June 19, 2024
European manufacturers are coming home.
Forget lowest landed cost. Faced with geopolitical turbulence, rising pressure to do business more sustainably, volatile energy prices and extreme weather — to cite just a few of the top-of-mind risk factors — many firms are looking now for the lowest landed risk.
Bert Hesselink, group client relationship director for CTP, is observing this very pattern. As a developer and manager of industrial and logistics parks, CTP has a portfolio of 11.8 million square metres (127 million square feet) of leasable space in 10 European markets. The majority of clients that Hesselink speaks to use derisking as an overriding argument for why they are looking for space or why they are looking to optimise their supply chains.
“Cost is less important now,” agrees Rosie Hunt, a London-based real estate research analyst for German asset management company DWS Group. “The focus is more on reliability and efficiency — and proximity.”
Jaromir Cernik, who leads the Asia office for CTP says the model where companies in the West produced in China and then shipped to Europe is changing. “Most large companies ask their suppliers to follow [them],” he says. “Every week we probably have some requests from companies for industrial buildings in Europe.”
And it is not only local companies that are coming back. Asian companies are also being drawn to Europe, either because key clients have asked them to come over or because they are looking to grow their European Union revenue before protectionist drawbridges are raised any further.
This does not mean, however, that any old space in a European time zone will do.
“Until five or 10 years ago, big was beautiful — centralisation was the big topic,” says Theo Soeters, the Amsterdam-based head of fund management for Edmond de Rothschild Real Estate Investment Management. “But centralisation has its limits … in some cases, you also see a trend where companies prefer again to work through smaller local hubs. Vacancy is virtually zero in more urban locations.”
How green is my industrial park?
The enthusiasm that office tenants have had for green space is reportedly beginning to infect logistics and manufacturing tenants too. “It’s taken longer for that to feed into the logistics sector from what we’re seeing, but it’s definitely now moving that way,” says Hunt.
“Occupiers — particularly industry leaders in their respective markets — are increasingly discerning of an asset’s ESG credentials, largely because they’re under similar pressure to that of investors to decarbonise their business operations,” says Charles Allen, head of European real estate at Fiera Capital. “[And] production and distribution facilities are a critical part of that framework.
“This represents a huge opportunity for investors [to] target EPC A+, BREEAM ‘Outstanding’ and net-zero carbon construction to attract best-in-class tenants on a relocation or expansion drive.”
Nearshoring offers many opportunities to go green. Firstly, it’s an easy way to cut down on transportation. “Lowering travel distances is essential towards reaching ESG targets and meeting net- zero goals through reducing carbon emissions,” says Hunt.
Secondly, it’s a chance to find a location that allows the company to use more sustainable energy, either by plugging into a green grid or investing in rooftop solar panels, Hunt and other analysts said.
“If you can tap into locally produced green energy through which you can then decarbonise your supply chain, that is increasingly interesting for companies,” says Hesselink, which is why CTP is investing in photovoltaic panels on the roofs of their warehouses.
The falling price of solar power is also beginning to change company thinking, particularly for those firms who would always place access to sufficient energy sources as their primary location selection criteria. “Solar panels have become very cheap. Per kilowatt- hour, it’s become a very cheap source of energy, and is delivering good returns,” Soeters explains.
However, adds Hesselink, the advantages are market specific — not because of the amount of available sunlight, but because of regulation. Landlords can face difficulties if the building is producing too much power for its needs and the local utility will not allow the company to sell the electricity to the grid.
Go (not too far) west
Geographically, eastern Europe seems to be the most popular choice for nearshoring, drawn by relatively lower rents than western Europe and convenient access to both eastern and western markets.
One recent study by Inverto, a supply-chain management consultancy, found that 57 percent of European companies say they already source from eastern Europe, and another 32 percent say they intend to set up shop there in the next few years. Hunt says there is ample evidence that this is already happening. “This is evident not just through increased real estate demand but also through an increase in manufacturing jobs and foreign direct investment into manufacturing,” he says.
Within eastern Europe, the Czech Republic, Poland and Hungary top most location lists, but a number of other eastern European countries are also now getting a second glance. A 2023 study by Maersk found that Romania topped many lists of European companies looking for a location to nearshore. In particular, Oradea, a city located on Romania’s northwest border with Hungary, is being seen as an important production hub. Among its attractive qualities, European executives told Maersk, are the city’s strong manufacturing base, skilled workforce and labour costs.
But Simon Durkin, global head of real estate research and analytics at BlackRock in London, argues that companies will pursue a variety of different nearshoring strategies. “We expect that the rise of nearshoring will play out in a similar way as ecommerce across Europe, whereby demand comes from and to different places, at different paces and to differing extents,” he says.
DWS’s Hunt also sees a variety of winners beyond eastern Europe, pointing to the Netherlands, given its access to the port of Rotterdam and major manufacturing hubs, such as Germany with its traditional strength in automobile production.
Durkin and Hunt even see opportunities in the United Kingdom.
“Even though the United Kingdom would not typically be deemed a traditional play for a multinational company when choosing where to relocate, we have seen demand for space driven by increased manufacturing,” Durkin says, citing a Savills finding that manufacturing accounted for 29 percent of logistics market deals in the United Kingdom in 2023.
“I think you will find some companies looking to locate closer to the British consumer, especially with the increased costs that come as a result of Brexit,” Hunt says.
Serbia is another market of interest, despite being outside the European Union, according to Cernik, who cites the lack of red tape and the number of talented young people in the labour pool. “Generally, we see increased investment activity in Slovakia, Hungary, Romania and Serbia. Besides China, we work a lot now with Korean investors who are making big commitments towards manufacturing in Eastern Europe,” he says.
Unsurprisingly, investors are less open to markets where there is some perception of political risk, according to Hunt. “Geopolitical factors are certainly a concern, and we’ve seen liquidity and pricing take a real hit in markets such as Hungary, where there is increased geopolitical risk.”
“You can see politics is also having an influence on location decisions,” says Hesselink, pointing to Chinese companies’ preference for Hungary and increasingly for Slovakia, while American, English and German companies lean towards Poland.
Cernik says most Chinese companies heading into Europe are not so much redeploying capital out of China as expanding into new markets. “They’re not transferring completely out of China, they’re just expanding the capacity elsewhere,” he explains. “They are definitely exploring ways how to produce locally most efficiently with local resources.”
Two Asian industries seem to be especially active just now: silicon chips and electric cars, analysts say. Taiwanese chipmakers, for example, are looking at building a research centre in Prague, hoping to take advantage of proximity to the Czech capital’s technical universities.
Space to build electric vehicles also seems to be in demand. Now that all-electric vehicles and plug-in hybrids represent over a third of the new car market in China, Chinese electric car manufacturers are looking for opportunities for growth beyond the cut throat Chinese automotive market.
Chinese carmakers are looking mostly at Hungary now, partly because the relationship between the two governments is generally cordial, making it easier for them to get established in the country, according to Cernik.
Hunt notes that Chinese battery producer CATL is investing in a battery plant in Hungary. “We’re seeing similar movements from other market players seeking to reduce dependence on Asian production,” she adds.
Other Asian companies are only moving somewhat nearer to Europe. For instance, some Chinese manufacturers are now opening facilities in India, attracted by a skilled workforce and Indian government incentives, according to Durkin.
What’s next?
At the moment, global manufacturing’s westward movement seems likely to continue.
As many as two-thirds of European companies say they are either planning or already beginning to require their supply chains to reduce the risk of disruption, according to the survey by Inverto.
But Durkin says it is not clear how much space all these firms will eventually need. “For many companies, questions are likely to be raised around the feasibility of higher costs, namely in terms of labour and materials, when shifting their operations,” he says. “Some business models simply may not be robust enough to take on the additional costs associated with manufacturing in Europe.”
Moving itself is also a complex task, he adds, particularly when the business is trying to keep production running smoothly during the transition.
Allen shares similar views and urges caution. “The reality is that it isn’t easy to unmoor from global supply chains, and if nearshoring does occur, this won’t be instantaneous,” he says.
“So far, evidence is largely anecdotal and its impact is limited. But in the medium to long term, particularly if global conflict intensifies, we expect to see some reconfiguration of supply chains as international multiples reprioritise their key markets, and occupiers look to protect future income streams. Sustainability will also be an underlying driver.
Nearshoring supports the decarbonisation of fleets through shorter travel times, but it also enables greater electrification.”
Advances in automotive technology also seem likely to translate into smaller footprint demands for manufacturers. Electric car drivetrains have roughly 20 moving parts compared with the 200-plus parts of a conventional drivetrain, a difference that might reduce the overall space needs of EV manufacturers’ ecosystems.
But some of the space saved on the front end of the EV manufacturing ecosystem may be needed on the back. One electric automotive analyst warns that battery recycling facilities are likely to be very power, water and space intensive. “It’s complex real estate too — it’s not just warehousing,” warns Jean-François Tremblay, CEO of Mouve & Company in Montreal, Canada.
One possibility that almost no-one is betting on is an outbreak of saner politics. Only 11 percent of executives believe that politics alone could resolve global tensions, according to the Inverto survey — which suggests an ongoing derisking programme of supply chains.
“Logistics networks have undergone a sort of natural compression anyway, as one-day delivery and the growth of ecommerce requires greater proximity to local markets,” points out Allen.
“But less reliance on foreign operations is accelerating this trend.”