New Battery Belt 'Ecosystems' Mean Opportunity For Skilled CRE Players

For more than a decade, the production of lithium-ion batteries, an essential part of making electric vehicles, represented an industrial niche play — mostly the purview of Tesla — that barely had an impact on real estate development or investment nationwide.

But now, with manufacturing construction spending doubling over the last year — to $190B led by an infusion of federal funds — that has changed, touching off a wave of growth in the so-called Battery Belt.

With heightened federal subsidies and a solid commitment by major U.S. automakers to go electric, the Battery Belt is expected to expand dramatically by the end of this decade. With that will come opportunities for the commercial real estate industry, though perhaps not as straightforward as plopping new properties close to battery-makers.

“It's like Henry Ford when he built the River Rouge plant,” Savills Head of Industrial Service, North America Gregg Healy said. “Entire new regional ecosystems are going to be created as battery production ramps up. We're not right at the beginning, but we are still in the infancy of this trend.”

A gigafactory, a term reportedly coined by Tesla, is a giant factory for producing the many batteries needed to make electric vehicles run. The factories are measured by how much power their annual output of batteries can store. A gigafactory can produce batteries equal to at least 1 gigawatt-hour per year, according to the Dallas Federal Reserve.

Most gigafactories are, or will be, much larger than that. Tesla's factory near Reno, Nevada, for instance, has a capacity of 35 GWh, while its factory near Austin is much larger still at 100 GWh.

The development of gigafactories has been underway for more than a decade, most famously since Tesla broke ground on facilities in California, Nevada and Texas, and other automakers started investing in facilities in more recent years.

“Battery Belt” isn't quite an accurate term, since gigafactories, both existing and under development, can be found in various parts of the country. But there is a concentration of the facilities in the Midwest, the mid-South and the Southeast.

Many of the new gigafactories will be near — or at least in the same states as — existing auto factories. Michigan, Kentucky and Georgia will have the most capacity by 2030, followed by Ohio, Kansas, North Carolina, Tennessee and California, according to the U.S. Department of Energy.

The Battery Belt got a major boost in 2022 with the passage of the Inflation Reduction Act, which enacted a raft of federal subsidies for sustainable power on top of those from state and local agencies.

For example, there is now a federal tax credit of $35 per kilowatt-hour for each domestically produced battery cell, or about one-third of the cost of production. For a large factory, that can amount to serious money. For its 86 GWh factories in Kentucky, Ford could reap a subsidy of $3B, Axios reports.

“We've tracked about $190B in annual manufacturing construction spending as of April,” Healy said. “That's more than twice as much as the 12 months before that, and the catalyst has been the IRA, pushing forward this reshoring effort, particularly around green tech. EV batteries is the primary vertical in which we're seeing a lot of this growth.”

A battery gigafactory doesn't stand alone, but needs a variety of support industries, all of which will occupy industrial space of one kind or another. Besides the plants themselves, there need to be supporting facilities to make battery components and recycle batteries as well.

Once an EV plant starts development, ancillary industries related to the main plant will plan expansion nearby, partly inspired by the idea of shorter supply chains, Healy said.

“There's a multiplier effect on a community,” said JLL Executive Managing Director Greg Matter, head of the company's advanced manufacturing team. “Each manufacturing job supports perhaps two and a half or so other jobs, or by some estimates as many as five. As the battery factories come online, that means growth for the community in which it operates.”

The economic impact of the Tesla gigafactory in Nevada illustrates the point.

Between 2015 and 2022, investments at the Tesla plant generated $10B in direct economic activity, or $1.3B annually, according to an economic impact report by Applied Analysis, with a ripple effect over the last eight years of about $17.1B. The report also notes that 10 jobs at Tesla support 18 jobs in the local economy, which is seeing population growth, higher residential prices and an expanding supply of industrial space.

“You're starting to see more of the supplier ecosystem formed around some of these major [gigafactory] announcements,” Matter said. “So that means more jobs relating to distribution and manufacturing, and raw materials suppliers and 3PLs and such, are coming into the market.”

Though gigafactories development supports industrial expansion, less clear is how much of that will be close to the factories themselves, according to CBRE Executive Vice President Steve Preston, who is with the company's Nashville Industrial Advisory and Transaction/Capital Markets Group.

Middle Tennessee has a 6 GWh facility by Envision AESC up and running, and others are under development in the region, as well as nearby in Kentucky.

“The feasibility of additional industrial or distribution development remains uncertain,” Preston said. “The supplementary industries supporting EV operations do not demand immediate proximity, allowing them to be supported from distant locations. But in light of the advancements in EV technology, it's clear that residential development is a certain outcome, due to the rise in local employment opportunities and income levels.”

The development of a gigafactory is capital intensive, requiring years of planning and execution, as well as construction workers to build it, and skilled factory workers to make it viable.

That is one of the prime headwinds facing the expansion of gigafactories and industrial development that would support it, according to Clayco President of the Industrial Business Unit Anthony Johnson.

Clayco recently broke ground on a gigafactory project for Envision AESC near Florence, South Carolina, and Johnson says the contractor is tracking about $200B of electric vehicle-related projects throughout the United States.

“Labor is a constraint for some sites, which aren't able to perform under the timetable required by the manufacturers,” Johnson said. “The labor required to build these factories is significantly higher than most projects. You need a substantially higher number of electricians, for example, on a battery plant than you do on almost any other project, and the number of electricians isn't growing.”

Another challenge for gigafactory development is power, Johnson said.

“The factories are pretty large energy users, and so for energy producers to keep up with them by upgrading their infrastructure is a big challenge,” he said.

There are also unanswered questions about state and local subsidies for gigafactories. 

In March, the Nevada Governor's Office of Economic Development gave Tesla an additional $330M in tax abatements to help fund an expansion of the Tesla factory near Reno.

State Sen. Dina Neal, a Democrat who has been a vocal critic of the previous abatement for Tesla, called the process flawed.

“It is our job to balance the checkbook of the state’s budget, but under current law, there is an imbalance of power that prevents the Legislature from providing appropriate oversight and review of tax abatements,” Neal said in a statement.

Despite those uncertainties, and other development headwinds, such as higher interest rates and timid lenders, developers are keen to build in regions that will be, or are, home to gigafactories, according to Glenstar Properties principal Brian Netzky, whose company is a national developer.

The company is preparing to break ground next month on Cherokee Commerce Center 85, a 290-acre commercial warehouse park in Gaffney, South Carolina, which is between Greenville-Spartanburg, South Carolina, and Charlotte, North Carolina. A number of gigafactories are underway in that part of the country, including an operating SK innovation 11.7 GWh plant in northern Georgia, and factories under development in South Carolina and North Carolina.

“EV battery production, and green manufacturing more broadly, along with reshoring, are all factors that broaden the demand, and we look for places and business strategies that will attract a wide range of users, from medium manufacturing all the way down to light manufacturing assembly,” Netzky said.