Industrial N Illinois

Capital availability may be drying up for select industrial products

Capital availability may be drying up for select industrial products,ph1

Industrial has been so sturdy for so long that it’s hard to remember a time when the asset class wasn’t the darling of commercial real estate. While e-commerce growth is expected to continue—and with it, the warehouses and logistics facilities that bridge the flow of goods from suppliers to consumers—there are a number of question marks at the beginning of 2019.

Interest rates, international trade wars, oversupply, a slowing economy and other factors are potentially strong enough checks on industrial performance that there is reason to wonder if they could bring its meteoric rise back into balance—or possibly even trend downward. So what indicators are investors keeping an eye on as we head into the first quarter of the year?

Big box, speculative projects have dominated certain Chicago submarkets this cycle, including the I-80 and I-55 Corridors. There is reason to be concerned that overbuilding in some submarkets could choke off some of the capital that freely flowed into these areas in recent years.

“Financing for large, big box, speculative construction is tightening due to the potential oversupply in the southwest submarket and lenders are more disciplined for outlaying projects,” said Kenneth Szady SIOR CCIM, national director–North America and Canada at Marcus & Millichap. “Some of the completed big box developments remain vacant and are giving lenders pause. However, many of the large projects are well capitalized this cycle by large pension funds or life companies that may fund them as equity.”

Though particular submarkets and asset types may have ambiguous futures, the current and near-term performance of the overall industrial product type is strong enough that investors continue to pursue industrial properties that they can lock into their portfolios. This means that funding of all stripes continues to flow into Chicago’s industrial corridors.

“From a sale perspective, all silos of capital are underweighted and chasing industrial acquisitions: pension funds, life companies, REITs, foreign and, without question, high-net-worth private capital originating from the East and West Coasts,” said Szady.

The areas and property types that institutional investors remain excited about all have one thing in common: good fundamentals. While investors will have to continue doing their due diligence, according to Szady there are certain characteristics that should draw the most attention looking ahead.

“In 2019, investors are focused on acquiring best-in-class, multi-tenant properties located in well-established submarkets with an average lease duration over five years,” Szady said. “Those properties are trading in the low 5 percent cap rate level.

Of course, investors and spec developers aren’t alone in their interest in the Chicago market. Plenty of owner-occupiers cite the area’s transportation infrastructure and population base as reasons why they need to locate here. For example, Rana USA, a food distributor headquartered in New Jersey, is slated to complete its 326,000-square-foot facility in Bartlett’s Brewster Creek business park this quarter.

“Away from speculative construction, we have seen a surge in build-to-suit requests by companies looking to modernize their supply chain in strategic locations in Chicago as well as other major markets,” Szady said. “Most of the build-to-suits are trying to limit lease term to 10 years versus 15 years, as was the standard a few years ago, both for rated and unrated credit.”