Industrial N Illinois

Which way to the capital?

Which way to the capital?,ph1
LogistiCenter, 365 North Avenue in Carol Stream
Which way to the capital?,ph2
LogistiCenter, 365 North Avenue in Carol Stream

Though it remains the hottest asset type, obtaining financing for an industrial venture still comes down to the basic fundamentals of each specific project, including location, the credit quality of tenants, building essentials and the ability to re-tenant a space.

As for location, the I-55 and I-80 corridors are the in-demand submarkets right now. “They’ve always had consistent demand and reliable transaction velocity,” said Dan Barrins, vice president, relationship manager at Associated Bank. “Even though I-55 has a high vacancy rate, we’re not too concerned about that. There are a group of tenants that really want to be there, we have different price points for rent and they all require different size spaces and building depths.”

Outside of those two submarkets, Barrins points to several others that developers should be keen to take a closer look at in 2018: central DuPage, west of O’Hare and southeast Wisconsin, as well as infill, last mile locations around the city and near suburbs.

Most of the activity in central DuPage is occurring in Downers Grove and Carol Stream. The submarket’s largest new construction project is the LogistiCenter at 365 North Avenue in Carol Stream. Developed by Dermody Properties, the spec site offers 381,600 square feet of divisible space with 36-foot clear height, 81 dock doors and parking for over 320 cars. The site’s proximity to I-355 is another selling point as that corridor is gaining interest from both developers and users because of its access to other major interstates in the area.

The extension of the Elgin-O’Hare Tollway to actually reach O’Hare is designed to ease congestion around one of the world’s busiest airports. But it would also open up opportunity to commercial real estate developers.

“In our opinion, these improvements are really long overdue. West access at O’Hare is going to be a gamechanger,” said Barrins. Communities all along the Elgin-O’Hare expressway, including Hanover Park, Wood Dale, Itasca, Elk Grove Village and Bensenville are all going to benefit from direct access to the airport.

Talk of a western terminal has ebbed and flowed over the years, with hopes of trimming delays at the airport. If that doesn’t materialize, there exists the possibility of a west cargo facility to help alleviate some of the congestion at the airport’s south cargo area. The wild card is whether tenants will accept faster access to the airport given the extra tolls and added miles on truck fleets. Would rents adjust downward to compensate?

“Some logistics expert is going to have to do some math and decide if a little bit less rent is a fair tradeoff for a few tolls and a few more miles on a truck,” said Jerry Rotunno, senior vice president, team leader, Associated Bank. “The market will speak and tell us how that math works out once tenants start relocating to areas that have improved access.”

Southeast Wisconsin is another target submarket. A lot of the renewed interest there is due to the Foxconn plant now under development, which should spur suppliers and support companies to attempt to locate near the new factory. “They’ll have a major impact on that whole area of southeast Wisconsin,” Barrins said.

The final location that developers might want to target isn’t any one submarket, but infill opportunities throughout the city, especially those that can serve some last mile function. “We’re seeing a lot of activity around Cicero and along I-55 in the city,” said Barrins. “Everyone says e-commerce has been a major driver, which it has been to these infill locations. But also in the city and near suburbs you still have a highly skilled workforce that’s going to help attain and attract new investment into the areas.”

For construction lenders, the most desirable new projects to finance are those that will attract tenants looking to upgrade into the most efficient buildings. Right now, those are structures with greater than 30-foot clear, easy truck access and abundant trailer parking.

The supply and vacancy rates will always affect the availability of financing. But one question developers are asking is if the large, spec industrial deliveries in 2017 that remain under-leased will affect financing or require more pre-leasing on new loan requests.

“We like to keep our projects, specifically our speculative projects, staggered so that if there is a lease slowdown we don’t have too many loans delivering space at the same time,” Barrins said.

The good news for industrial is that the building cycles are short, allowing developers to adjust to economic changes. As it only takes roughly nine months to build most industrial buildings—contrasted with the 24-month build (plus 18 months to stabilize) that is common in apartment construction—lenders and developers can be much more nimble on industrial projects. Multifamily and office buildings rarely sell empty in the current economic climate, but that’s not so for industrial.

“If you get enough pre-leasing, there is a tradeoff,” Rotunno said. “The required equity in the deal decreases because the equity is there for covering risk. When you get pre-leasing, the risk is reduced, therefore the developer negotiates a lower equity contribution, thus a higher loan to cost.”

“For us, the key is to partner with the best industrial developers who know the markets and plan to build better than anybody else,” said Barrins. “We have to have confidence in our developers, and to a certain degree we have to have a lot of confidence in our developers’ leasing brokers.”

Last year’s federal tax rewrite has many wondering if there will be long- or short-term effects on commercial real estate. Both Barrins and Rotunno feel that to the extent that there are any consequences, they will be positive. Putting more money into businesses’ coffers should lead to any combination of three things. The corporations can either pass those tax savings on to their employees, spend on research or other capital expenditures and/or use the money to pay down debt.

“All three of those scenarios are positive for industrial development. If they pass along the money to their employees, their employees go out and make purchases,” Barrins said. “If they invest in R&D technology, it really increases the efficiency by way of moving into new or more efficient buildings or even more productive automation in their existing buildings. And lastly, if they decide to pay down debt, reducing the company’s leverage allows them to be a little more free in how they operate their business.”