Industrial Property To Benefit From US National Security Investment
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President Biden signed the Chips Act on August 29, 2022, earmarking billions in expenditures aimed at better securing the US’ national security position through on-shore computer chip production, in this case. This is well-timed, geopolitically speaking, as well as from the standpoint of adding further demand for industrial property in general.
National Security Vs Economic Efficiency
National security is perhaps the category of economic inefficiency most likely to succeed. Investments in natsec necessarily trade something today for the ability to avoid or overcome some potentiality tomorrow, and in this sense act like insurance. Insurance as a subject carries with it an entire book of possible maladies, from adverse selection to asymmetric information to principal-agent problems.
Economic efficiency gets defined in many ways, but very generally it means getting the most possible in exchange for a given expenditure. By this broad definition, investments into national security initiatives are completely inefficient, because what’s received in exchange for the expenditure is not something that can be consumed today, and might never be consumed. But this tradeoff is less costly for the US than for other countries, due to its position in the global economic and political heirarchy.
Natsec Is Different For The US
The United States occupies the single most valuable chunk of territory anywhere in the world, and as a result has grown a robust consumption-based economy and a projection-based military. These two fundamentals cannot be understated. The combination of these two pillars of American strength results in a largely accidental advantage: investments in national security technology, specifically, tend to be developed by private enterprise for consumer use. Examples include the following:
- The microprocessor (aka computer chip) was developed to allow missiles to more easily find their targets.
- GPS was also developed to allow smart weaponry as well as military vehicles to navigate more easily.
- The digital camera was developed by DARPA to solve the problem of retrieving images from spy satellites
- The internet itself was created as a means of self-identification and communication after a nuclear incident.
- Drone technology
- Siri on your iPhone
- The computer ‘mouse’
By allowing private industry to leverage the power of these inventions in a consumer context, the US adds value at scale to its own economy, and to the world’s. Therefore, some natsec investments contain within them the seed of much greater value, whereas in other countries these would be simple dead weight loss. And this, in part, serves to justify the scale and success of the ‘military industrial complex’ in the US. It isn’t like paying to field a standing army on our borders, but more like building functional concentric rings of protection that occasionally transmute into gold.
The Chips Act is Thematic
President Biden signed the CHIPS and Science Act of 2022 in August, which makes provision for semiconductor manufacturing facilities to once again locate in the US. In fact, several chip fabs were already under construction before the act was signed into law, because chip manufacturers correctly read the tea leaves. With the global economy enabled by the Bretton Woods agreement contracting in earnest, the writing on the wall says to co-locate your manufacturing facilities close to your largest contiguous consumer base. And that’s what they’re doing.
These Fabs Are Better
Manufacturing in general is returning to the US, and as it does so, it is more a more compact yet advanced sort of process, often featuring nearly-complete automation of the process, meaning humans are free to explore more creative endeavors than working in a factory, while the output of the factory continues to grow. We get the value of the output without the need to even contemplate labor unions or retraining or much about politics in doing so.
Chip fabs are similar in that they encapsulate the incredible degree of know-how we have accumulated over the decades into new, highly-automated, extremely high-tech facilities ready to take on the next challenges of layering finer and finer (20 angstrom) line widths onto silicon wafers. The US currently has 10 chip fabrication facilities in various stages of execution, to be operated by Intel, TSMC, Samsung and TI. A single company, AMSL, makes 100% of the high-end chemical deposition and layering machinery, and this company represents a probable investment target of DARPA or similar state agency. DARPA, in fact, in the process of launching a public/private partnership to fortify access and restore supply chains underpinning modern communication, national security, travel and manufacturing.
Chip Fabs To Ship Fabs
There’s a theme to this piece, and it’s about industrial property in general, as buoyed by natsec momentum and direction. This single CRE asset class is potentially the biggest bright spot at this point in time, as the US has emerged as the nation with not only the ultimate geographic advantage, but also the greatest demographic advantage. We are aging, but not as quickly as other parts of the world, and this gives us roughly a one-generation lead over other countries currently wrestling with a problem they’ve no idea how to handle. We have the luxury of being able to observe, referee, disrupt and invest for ourselves using accumulated knowledge gleaned from having done so.
One area of particular interest and specialty is shipyards. There are currently 154 active shipyards in the US and its territories engaged in the construction of marine vessels, yet US flagged vessels make up only about 0.4% of the world’s vessels. That’s to some degree because vessels can be flagged by convenience, not necessarily country of origin. The fact, however, is that the US is inherently a maritime nation, has the most capable and projection-based naval assets by a factor of more than 10 over any other nation, yet its merchant fleet is largely manufactured elsewhere, which is counter-thematic to what is happening economically in the world at present.
One Opportunity Of Many
Shipbuilding is one opportunity of many set to return to the US at scale, and importantly, highly automated. Many of these opportunities involve the acquisition, creation or use of US industrial property, since these were predominantly sent offshore in the 80’s and 90’s in search of lower labor costs. Today, as they return they feature far greater automation, which means we get the benefit of jobs without having to supply ‘jobs.’ Workers can therefore climb up the value chain with their skill sets without the need to get stuck at the ‘ship building by hand’ level of know-how, and society is far, far richer as a result. There are many other manufacturing facilities to be reshored in the coming years, and this ‘fully automated’ feature is quite prevalent, suggesting much larger returns for investors, as labor represents a major cost, and these facilities improve upon output quality without it.
Generational Opportunity
Industrial use property is perhaps the brightest investment spot on the CRE landscape at present, given the state of the world economy and what is likely to occur domestically in the US for the foreseeable future. Getting in front of a trend shaping up like this can create generational wealth for enterprising investors, and should be investigated.
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