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Where Are The Headwinds Coming From In A Robust Industrial Market?

Industrial is the strongest-performing asset class in commercial real estate, with demand outpacing supply and record-low vacancy rates and absorption.

But while the sector has the wind at its back right now, that can turn on a dime, and on the smallest of factors. The panelists at Bisnow's Midwest industrial and logistics summit at the Loews Chicago O'Hare Hotel yesterday discussed what they are keeping an eye on and why.

Headwind 1: Local And State Politics

Exeter Property Group CEO Ward Fitzgerald and Liston & Tsantillis Partner Peter Tsantillis
Exeter Property Group CEO Ward Fitzgerald and Liston & Tsantillis partner Peter Tsantillis

Exeter Property Group CEO Ward Fitzgerald said while Chicago's 1B SF industrial market presents ample opportunities, state and local politics and budget deficits present challenges for developers and investors seeking opportunities and yields.

"You're surrounded by right-to-work states, tax incentives and capital to attract business. Obviously, Chicago is a world-class city, but it has some challenges from a competitive business environment and will unfortunately lose businesses to places like Indiana, Tennessee, Kentucky and even Texas, as people move away," Fitzgerald said during the keynote Q&A. 

Still, Chicago has a wealth of time, talent and treasure, and Fitzgerald said political and business leaders need to focus properly to compete on a regional, national and global scale.

Headwind 2: Available Labor

CenterPoint Properties Chief Investment Officer Jim Clewlow, CoStar Group Director Rene Circ, Gramercy Property Trust Chief Investment Officer Nick Pell, Stag Industrial Senior Vice President Brad Sweeney, TH Real Estate Managing Director Graydon Bouchillon, Inland Mortgage Capital President Art Rendak, Seefried Industrial Properties Executive Chairman Ferdinand Seefried and Avison Young Principal Eric Foster
CenterPoint Properties Chief Investment Officer Jim Clewlow, CoStar Group Director Rene Circ, Gramercy Property Trust Chief Investment Officer Nick Pell, Stag Industrial Senior Vice President Brad Sweeney, TH Real Estate Managing Director Graydon Bouchillon, Inland Mortgage Capital President Art Rendak, Seefried Industrial Properties Executive Chairman Ferdinand Seefried and Avison Young principal Eric Foster

If you build it, they will come. That holds true in "Field of Dreams" and industrial real estate. But there is a growing bifurcation between population centers and the size of new warehouses being built.

Seefried Industrial Properties Executive Chairman Ferdinand Seefried said 40% of new warehouse demand is coming from e-commerce looking to fulfill customer orders. But finding qualified labor has become an issue over the past three years. Many tenants want to be near dense population centers to have better access to the labor pool, which is great for infill developments. Bigger distribution centers are now looking at locations farther away because it is difficult to find sites.

"There needs to be a balance of finding qualified sites with finding labor," Seefried said.

Headwind 3: Parking

Kirkland & Ellis Partner Joshua Hanna, Venture One Real Estate Principal Ryan Stoller, Liberty Property Trust Vice President Neal Driscoll, Clarius Partners Managing Partner Kevin Matzke and CRG President Shawn Clark
Kirkland & Ellis partner Joshua Hanna, Venture One Real Estate principal Ryan Stoller, Liberty Property Trust Vice President Neal Driscoll, Clarius Partners Managing Partner Kevin Matzke and CRG President Shawn Clark

Clarius Partners Managing Partner Kevin Matzke said car parking continues to be a primary focus for spec developments.

"The amenity warehouse workers want most is a short drive home," Matzke said.

CRG President Shawn Clark said the reason parking takes such a priority is because of the number of people working in these warehouses. Liberty Property Trust Vice President Neal Driscoll said prioritizing parking extends to keeping car and truck parking separate. On infill sites, developers are looking at ways to construct wider trailer positions separate from the building. 

Developers are keeping an eye on automation. Matzke said once self-driving vehicles become commonplace, they can be a generational game-changer for real estate.

Headwind 4: Future-Proofing

CREtech founder and CEO Michael Beckerman, Newmark Knigh Frank Executive Managing Director Geoff Kasselman and Liston & Tsantillis Partner Peter Tsantillis
CREtech founder and CEO Michael Beckerman, Newmark Knight Frank Executive Managing Director Geoff Kasselman and Liston & Tsantillis partner Peter Tsantillis

Newmark Knight Frank Executive Managing Director Geoff Kasselman said commercial real estate needs to add the word "future-proofing" to its vocabulary.

"Any building you buy or build today has to have a shelf life. If you're a holder, then future-proofing becomes critical to you in the world of industrial real estate," Kasselman said.

NKF recently assisted Duke Realty and Design Within Reach on plans for a 620K SF distribution facility outside of Cincinnati. When everyone sat down to discuss the development, future-proofing was a main topic of discussion. The site's parking lots will have conduits running to them, so that electric car chargers can be added at a later date. More money is being invested to reinforce the center's structural capacity to add solar panels on the roof, and infrastructure to add secondary power sources was included in the plans. Duke will install dock restraints that are compliant with self-driving trucks, when that technology eventually arrives.

CREtech founder and CEO Michael Beckerman said future-proofing includes getting up to speed on the changes technology is bringing to industrial, as the industry is barely keeping up with the innovation. There are over 3,000 startups today focused on commercial real estate. In 2010, there was only $30M invested in PropTech. Last year, that number totaled over $12.5B.

"Every major landlord has a fund, a direct investment strategy or an incubator," Beckerman said.

As an example, he cited Prologis' partnership with Plug and Play to support logistics and supply chain startups.

Beckerman said the biggest issue facing firms embracing tech is scale. How fast will a firm roll a new platform out, train brokers on it and get a sizable return on investment.

Headwind 5: Soil

Pepper Construction Vice President Jake Pepper, Logistics Property Co. CEO Jim Martell, WBS Equities CEO and founder Wendy Berger, Meridian Design Build Executive Vice President Howard Green, FCL Builders Principal Fred Johanns and Heitman Architects Director Paul Heitman
Pepper Construction Vice President Jake Pepper, Logistics Property Co. CEO Jim Martell, WBS Equities CEO and founder Wendy Berger, Meridian Design Build Executive Vice President Howard Green, FCL Builders principal Fred Johanns and Heitman Architects Director Paul Heitman

As more developers seek sites on Chicago's Southwest Side near Interstate 55, FCL Builders principal Fred Johanns said soil composition will become a common problem. He has experienced it firsthand. Here, Interstate 55 runs parallel with the I&M Canal, and the soil composition of sites in this area run the gamut from sand to clay to landfill materials.

"Some of the sites have rubble 50 or 60 feet deep," Johanns said.

Meridian Design Build Executive Vice President Howard Green concurred that building industrial can be a challenge inside the city limits because of soil composition. Meridian completed three projects in recent years along I-55, between Damen and California avenues. One project, a FedEx ground facility, needed soil improvements. A second project, a build-to-suit for Banner Wholesale Grocers, proved challenging because part of the building is on an old canal slip that was filled in years ago.

Green said these challenges can be overcome with an experienced environmental design firm working with the developer and contractor team and the city to find solutions.

Headwind 6: Trump's Trade War

Cushman & Wakefield Executive Managing Director John Morris, Transportation and Logistics Advisors Managing Parner Lee Clair, BLS & Co. Industrial & Supply Chain Practice Leader Michelle Comerford, DHL Director Keith Gill, Ports Of Indiana Port Director Ian Hirt and BNSF Railway Co. Regional Manager Eric Pitcher
Cushman & Wakefield Executive Managing Director John Morris, Transportation and Logistics Advisors Managing Partner Lee Clair, BLS & Co. Industrial & Supply Chain Practice Leader Michelle Comerford, DHL Director Keith Gill, Ports of Indiana Port Director Ian Hirt and BNSF Railway Co. Regional Manager Eric Pitcher

Ports of Indiana Port Director Ian Hirt said his agency handles mostly industrial materials like steel and aluminum, and the Trump administration's tariffs are starting to impact the port's imports.

"I sure hope it's a negotiating tactic that's going to be short term, because long term we're seeing some implications that are pretty negative," Hirt said.

The price of steel in the U.S. is $200/ton more than it is in Europe. If the tariffs don't go away fairly soon, Hirt said we may see goods once made in the U.S. being made cheaper in Europe. If those goods are exported to the U.S. with no tariff, it will hurt American small manufacturers and put some out of business. 

"Free and fair trade is a good thing," Hirt said.