Industrial N Illinois

The road ahead for logistics is all clear

The road ahead for logistics is all clear,ph1

The impact that transportation and logistics have had on industrial real estate over the past decade is unprecedented. The flow of goods, spurred on by online shopping, has led to an incredible pace of warehouse and logistics facility development.

But with so many question marks out there—tariffs, rate increases, consumer behavior and more—how long will this historic streak continue? On October 26th, Dan Barrins, vice president at Associated Bank and Larry Johnson, senior vice president at CBRE, will join more than a dozen other industry experts at the 15th Annual Transportation & Logistics Conference to look at the state of market, as well as development, investment and financing trends. Click here to register or to find out more.

“We’ve never been in this space before,” Johnson said. “Consumer confidence, low unemployment, corporate optimism, the tax stimulus, the overall economy, a rising stock market—everything seems to be going right. We’re very bullish here at CBRE and many of us in the real estate industry are as well.”

Prudence on the part of those in the industry—many still recalling the sting from 2008 to 2009—has helped to keep this segment of the economy going strong. For developers, institutions, corporate users and occupiers of space, that has meant purposeful and cautious use of space.

“When users grow into a community, they want to see some solid leadership. They want predictability,” Johnson said. “They know it’s not bullet proof, looking ahead three, five or 10 years, but they want to make sure they are going into the right community.”

According to Johnson, there are so many variables for these groups that controlling the controllable has become very important. With labor costs rising, investors, owners and tenants are attracted to properties located in deep labor pools. And uncertainty at the federal and state level means that forming partnerships with municipalities can help alleviate some of that tension.

That political uncertainty does not extend to the Federal Reserve, according to Barrins. We are at the tail end of the longest bull market in modern history and a sudden spike in interest rates could lead to a catastrophic downturn similar to the Great Recession. The sensible and transparent rate hikes that we’ve witnessed, therefore, should allow construction of and investment in warehouse and logistics facilities to continue for a few more years.

“The Fed has done a really good job of communicating the proposed hikes in 2018 and into 2019,” Barrins said. “I think developers, investors and users have already baked those rate hikes into their modelling and their pipeline for the next 12 to 24 months.”

Because of the buoying from e-commerce, logistics and transportation-associated facilities have never been more desirable, from either a development or investment standpoint. The speed with which the industry can turn around quality product also makes funding easier to come by.

“The trend for us is to finance as many industrial properties as feasible,” said Barrins. “Where we are at in the cycle—with the ability of developers to throw these buildings up and the availability of capital on the backend—it makes these buildings in this asset class really attractive to lenders to avoid exposure with the potentially coming next downturn.”

The institutional investors have stayed relatively stable, with few new foreign investors entering the market. Barrins said that he has seen the same domestic institutional groups buying these assets, though their recent activity has altered a bit.

“They either jump in and buy these buildings when they’re stabilized and clip coupons or a lot of them are deciding to take on leasing risk and buy these buildings at shell completion,” Barrins said. “With the strength of the leasing brokers, it gives some of these institutional owners a lot more comfort buying these assets empty and allowing them to realize the value creation.”

With all the activity surrounding the asset class, financing for industrial is easier to come by. Lately, banks are facing new competition as debt funds and even life insurance companies are providing new sources of capital.

Flush with both funding and space (at least in the outer submarkets), owners and tenants can be picky. So what is it they want? As has been written about before, user demand is raising ceiling heights, spreading out columns and paving more car and trailer parking. But these tangibles, according to Johnson, are only part of the story.

“The old days of just listing the real estate features are pretty much gone today,” said Johnson. “Users are looking at labor force availability, population density, highway network systems and municipal pro-business attitudes.”

There are other factors to consider as well. Getting goods from factory to doorstep requires a few stops in between, with one of the most critical being a last mile facility in the urban core. One thing that is making last mile so much more difficult, after infill site availability, is Chicago traffic.

“It seems like there is no rush hour anymore. It’s just consistent throughout the day,” said Johnson. “That’s a metric that is becoming very concerning.”

The Chicago area infrastructure is actually rather strong and diversified. It can always be expanded and improved, however, to maintain the high level of product shipping that passes through the area. That would require leadership from the state legislature as well as room in the budget.

But for the remainder of this development cycle, which is predicted to stretch into late 2020, the industrial asset class—and in particular, large logistical warehouses—should perform equally as well as in the past few years.

“We’re very bullish. Momentum is terrific and we are very optimistic about the next few years,” Johnson said. “We think it’s going to be a great time to be in the real estate industry.”

To learn more from industry experts about at the development, investment and financing trends surrounding these types of facilities, register for the 15th Annual Transportation & Logistics Conference. The event will be held the morning of October 26 at Hamburger University in Oak Brook, Illinois.