Industrial Midwest

As demand increases for industrial REITs in Chicago market, investor activity rises

Entrepreneurs are investing heavily in industrial real estate today. It’s little surprise, then, that Real Estate Investment Trusts (REITs) are targeting Chicago. It’s a strong commercial real estate market that’s only gaining strength. The city has been a highly attractive location in the past year, especially for investors seeking industrial space.

Entrepreneurs are investing heavily in industrial real estate today. It’s little surprise, then, that Real Estate Investment Trusts (REITs) are targeting Chicago. It’s a strong commercial real estate market that’s only gaining strength. The city has been a highly attractive location in the past year, especially for investors seeking industrial space.

But Chicago isn’t alone.

In fact, there are many large REITs that continue to grow because of their activity in the Midwest. The largest publicly- traded industrial REIT, Prologis, has a strong presence in the Midwest as does First Industrial Realty. Others with sizeable investments in the region are Duke Realty, DCT Industrial, Liberty Property and STAG.

David Harker, executive vice president of First Industrial Realty’s central region, explained that the company allocated 5.5 million square-feet in the Chicago market and as of March 31 about 96% of it was occupied.

In an interview, Harker and Pen White, president and chief investment officer at Plymouth Industrial REIT, spoke to Chicago Industrial Properties about the current REIT activity in Chicago and explained what it is about the Midwest that drives these investors to do business there.

These two industrial REITs differentiate in their areas of specialty. While First Industrial focuses primarily on investing in bulk and regional centers, Plymouth Industrial’s main focus lays with Class B properties.

Chicago Industrial Properties: Can you explain what’s going on with REITs in industrial properties?

David Harker: Demand continues to be strong on the leasing side as well as the investment side. The U.S. industrial market has enjoyed 20 quarters in a row of positive net absorption. Supply and demand are in balance. Investors continue to be attracted to industrial properties in the pursuit of yield and growth.

Pen White: There’s lots of investor interest, especially because in Class B, the cap breaks are high and get more yield and strong interest. That’s why we spend more time in Class B.

CIP: What’s going on with investment activity?

DH: Investment activity in the industrial sector continues to climb and we at First Industrial have been increasing our investment over the past few years. Our balance sheet has never been stronger and our team continues to pursue acquisition and development opportunities that will contribute to our long-term growth and enhance our portfolio.

CIP: What kind of industrial properties make for the best investments and why?

DH: At First Industrial, we have been focused primarily on investing in bulk and regional distribution centers. One of the key strengths of our platform is our team of experts that can find attractive sites to develop new industrial buildings to meet tenants’ demand with the right features to be competitive for the long-run. We believe this allows us to earn better risk-adjusted returns than the very competitive acquisition market. We are also actively pursuing acquisitions, but we are very selective when bidding on existing facilities to ensure that they meet our return and quality requirements.

PW: We believe that the best value lays in Class B assets, mostly in secondary markets where the cap breaks markets managing these properties whose tenants are paying below current market. We’re in markets where these rental gross rates are three to five percent. If tenants are paying below, and growth rate is three to five percent and their rent expires in three to four years, you can see where you can increase rent of tenants. We feel we can increase without running a significant risk of them relocating and they tend to say for a long time.

CIP: What makes Chicago an attractive place for you to invest?

DH: Overall, the Chicago industrial market is large and highly liquid, making it attractive to investors— from large pension funds to local investment groups. With its diverse economy, large population, and critical position as national transportation and distribution, Chicago has a wide range of tenants that need industrial space. These spaces can be infill properties to serve local needs or larger distribution centers that offer efficient highway or rail access to meet demand whether here locally, the Greater Midwest or nationally.

PW: We like Chicago because it’s a premier marketplace to be in and we bought a portfolio there in October, so we had initial investment there and we plan to acquire more properties there.

CIP: Where in Chicago have you invested? Where in Midwest?

DH: Chicago is an attractive market due to its breadth of demand from investors and tenants. Over the past few years, we acquired a 509,000 square-foot bulk distribution facility in Joliet near the intersection of 1-55 and I-80. We added a 53,000 square-foot facility in Aurora off I-80 near properties we owned. We also have been investing in the Southeast Wisconsin submarket, as sophisticated users such as Amazon continue to be attracted to its efficient access to the large regional population, skilled labor force, and business-friendly environment. In addition to the aforementioned Rust-Oleum expansion, we added a 627,000 fully-leased facility there last year and continue to pursue other opportunities there.