18 May Coming Home: US Companies Return Home And Foreign Investors Seek Stability

By Jack Mullen, Founder & Managing Director, Summer Street Advisors

The original version of this article appears on Summer Street Advisors’ blog.

Key Take-Aways:

• With an uncertain future – Investors are seeking the safety and comfort of the US market
• After 30 Years of globalization, the trend is now reversing – the US Heartland is the Big Winner here
• With rising interest rates and instability, it is critically important to evaluate and structure CRE to maximize returns

As COVID-19 turned normalcy on its head two years ago, there was a silver lining I thought could materialize if U.S. manufacturers and political leaders reconsidered the wisdom of outsourcing so much production abroad. Establishing a presence in North American markets to be closer to trading partners was one thing, but did it make sense over the last three decades to depend primarily on one country – and a potential adversary, at that – to supply most necessities for business and everyday life in this country?

There are indications that many companies are indeed re-thinking that approach and are pursuing “re-shoring” or “onshoring” strategies. As of last year, some 1,800 firms intended to re-shore part or all of their business to the U.S. In addition to the worldwide lockdowns that initially fueled supply chain disruptions, China’s current lockdowns of four hundred million people in Shanghai and other cities and its heavy-handed administrative takeover of Hong Kong are further validating those decisions.

While these disruptions had already persuaded many companies to review their outsourcing practices, Russia’s invasion of Ukraine and its destabilizing influence on European energy and food security has virtually ended economic globalization, a movement synonymous with the new world order following the Cold War. The jury is still out as to what extent U.S. companies will come home, but the Biden Administration recently proposed a 10 percent tax credit for expenses related to onshoring a U.S. business that in turn reduces offshore activity. As part of the broader onshoring trend, we are seeing companies expanding on U.S. soil instead of looking overseas.

Here are a few examples:

• Intel is investing more than $40 billion to build four semiconductor plants – two outside of Columbus, Ohio, and two at its campus in Chandler, Arizona – and has shelved plans to expand production in China.
• General Motors is spending about $7 billion to manufacture electric pickup trucks in a converted factory and build a new battery cell plant north of Detroit.
• U.S. Steel is building a new $3 billion steel plant near its Big River Steel plant in Osceola, Arkansas.
• Additionally, although not an American company, Taiwan Semiconductor Manufacturing Co., which controls a quarter of the world’s semiconductor output, is building a $12 billion fabrication plant in Phoenix to be closer to its U.S. customers.

The ripple effect that onshoring and de-globalization will have on the U.S. real estate market cannot be underestimated. These types of investments typically fuel supplier and service expansions to support the new production facilities, which translates into jobs and demand for housing, stores, restaurants, and other services. That will keep driving a robust property investment market that shows no signs of slowing. Despite rising interest rates and inflation, buyers and sellers completed $171 billion in commercial real estate deals in the first quarter of 2022, a year-over-year increase of 56 percent, according to Real Capital Analytics.

What is more, foreign real estate investors continue to view the U.S. as a safe and stable place to do business, a perception that typically becomes more pronounced during and immediately following turbulent times. After staying on the sidelines for most of 2020 and the first half of 2021, cross-border capital sources sunk $69 billion into U.S. commercial real estate during the second half of the year, taking total investment for all of 2021 to a six-year high of $71 billion. I would expect strong foreign investment in U.S. real estate markets continuing given the uncertain situation in Europe and elsewhere.

All this activity comes with a caveat: Along with rising interest rates and inflation, a volatile equities market and the annualized 1.4 percent decline in first quarter GDP have heightened recession fears. If a slump is indeed on the horizon, the Federal Reserve’s current inflation-fighting plans to raise the benchmark federal funds rate beyond its two springtime hikes totaling seventy-five basis points may go too far in stifling demand for goods and services. Ultimately that will reduce the desire of companies to expand on U.S. soil and foreign investors to park capital here, making it critically important to evaluate and structure CRE to generate maximum returns.