Finance Midwest

Column: Why investors are drawn to the modern industrial market

The resurgence in light manufacturing and the continued growth in transportation and logistics together are fueling a strong industrial market going into 2016. While big box building sales tend to make the headlines, there is much more to the industrial story.

By Daniel R. Brown, President of Brown Commercial

Byline-BrownCommercial_DanBrownThe resurgence in light manufacturing and the continued growth in transportation and logistics together are fueling a strong industrial market going into 2016. While big box building sales tend to make the headlines, there is much more to the industrial story. Throughout Chicago’s suburban market, many small to mid-sized users are in expansion mode and are driving the market.

Overall market fundamentals, along with pent up demand, have created a positive environment for investors looking to gain a foothold in this growing market. This is particularly true for entrepreneurial investors who are following the traditional institutional investors and looking for opportunities to own buildings that are positioned to meet the needs of growing businesses.

In this investment climate, what should investors look for and how can building owners position themselves to capitalize on the activity?

Beyond the obvious factors, such as well-located buildings with high occupancy rates, investors should look closely at the tenants and their long term stability. Companies tied to growing markets, such as technology, energy, and healthcare are a big draw for investors as they evaluate assets.  Investors are often looking at a 5 to 10 year exit strategy and want to ensure the tenants are viable for today and into the future.

The building’s cash flow and existing lease structures also should be evaluated carefully. As the market has recovered, rents are increasing, providing investors with opportunities to generate additional income by restructuring leases to fit today’s improved market conditions.

Many multi-tenant industrial buildings are ideal for this type of income generation. These buildings typically include many small to mid-sized entrepreneurial firms. As the companies expand and move into larger spaces within the building, it can create additional income for the investor.  Also, these types of tenants often sign shorter term leases, providing more opportunities for adjusting rents to reflect market rates.

Assets that are close to key transportation corridors, are designed for distribution, and have land for future development will remain attractive to today’s investors. These property attributes can help boost an asset’s value and provide investors with options for expanding their income stream down the road.

On the building ownership side, there is a limited supply of well-maintained industrial buildings with desirable amenities in many submarkets. While new construction is occurring, it is tempered and will take many months to come online.

Buildings completed within the past five years that offer sizable clear heights, expansive column spacing, multiple dock doors and ample truck parking are in strong demand in the suburban market. Smaller buildings that have been modernized and offer proximity to major transportation hubs are also catching investors’ attention. Owners of older buildings are wise to evaluate whether modernization efforts are needed to ensure the long term value of their assets.

Today’s investment market also is buoyed by a loosening in the financial sector. Lenders are more amenable to relaxing some of the stringent guidelines put in place during the recession. The stronger economic climate, along with low vacancy rates and other positive fundamentals, are creating a more favorable environment for lenders. While movement in interest rates is always a consideration, rates will remain highly favorable for the foreseeable future.

Another important component of today’s investment market is the investor/occupier, those businesses that want to control their own costs by owning real estate. Whether the solution is outright ownership or a sale leaseback, many businesses today have improved profitability and balance sheets that are growing year over year, making them good candidates for financing.

Investor/occupiers may look at various scenarios, including buying buildings that can accommodate their long-term growth but also provide rental income as they grow into that space.

Overall, investors are drawn to the industrial market because of its stability and potential for long-term growth. This is one asset class that offers a relatively inexpensive cost of entry, compared with other market segments.

Chicago’s industrial investment market is thriving amid continued low vacancies and strong business growth across the region. As investors and owners look toward 2016, they can expect continued positive momentum and many opportunities to ride the tide of business growth throughout the suburban market.