Industrial's Tsunami of Capital
There’s more capital flowing into industrial than there is product, we learned from the leasing and development panel at Bisnow’s Chicago Industrial Real Estate Summit last week in Rosemont. (Where are they going to store all the extra capital? They could build a warehouse for it... that would kill two birds with one stone.) NAI Hiffman COO of brokerage services John Picchiotti says vacancies in key submarkets are at historic lows (4.6% in North DuPage, 8% in I-55), with 10M SF of product under construction. That’s a drop in the bucket, or 1% of current stock, and new product will be easily absorbed as companies evolve in how they use industrial space. Even Bolingbrook used to be considered a pioneering play, John reminds us, and submarkets will continue to shift as developers search for well-located sites.
Industrial product is seeing a demand uptick from 50k SF-to-300k SF users, Ridge Development president Jim Martell says. To win business from the larger logistics-type users as well the e-commerce users, you have to factor in not just rents, but an attractive total cost of occupancy (including human capital, transportation, etc.) for the tenant. Ridge just landed a 1.7M SF build-to-suit (expandable to 2.7M SF) for Michelin at its Ridgeport Logistics Center in Wilmington, a 2,500-acre mixed-use project. At the same site, the firm is pioneering the transport of food products from Chicago to California and back in refrigerated boxcars, Jim says. He’s not sure why the railroads didn’t start doing this long ago, since it helps food companies move product cheaper and faster than by truck.
Venture One Real Estate principal Mark Goode says we can thank the banks for the demand surge from smaller industrial tenants, since lenders are becoming more reasonable in giving corporate clients and small businesses the capital to expand. International money (Middle East, Russia, South America, etc.) flowing into Chicago industrial doesn’t care about small percentage changes in cap rates, Mark says, but they're looking for a stable market where they won’t lose half of their equity due to geopolitical events. (Thanks for nothing, Putin.) Venture One is actively buying value-add industrial with several funds, and it targets buildings from 20k SF to 650k SF.
Duke Realty leasing and development VP Ryan O’Leary says his firm’s sweet spot is tenants in the 150k SF to 200k SF range, and they’ve been able to push rents across Duke’s 98% occupied, 11.5M SF Chicago portfolio. While a couple years back institutions only bought core, long-term leased industrial product, they’re stepping out on the risk spectrum to get that extra piece of yield, Ryan says. (Ex. Buying completed vacant spec buildings, or developing spec at a 6.5% cap versus buying core assets at 5.75%.) Duke has grown 2.5M SF in the past two years, and these days it’s focused on build-to-suits (they recently did 750k SF for Weber-Stephen in Huntley) and potential spec projects.
Corporate occupier accounts nationally are retooling and rightsizing their spaces, Cushman & Wakefield executive director Britt Casey tells us. To show the cyclical nature of the business: Britt was leasing Addison Business Center for $4.25/SF 27 years ago, and these days the asking price on the real estate is exactly the same. (If only our waistlines looked the same.) The state may be suffering, but we have to celebrate our wins. Britt hopes his deal bringing Method’s US HQ and manufacturing plant to the far Southeast Side in Pullman’s historic district will spur much-needed re-gentrification of the community where George Pullman once made his train cars.
Real estate tax guru Brian Liston, partner at Liston & Tsantilis (who handled Westmount Realty's purchase of the KTR portfolio), moderated. (He’s our pick to help coach the Hawks to another Stanley Cup with Joel Quenneville, given the expertly crafted discussion and panelist pep talks in which he called everyone champions.) Post-game, Wells Fargo sponsored a raffle that included $25 and $50 gift cards to Best Buy, along with the grand prize iPad Mini, awarded to Aon’s Max West. Check out more pics from the event here.