&D, testing and manufacturing spaces.

Those advocating onshoring and nearshoring in this industry must also consider the available energy and infrastructure. Manufacturing requires energy, transportation and resources; it also creates waste. It is water intensive, potentially causing problems for the thriving chip manufacturing industry in Arizona, one of the US’ driest states. “Providing the inputs and mitigating the outputs requires sophisticated infrastructure, and that's not easy to replicate,” explains Doering.


The future of nearshoring and supply chain diversification

Nearshoring and onshoring are going to have an impact on the world economy and will lead to a shift in trade patterns, but this will not lead to a complete abandonment of globalisation and a retreat to regionalisation. “We call it trade diversion. Global trade is being rerouted,” David Doyle, Managing Director, Head of Economics, Commodities and Global Markets comments. “Things will look slightly different than they do today in the sense that you will have more regional, bifurcated trade. The US is still going to have substantial trade with Asia in five or ten years' time, it's just that there will be certain areas that will continue to attract greater attention from policymakers.”  

By 2035, 45 per cent of supply chains are expected to be mostly autonomous, utilising automation such as robots in warehouses and stores, driverless forklifts and trucks, delivery drones and fully automated planning, according to a 2022 EY report15 based on a survey of 200 senior-level supply chain executives. The growth of automation may well reduce the necessity to offshore production to countries that offer lower labour costs, but a human skills base will still be required for onshore and nearshore manufacturing, particularly in the areas of technology.

“We're really thinking about this as a multi-decade type change in the way that the world does business from a manufacturing and trade perspective,” says Hanna. “These sorts of changes don't happen overnight, or even in the space of a year. We see them as long-term changes over time and expect them to drive increased investment and demand in areas such as industrial real estate in Mexico over many years.”

  2. Reshoring Initiative® 2022 Data Report