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Onshoring: Industrial & Multifamily Markets Improving

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By Tod Snodgrass

The U.S. industrial sector saw a lot of growth during the COVID-19 pandemic, starting in 2020. The growth was driven, in the main, by a surge in warehousing demand, which was fueled by e-commerce. Fast forward to now, stakeholders seeking new avenues for growth are shifting their focus more to the manufacturing sector as a potential source of new demand.

Commercial Real Estate Investors (CREs), as well as commercial real estate brokers/realtors, commercial lenders, etc. are seeing an increase in this vital area of the US economy.

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Recent data shows that U.S. manufacturers are increasingly moving production and operations closer to U.S. consumer markets. Across the industrial sector, onshoring and reshoring have grown quite a bit, post-pandemic, as companies adapt their warehousing and manufacturing strategies. The motivation is to reduce or eliminate supply chain vulnerabilities that were exposed by the COVID pandemic. Doing so should help to create a more resilient, and long-term industrial manufacturing process. At the same time, onshoring can help build added resilience into supply chains, reducing our dependence on foreign sources and mitigating geopolitical risks. Ongoing research by the Reshoring Institute indicates the U.S. lost five million manufacturing jobs between 2000 and 2014, much of it to China, in search of cost savings.

At first, the expense-reduction approach drove higher profitability, however pandemic-related supply disruptions underscored limitations to that approach, leaving many companies exposed. Not all industries and/or companies will return to U.S. shores, many will split their manufacturing between different geographic locations. After all, lower-cost goods can still be found overseas, but the current shift to U.S. onshoring signifies a gradual, strategic transition that appears to be gathering momentum over time.

Factoid: With its current momentum, onshoring will increase the size of the current U.S. manufacturing base by more than 10% over the next decade (adding roughly 500 million square feet), according to a report from Commercial Real Estate Development Association.

A. Impact on Industrial Real Estate

1. New or refurbished facilities. With the predicted explosive growth in AI-related technologies over the next decade, look for more advanced factories which can support high-tech production. This will require either building new structures which will appeal to advanced manufacturing owners/tenants and/or modernizing currently outdated facilities.

2. Increased demand for logistics. While the demand for manufacturing facilities is expected to be significant, the ancillary demand for distribution and logistics support that comes with all those new American factories, should positively impact the US economy as well.

3. New industrial hubs could see a return of the “factory town”. Older and/or large cities are not where most of the new facilities will be found in the future, according to the latest research. “Legacy” cities such as Chicago, New York, Detroit and among others, are not favored due to high taxes, excessive regulations, poor municipal services, outdated transportation infrastructure, high crime, lack of available modern factories, etc.

4. Downstream beneficiaries. As a result, many if not most brand-new factories will be found in rural and secondary markets. Shortly thereafter, vendors, suppliers and logistics facilities can be expected to spring up in those same rural/secondary areas to support the new facilities. All these factors taken together will see many new job opportunities come to the fore, thereby fueling growth in the respective local economies due to the “downstream” effects of all the new factory growth.

Factoid: According to the National Association of Manufacturers, for every $1.00 earned in direct labor income in the manufacturing sector, $3.99 in total labor income earned is added to the overall U.S. economy. Put another way, for every one worker in manufacturing, 4.8 workers are added in the overall U.S. economy. These figures represent one of the largest sectoral multipliers in the economy.

B. Increased demand for housing

The onshoring trend is not only increasing the demand for industrial space, but also positively impacting multifamily real estate where manufacturing is returning. For example, the construction of a new (or refurbishment of an old) factory typically creates a need for more multifamily rental housing, 1-4 housing as well as office space and light industrial properties.

CRE investors and real estate service professionals would be wise to keep a close eye on which states and local markets will benefit most from the coming boom that will eventually result from all these positive onshoring trends.

1. New construction. Onshoring means new workers. This creates an obvious need for new housing, i.e. multifamily to accommodate the growing population of needed workers in those manufacturing hubs.

2. Supplier businesses (to the newly “onshored” companies). Onshoring almost always attracts vendors, suppliers and other businesses that support manufacturing. This in turn can lead to the development of more real estate space, including single family residences for managers and executives of those onshoring companies.

3. Onshoring

a. Increases the demand for and development of more logistics locations, distribution facilities and data centers.

b. Can lead to improvements in infrastructure, such as updating the grid to support the utility needs (power, water, gas, sewage, roads) of those new factories, development of new shopping centers, strip malls, small industrial parks.

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C. Summary

While the Commercial Real Estate sector no doubt faces challenges due to economic and political uncertainties, pockets of demand/supply imbalances, and a potentially higher interest rate environment, the growing onshoring trend represents substantial opportunities for those who seize the moment. The assumption of course is that all these new factories will be competitive with already-in-place, overseas production facilities. The good news is that several U.S. regional markets are now showing that certain strategic U.S. government policies, as well as local (state, county, city) incentives and corporate initiatives are stimulating economic growth as well as job creation and viable real estate development. Those successful markets signal a potentially robust future for CRE investments, rents and values.

References: Forbes, U.S. Dept. of Commerce, National Association of Manufacturers, U.S. Labor Dept., Reshoring Institute, Commercial Real Estate Development Association

Tod Snodgrass
Creative Transaction Funding LLC
[email protected]

Short-Term Equity Financing

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By Tod Snodgrass

Due to rising interest rates, conventional funding from banks, hard money sources, etc. is becoming increasingly problematic for many Real Estate Investor Professionals (REI Pros). For example, say a REI Pro needs capital to plug a temporary financial hole—say $50,00 or $100,000 or $250,000 for a very short period of time, say just one day? Virtually no lender will provide funds for such a short period of time.

This is where a Short-Term Equity Financing (STEF) source can come in handy. STEF’s are not brokers; they are direct equity funders using their own private capital. They write the checks. The buck stops with them when it comes to final decision-making.

STEFs do not provide loans. Instead, a temporary Joint Venture Agreement (JVA) is created—a form of equity–with the REI Pro. The STEFs profit normally comes from a share of the REI Pro’s profit. Typical markup is 50% of the amount funded. If the STEF provides $100,000, they receive $150,000 in return. Obviously, all the paperwork involved has to be carefully crafted to offer maximum protection to all parties, with appropriate security and collateral issues spoken to successfully, which is why STEFs normally require that doc prep, title and escrow functions all be assigned to service vendors chosen by the STEF.

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4 STEF Case Studies

CASE STUDY NO. 1

Situation: A homeowner has fallen way behind with his monthly mortgage payments due to the fact that he lost his job. The bank recently sent him a NOD (Notice of Default) and the property is now in pre-foreclosure status. With insufficient time to fix up the place and subsequently sell it for top dollar, the homeowner has come to realize that he needs to prepare to move away from the residence, sooner rather than later. He reaches out to a local real estate broker who in turn puts him in contact with a cash buyer investor who is interested in purchasing the property—at a discounted price—via a double close (involving two separate escrows).

Problem: In addition to the overdue first position mortgage on the property, it is also encumbered with several liens: mechanics, HOA, property tax, as well as a lawsuit, including a lis pendens filing. The seller has no money to clear up the title, so it remains clouded, and the property remains unsold. Due to the high-risk factors involved, everyone (including the cash buyer) is reluctant to front the money to pay off the liens beforehand. The homeowner is stuck.

Solution: Seeking a way out of his client’s deteriorating financial situation, the broker reaches out to a Short-Term Equity Financing source for help with paying off the liens which created the clouded title logjam in the first place. Once all the pieces of the financial puzzle are properly in place (agreements and contracts signed, proper escrow instructions prepared, all monies needed for the deal are sent into both escrows), both closings can occur pretty quickly.

Result: The property owner came out OK via a cash-for-keys/deed-in-lieu arrangement with the cash buyer; the buyer got the property at a good discount from FMV; the STEF was amply rewarded for its involvement; and last but not least, the broker earned a 5% referral fee from the STEF (based on the amount that the STEF funded) for their time, trouble and expertise.

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CASE STUDY NO. 2

Situation: A General Contractor Investor (GCI) owns two acres of prime residential real estate, free and clear, with no loans or liens against the property. The land had already been successfully subdivided, entitlements are all in place, architectural drawings and plans are 100% complete for all the SFRs. Further, the GCI has already arranged a construction loan with a major bank for all the new houses, to be built one-after-another, in a series. The only thing left to do, prior to starting work, is to pay for the permits on the first few houses.

Problem: The wife of the GCI recently filed for divorce, tying up all the CGI’s assets, including the funds he had previously put aside to pay for the permits.

Solution: A STEF was brought in to provide funds for the permits. The STEF was provided with collateral via liens against the lots the CGI owned free and clear. Based on that, the STEF fronted the money for the permits, which had already been previously approved. By prearrangement, the bank providing the construction loan had agreed to “overfund” the construction loan in order to provide payback to the STEF for the funding they provided + the STEF’s markup.

Result: That same day, the loan got funded and the permits were issued. Construction soon got underway. It all turned out OK at the end for all parties.

CASE STUDY NO. 3

Situation: A property was part of an estate. The owner died and the property went into Probate. While the property had a lot of equity in it, there was still an outstanding first mortgage with a modest amount still due, which the court ruled in this case had to be paid off completely before Probate could close. Once probate closed, then the four beneficiaries could each receive their respective six-figure proceeds.

Problem: To say that the four heirs to the estate did not get along well would be an understatement. There was apparently long-standing bad blood between several different family members. The result is that, because of a total lack of trust, none of them could or would agree to pay off the amount due on the mortgage. It was a financial standoff.

Solution: A STEF was referred into the situation by an attorney. The STEF provided sufficient capital to pay off the one remaining encumbrance: the first loan, so the property could be sold a ready buyer.

Result: Probate was able to close; the property sold; the heirs got their money and STEF was paid off for its investment + standard markup. All parties walked away with a smile on their respective faces.

CASE STUDY NO. 4

Situation: A successful REI Pro owned several commercial and industrial properties free and clear. He recently identified an investment property he wanted to buy from a distressed seller. The REI Pro calculated that he could turn right around and immediately sell the property for a handsome profit, since it came with an extraordinary amount of equity. The REI Pro had the property under contract. Further, the REI Pro had already lined up a cash buyer to purchase the property. The buy and sell would only take one day to successfully accomplish.

Problem: The REI Pro, at that time, was “asset rich and cash poor”. He had no ready cash to use to buy the investment property he wanted to immediately flip. To further complicate things, he had recently defaulted on a bank loan, which had caused his FICO score to plummet. Due to the hit on his credit score, no banks in the area were willing to loan him the money he needed to buy the equity-rich property he had his eye on.

Solution: A STEF was brought into the picture who fronted the purchase price, once the REI Pro pledged several properties he owned in order to cross-collateralize the deal.

Result: It all wrapped up to everyone’s satisfaction.

NOW AVAILABLE:

A. We currently offer two different funding programs for professional real estate investors: Short-Term Equity Financing & Down Payment Assistance Funding.

1. We help make deals happen that might not otherwise close, absent our funding.

2. We are happy to pay you a 5% referral fee, based on the amount we fund. For example, if you send us a lead and we fund $100,000, we send you a check for $5,000 at closing.

B. Short-Term Equity Financing: As described above.

C. Down Payment Assistance Funding Program. For more information, see https://creativetransactionfunding.com

1. Are you a Real Estate Investor Pro (REI Pro) who has a property you want to buy, with a 70% LTV or better, but you lack some of the Down Payment (DP) money needed to close the deal? You need say, 25% DP, but can only come up with 10% and need 15% more (DP money?

2. The good news is if your deal meets our standard criteria (70% LTV or better = 30% or more equity in the deal, etc.), CTF can provide the missing 15% in DP funding. By not having to put out all your own capital into DPs–especially if you are low on cash–you’ll be able to do more deals. With your DP source already in place, it will shorten your time for getting positive confirmation from your primary lender, and for getting more deals successfully closed.

D. If you would like to receive free information about our funding programs, please send an email to: [email protected], with the following three lines of (your) info:

1. Full Name
2. Phone number
3. Email address

Any questions, please advise.

Sincerely,

Tod Snodgrass
President
Creative Transaction Funding LLC
Providing Down Payment Assistance & Short-Term Equity Financing to investors, nationwide.
[email protected]

Learn more about Tod Snodgrass, President of Creative Transaction Funding LLC, visit https://creativetransactionfunding.com

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