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The Loan Ranger

Election Impact – Who Wins If Trump Delivers On Manufacturing In Ohio?

One of the foundations of Donald Trump’s presidential campaign was the pledge of more
manufacturing jobs in the U.S., a factor that helped him win swing states like the former manufacturing stronghold of Ohio.
Of course, we don’t know if U.S. manufacturing will rise as promised, but if it does, industrial real estate is
highly likely to be a beneficiary.
We homed in on several Cleveland-area industrial properties, including factories and warehouses, to see
which manufacturers and which owners, lenders and tenants could benefit from a possible upturn in U.S.
manufacturing. Below that, you’ll see an analysis of the data and some reasons for caution.
We’ve included heavy industrial properties – manufacturing facilities that will be most directly affected by
any changes in the manufacturing industry – as well as light industrial properties expected to be slightly
more indirectly affected by manufacturing trends. These categories are closely interlinked, in part because
manufacturers need warehouses to store the goods they produce in their factories, helping to bump up
warehouse demand. (See the properties mapped out below.)

 

Heavy Industrial

 

  • Northern Stamping welding plant at 7750 Hub Parkway in Valley View, Ohio, manufactures complex
    structural components and welded assemblies for the global automotive market.
  • AeroControlex facility at 4223 Monticello Blvd. in South Euclid, Ohio, fabricates, assembles and tests
    hydraulic, fuel, lubrication and coolant pumps for the aerospace industry.
  • Roscoe Medical at 6753 Engle Rd. in Middleburg Heights, Ohio, manufactures medical equipment.
  • Cleveland Wire Cloth, which has been in business since 1914, manufactures industrial wire cloth at 3573 E.
    78th St. in Cleveland.

Light Industrial

 

Below are several light industrial properties in the Cleveland area that were refinanced this year, with the
results broken down by lenders, owners and tenants.

Lenders

 

We examined two big industrial loans in the Cleveland area that were issued this year, and found 10
properties, most of which were cross-collateralized in a single loan. These are the lenders:

  • Deutsche Bank AG NY
    The New York branch of Deutsche Bank issued a syndicated $78 million loan on March 29 for multiple
    industrial properties in the Cleveland suburbs Solon, Strongsville and Highland Heights.
  • Voya Retirement Insurance and Annuity
    In February, Voya Retirement issued a $63 million loan for self-storage facilities (and a small storefront) In
    totaling 18,180 square feet at 16505 Lorain Ave. in Cleveland. Voya was originally a spinoff of Dutch
    bank ING.

Owners

 

  • Dalfen America Corp. and NorthStar Realty Finance Corp.
    The industrial properties in the Cleveland suburbs that are cross-collateralized in the Deutsche Bank
    loan are owned by a joint venture of Dalfen, a Quebec-based real estate investment manager, and
    NorthStar Realty Finance, a New York-based real estate investment trust. The Cleveland properties
    were part of a 23-property, 2 million-square-foot light industrial portfolio in Ohio the joint venture
    acquired this year, in the Columbus, Cincinnati and Cleveland markets.
    Dalfen specializes in the acquisition, development and operation of industrial properties in the U.S. and
    Canada, while the commercial real estate acquisitions of NorthStar Realty (whose operations and asset
    management business are run by NorthStar Asset Management Group) primarily constitute health care
    properties, hotels and manufactured housing communities. In Q3 NorthStar sold off its health care real
    estate portfolio to Beijing-based insurance and financial service provider Taikang Insurance Group.

Select Industrial Properties

Cleveland Area, Ohio

 

  • Amerco
    The DIY moving and storage operator Amerco, the parent company of U-Haul International, is the owner
    of the self-storage facilities and moving products store at 16505 Lorain Ave. in Cleveland, about three
    miles from Cleveland Hopkins International Airport.

Tenants

 

Businesses that are tenants of these industrial properties include:

 

  • Home Depot is the sole tenant of a 219,574-square-foot distribution center at 30301 Carter St. in the
    Cleveland suburb of Solon. Its lease expires April 2018.
  • Europa Sports Products, a Charlotte, North Carolina-based distributor of nutritional and sports
    supplements, and Strongsville-based air filtration systems manufacturer HMI Industries are tenants in
    13675 Darice Parkway and 13325 Darice Parkway in the Cleveland suburb of Strongsville. The two
    properties total 179,690 square feet.
  • The gaming company Intralot, based in the Greek capital of Athens, takes up over half the 85,912
    square feet of the warehouse at 13500 Darice Parkway in Strongsville. Its lease expires in October
    2019.
  • Leading Connecticut-based tool provider Stanley Black & Decker takes up 80% of the 75,167 square
    feet in the industrial property at Cleveland’s 5335 Avion Park Drive. It has about one year left on its
    lease, which expires in December 2017.
  • Alltech Medical Systems America, a provider of medical imaging products headquartered in Chengdu,
    China, has a lease that goes until May 2022 for just under half the space in the 108,700-square-foot
    property at 28900 Fountain Parkway in Solon.
  • Overhead Door Corp., which manufactures doors and openers, is renting about a third of the
    62,400-square-foot industrial space at 6161 Cochran Rd. in Solon. Its lease ends in September 2018.
    Overhead Door is headquartered in Texas and is a subsidiary of Sanwa Holdings Corporation, based in
    Tokyo.

Analysis

 

Ripple effect

 

There is a “ripple effect” linking light industrial properties such as warehouses with heavy industrial
properties such as factories.
“The strengthening U.S. manufacturing sector has also bolstered demand for warehousing and
distribution space,” reads a Cushman & Wakefield analysis in the spring 2016 magazine by the
Commercial Real Estate Development Association (NAIOP). “These two property types have always been
interconnected, since manufactured goods must be stored and shipped to end users. In addition to the
resulting direct demand for warehousing and distribution capacity, an important ripple effect bears
mention. Manufacturing has the highest multiplier effect of any economic sector in the nation. For every
$1.00 spent in manufacturing, another $1.37 is added to the economy. This, in turn, drives demand for
warehousing.”
A manufacturing boost could contribute to warehouse demand that is already subject to pressure from
other factors, such as the need of e-commerce retailers to store and distribute goods from centers within
short distances of their customers, and the push for growing and storage facilities spurred by recent
votes to legalize marijuana in eight more states (whether for medical or recreational purposes).
This could, in turn, create an owners market for industrial properties. In that case, the rent — and ultimately
the value — of warehouses could increase, benefiting lenders and existing owners, but making it harder
and more expensive for those who want to purchase industrial properties to break into the market or
expand their portfolio.
Tenants who already occupy warehouses could benefit in the short term if they have good terms on their
lease, but once their lease expires, they could face challenges finding similar terms for a new lease. As for
self-storage like the U-Haul properties on Lorain Avenue in Cleveland, the operators could have to pay
higher rent and pass on the cost to their customers.

 

The state of manufacturing and industrial CRE

 

The owners of industrial properties in the Cleveland area and the lenders providing much of the financing
for it could potentially stand to benefit if manufacturing does go up in the area.
In that situation, industrial rents could go up and vacancies could go down, giving an advantage to
existing tenants, at least as long as their lease is in effect.
An upswing in manufacturing could also trigger a boost in the local economy and other property types
(the ripple effect alluded to above). If there are more manufacturing jobs, there could be a greater need for
multifamily housing. And people with jobs tend to buy stuff, so retail could go up as well, which in turn
could spark the need for more warehouses (industrial again).
Is U.S. manufacturing likely to increase under a Trump presidency? Well, by some measures, it already
has.
On the real estate end, demand for industrial properties on a national level has outpaced supply over the
past 12 months, JLL reports in its industrial investment outlook for Q3.
It says overall industrial inventory has expanded 1.8% over the past year, with total U.S. year-to-date net
absorption increasing by 23% year over year. The report shows that in Q3 the U.S. vacancy rate for
industrial properties fell to 5.8%, a decline of 30 basis points, and that 2016 is on pace for the
second-highest overall investment volume since 2008 (the record for the highest since the recession goes
to 2015).
The Cushman & Wakefield analysis in NAIOP looked further back, finding that the U.S. manufacturing
sector “has witnessed steady occupancy gains since it hit bottom in 2010, with more than 106 million
square feet of positive net absorption in the past five years.” It also found that the occupancy rates are
well below the 10-year average of 7.3% and that the annual average of 12.5 million square feet in
manufacturing construction has nearly reached the pre-recession average of 12.6 million square feet.
As for manufacturing in general, the big picture is decidedly mixed, and depends greatly on which metric
you look at.
In 2010 China displaced the U.S. as the largest manufacturing nation, yet the U.S. continues to be a major
global manufacturing power, with international manufacturing executives predicting that the U.S. will be
the most competitive manufacturing economy in the world by 2020. The U.S. share of global
manufacturing activity declined from 28% in 2002 to 16.5% in 2011, but it has since risen to 17.2%,
according to an April report by the Congressional Research Service.
Within the country, manufacturing is the largest sector of the U.S. economy by gross output, outpacing
agriculture, utilities, construction, government, education and the second-largest sector: finance,
insurance, real estate, rental and leasing. Manufacturing gross output hit $5.8 trillion in 2015, following a
35% increase from 2009 to 2014 (and a slight drop the following year) — 10 percentage points higher than
the overall U.S. gross output in the same post-recession period, according to the Bureau of Economic
Analysis. Yet as automation became increasingly prevalent, the number of manufacturing jobs declined
by about 5 million
since 2000, hitting 12.3 million in October.
In Ohio specifically, manufacturing employment has actually gone up over 10% since 2010, goods
production has climbed since 2000 and the state’s unemployment rate in October was just below the
national rate.
But voter frustration was fueled by manufacturing payrolls in the Buckeye state that plummeted in 2000,
dropping nearly 40% over the first decade of the 21st century, and in-state raw steel production that went
down more than 49% at the same time. Indeed, a February study by the research and advocacy
organization Economic Innovation Group found that Cleveland and nearby Youngstown, Ohio, were both
among the top five most distressed cities in the country.
So what’s next for manufacturing? The optimistic scenario is that the president-elect will deliver on his
campaign promises of boosting American manufacturing and American manufacturing jobs. But it is
worth considering some notes of caution:

 

Globalization of manufacturing

 

While the campaign promise of more manufacturing jobs was aimed at U.S. workers and U.S. companies,
and appeared to be part of an overarching isolationist approach, the beneficiaries of a prospective rise in
American manufacturing would not just be American companies – as seen in the Cleveland-area
industrial real estate players highlighted here.
Among the lenders, we’ve got Deutsche Bank, which is, of course, Germany’s largest bank (and could
potentially stand to gain from being what the Wall Street Journal called “a steadfast financial backer of
Mr. Trump’s business interests”). Among the owners, Dalfen is Canadian.
And the tenants include Greek gaming company Intralot, Chinese medical imaging company Alltech, and
a U.S. subsidiary of Japanese holding corporation Sanwa Holdings.
The idea of building up U.S. industry by keeping others out may sound good to those who favor
protectionism, but taking a look at the data behind industrial loans – even in just one small slice of the
Rust Belt – demonstrates that global interconnectedness is not just a buzzword, but a fact of
21st-century life.
By the same token, while trade barriers have been touted over the campaign as protective of U.S.
companies, trade is also essential to the manufacturing industry.
Take the auto industry. Last year Mexico was the largest export market for U.S. auto parts overall,
supplanting Canada, according to a 2016 report by the U.S. Department of Commerce. At the same time,
the report found, auto sales have shown consistent growth since 2010, reaching a record high of over 1.3
million units in 2015.
That interconnectedness can be seen in Ohio too. In June, Cleveland automotive stamping company
Northern Stamping partnered with Ontario-based London Automotive & Manufacturing to complete its
investment in the Queretaro, Mexico-based manufacturing facility Lamtec Mexico. The investment is
aimed to serve the Mexican market and offer customers an integrated supply chain.
If the U.S. cuts down on auto part imports from Mexico, it is conceivable that Mexico will respond by
importing fewer auto parts from the U.S. and more from its other existing suppliers, like China, Japan,
Canada, Korea and Germany – a move that could end up damaging the U.S. auto industry.

 

Role of technology

 

Another complication to take into account is that even if there is a rise in manufacturing, that doesn’t
automatically translate into a rise in low-skilled jobs – the kind of manufacturing jobs that used to exist.
Aided by technology, the U.S. manufacturing industry has changed significantly over the last few
decades.
“As industry adopts increasingly sophisticated technologies, new manufacturing jobs require more
advanced skills
than are available at the high school level,” found a 2015 report by D.C.-based public policy
group the Brookings Institution.
The report cites a 2011 op-ed by General Electric CEO Jeff Immelt and American Express CEO Ken
Chenault saying there are more than 2 million open jobs in the U.S., “in part because employers can’t find
workers
with the advanced manufacturing skills they need.”
That skill gap extends to Ohio as well.
“What’s generally happened economically is really massive investment into new technologies, both in our
factories and in our products,” Ohio Manufacturers’ Association president Eric Burkland said shortly
before the Nov. 8 election. “Much more sophisticated technologies that require a higher level of skill.”
All in all, the manufacturers and commercial real estate players involved in the Cleveland-area industrial
property sector could potentially benefit from the promised improvement in U.S. manufacturing. At the
same time, there are several reasons for any optimism about the future of U.S. manufacturing to be
tempered with caution.

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