Industrial Real Estate Is Strong Like A Bull. Here's Why.
Few real estate sectors in Chicago are performing as strongly as industrial. The nation’s second-largest industrial market is thriving thanks to solid fundamentals and being a low-5 cap rate market last year. Demand is exceeding supply and landlords are commanding strong rent spreads. The featured speakers at Bisnow’s 6th Annual Chicago Industrial Summit at the Hyatt Regency O'Hare, 7am Tuesday, April 19, don’t see a change in the market any time soon.
Ridge Development president Jim Martell says the lack of land availability in core submarkets is pushing developers and tenants further from the metropolitan center. Land in the O’Hare submarket can cost $20 to $25/SF, versus $3 to $5/SF in the collar counties. While that's great news for developers farther out, it's having adverse effects for local, smaller tenants seeking space in costlier Cook County, which is also struggling to meet a growing demand for skilled labor. Jim asserts Cook County officials need to be aggressive in providing incentives, including 6B property tax assessment eligibility and tax incentives, to encourage development and job growth.
Brennan Investment Group chairman Michael Brennan agrees with Jim on 6B and tax incentives and adds that county officials need to work on minimizing the vulnerabilities of building industrial in Cook County. Michael says absorption levels are at or above historic highs—Brennan’s 25M SF national portfolio is 97% leased. While the recovery could be stronger, Michael says statistics show positive net absorption across every product type.
NGKF executive managing director Geoffrey Kasselman says speculation over announced industrial developments is now a phenomenon. There's 14M SF under development, with another 10M to 15M SF announced. Geoffrey tells us announcing projects has become one of the ways developers hedge their risks on building industrial, and it costs very little to hire designers to draw renderings of a spec development and hire a broker to entertain bids on it. Geoffrey adds that industrial landlords haven’t seen business this strong in 10 to 12 years, thanks to the lack of supply. Savvy landlords have a wide range of tenant options, and all they have to do is pick the right ones.
JLL managing director Keith Stauber (right, with JLL VP Steve Ostrowski and EVP Dominic Carbonari) says the top question users have for him is about the availability of labor. With solid job growth in e-commerce and food distribution, the talent pool is shrinking. Keith says real estate pros need to speak not only about industrial real estate itself, but about what the labor supply is in other markets and how companies will be able to fill the void. Many deals are near suburbs where the talent pool is more abundant, like the western suburbs.
Podolsky|Circle CORFAC International managing principal Alissa Adler tells us pricing has improved on middle market assets over the past year, thanks to solid market fundamentals and a faster rate of getting tenants into spaces. And capital is still flowing into the market in a disciplined manner. Alissa says there are still fears of what happens if interest rates are hiked. Will investors hold on to their properties or sell to the next guy? If that changes, we could see a shift in demand because investors have become so accustomed to cheap debt that it would be a bitter pill to swallow if that changes.
Venture One founding principal Mark Goode (right, with one of our moderators, Liston & Tsantilis principal Brian Liston) tells us his firm is doing its part to bring new product to market, with over 1M SF in development and good activity level on business parks. Venture One is seeing solid demand for spec and build-to-suit, as some companies in the area need specialty product. Mark says Venture One has the ability to be creative with tenants and users, and build out space to make it usable and profitable. If a tenant isn’t leasing at a rate to be profitable or fit in a space that doesn’t fit their needs, Mark says they won’t be a tenant very long.