The Inflation Reduction Act passed in 2022 includes major incentives to combat climate change, including lucrative tax credits as inducements to onshore critical manufacturing facilities and processes. These policies are focused on the development of facilities that generate clean electricity, as well as the manufacturing of components for green energy production, such as solar panels, wind turbines, battery storage, and more.
The result of this legislation has been a significant increase in demand from green energy companies (e.g. solar panel, EV battery manufacturers) that now require modern logistics facilities to ramp up the manufacturing, storing, and distribution of their products.
This relatively sudden boom in demand for state-of-the-art logistics facilities has created a compelling opportunity to invest in the building of these facilities. Below, Kyle Shannahan, Director at Cresset Real Estate Partners, further explores what investors need to know.
Kyle, please tell us more about the impact of the Inflation Reduction Act on the logistics industry. Just how big is the demand from green energy companies, and how compelling is the opportunity for investors to meet that demand?
Taking a step back, it is important to understand the structure of the Inflation Reduction Act. While the policy itself is complicated, it can be simplified into two major buckets of tax credits: investment tax credits and production tax credits. A company typically can only choose one type of credit.
The investment tax credit provides between 30% and 50% of the initial investment back to the company as a tax credit, which it can use itself or transfer/sell to another party. This means a complex manufacturing facility costing well over $100 million could receive a tax credit between $30 million and $50 million or more, depending on the final cost. The production tax credit is calculated per unit produced and is almost always more valuable than the investment tax credit over its lifetime. For example, look at the production tax credit amounts below for various solar manufacturing credits versus the average component prices below in 2023. For example, a solar wafer typically sells for about $0.05/W. Now, due to the Inflation Reduction Act, the manufacturer can sell the item at $0.05/W AND earn a tax credit valued at $0.05/W.
Expanding profit margins between 18% to 100% percent in a manufacturing business provides a compelling incentive to manufacturing companies.
However, it’s important to know that these tax benefits will not be available forever. They went into effect in 2023 and begin phasing out in 2030. That relatively tight timeline means many green energy companies are paying a premium for existing, vacant manufacturing facilities that meet their needs and substantially increase their speed to market, compared to constructing a new facility from scratch.
Finally, these companies are looking to locate in manufacturing-friendly states with easy access to critical logistics infrastructure, such as ports, railroads, and labor. Texas, South Carolina, Georgia, Tennessee, Ohio, and Michigan have seen significant interest because of these attributes. In addition, green energy logistics facilities require extensive buildouts to meet user needs, making those companies fairly “sticky” tenants long-term.
“Battery Belt” popping up in South Carolina,
Georgia, Tennessee, Ohio, and Michigan
1Dots represent Batteries/EVs private investment announcements.
This all sounds great, but is this policy working? Are tax credits with a limited lifespan making American-made manufacturing goods competitive on the world stage?
There has been a major uptick of manufacturing investment (a leading indicator of jobs) and record numbers of announcements of solar panel manufacturing.
2For example, Cresset Logistics Fund I has a logistics project in south Dallas called Tradepoint 45 West. Trina Solar, a top-five solar manufacturer worldwide by manufacturing capacity, leased the entire 1.3 million-square-foot building to manufacture 5 GWs per year of solar modules. They are investing more than $200 million beyond the cost of the building and will provide 1,500 local jobs. They chose this site due to the speed to occupancy, cost of occupancy, and its prime access to key points in the logistics network.
What makes these modern logistics facilities so special? What features do they offer that traditional warehouses and distribution centers do not?
Modern facilities offer tenants high ceilings, efficient depth, access to sufficient power, easy circulation, proximity to today’s labor force nodes, adjacency to critical infrastructure, and abundant trailer and car parking. Facilities that are under construction can also be easily altered to meet a manufacturing tenant’s demands, as these complex facilities usually require significant upgrades beyond a standard buildout. Older properties are more expensive to retrofit and offer less usability, as they were typically built with rack storage as the primary use case. Lastly, new speculative construction has the benefit of being a vacant building, which a manufacturer can move in to as quickly as possible and begin earning the production tax credit.
Why are these facilities largely being developed in the south and southeastern United States?
The south and southeast United States have easy port access, multiple major interstates, and an occupancy cost savings compared to many other major markets. Markets like Houston, Dallas, Savannah, Charleston, and Atlanta can offer substantial state and local incentives beyond the Inflation Reduction Act for large employers, while also offering a substantially lower cost of labor compared to west and northeast markets. Plus, there are also tax credit multipliers for certain communities that used to be reliant on the energy economy, such as closed coal mines or high-unemployment MSAs with historical reliance on energy jobs. Houston and the Appalachian Mountain regions in Kentucky, Ohio, West Virginia, and western Pennsylvania are areas that qualify for these additional tax credit multipliers.
In addition, we are starting to see co-locating of similar users. Solar manufacturers are focusing more on Texas, while electric vehicle battery manufacturers are focusing on Charleston, Savannah, and Atlanta. We believe this will continue as the companies will experience cost savings being near their shared suppliers.
What is your outlook for this sector? Does this represent a long-term opportunity for investors?
We believe the rush for space from green energy manufactures will continue through 2025, as users finalize their plans for a manufacturing facility in the United States. This demand will not only come from the primary manufacturers, but also the manufacturer’s suppliers, as contractors must locate near their major customers to achieve cost savings. We expect the green energy demand coupled with typical industrial demand from e-commerce and logistics users will deplete the remaining vacant space, which will leave a distinct lack of available, new construction.
While this green energy demand will be more front loaded, the policy is intended to make the United States a manufacturing powerhouse again. If the Inflation Reduction Act works in concert with follow-on policies like tariffs and a bi-partisan push for de-globalization, manufacturing could become a growing demand driver for speculative industrial space that has not been seen within the United States in more than three decades.
Thank you, Kyle. Wrapping it up, what should investors take away from what you’ve shared?
The Inflation Reduction Act is one of the most transformational pieces of manufacturing legislation passed in modern history. While many investors have looked to the direct recipients of the legislation (the green energy production and manufacturing companies), there are extensive secondary benefits to logistics facility owners and developers. Demand from new green energy manufacturing facilities is expected to be a strong demand driver through 2025 when there is projected to be minimal new space available due to lack of construction starts in late 2023 and early 2024. Looking beyond 2025, the onshoring of manufacturing may become a new long-term demand driver due to its bi-partisan support. Cresset Real Estate Partners remains extremely bullish on the logistics market and continues to invest in speculative construction in growing logistics markets nationwide.
Contact Us to learn more about investing in logistics.
1Source: https://www.whitehouse.gov/invest/
2Source: US Census
Construction spending: https://fred.stlouisfed.org/series/TLMFGCONS
Manufacturing jobs: https://fred.stlouisfed.org/series/MANEMP
