By Steve Schnur
Senior Vice President-Duke Realty
Five years ago, Duke Realty announced its plan to restructure its portfolio so that a greater percentage of its net operating income would come from bulk industrial and medical office assets, and less from its suburban office properties, particularly those located in the Midwest. Since then, the diversified, publicly held, nationwide REIT has aggressively executed its plan, with a significant amount of industrial and office transactions taking place in the Chicago market.
Chicago remains a major national distribution hub, so we have focused on increasing our industrial properties here. Since 2009, we have invested more than $300 million, adding more than 4.2 million square feet of industrial space through acquisitions and new development to raise our total Chicago industrial portfolio to 12 million square feet. At the same time, in keeping with our overall strategy, we have decreased our Chicago suburban office down to just about 3 percent of our local portfolio.
Why industrial?
A number of factors drove Duke Realty’s decision to shift its portfolio composition so that a higher percentage is in industrial products. First and foremost is that the United States is a huge society of consumers. Whether imports, such as laptop computers, or made-in-the-USA products, such as food, Americans “consume” or use products at an incredible rate. This affinity for consumption drives the need for strategically located warehouse/distribution facilities.
Industrial properties also have the ability to provide a solid rate of return over the long term. Compared to other property types, industrial buildings cost less to lease and operate over time. Most industrial buildings, whether 200,000 square feet or 1 million square feet, only need one or two tenants to be 100 percent leased. And the investment needed for a new industrial tenant is usually low since, in many instances, only a new coat of paint and carpet in the office area are all that’s needed to seal a new industrial deal.
Industrial buildings are low-maintenance facilities with a long “shelf life” as well. Repairs to parking lots and roofs typically are needed at the 10–20 year mark, with minimal maintenance in between. Assuming an industrial building has the clear heights, dock doors, bay widths and parking that warehouse operators and distributors need, a 20-year, well-maintained industrial building is highly leasable at favorable rents.
Why Chicago?
Companies select the locations for their warehouse/distribution facilities based on proximity to users and access to transportation. Chicago offers the best of both worlds for companies looking for a site that puts them within a day’s drive of a large percentage of the U.S. population and gives them multiple transportation options.
Chicago has the third largest population base in the United States, and other major metropolitan areas can be reached efficiently and cost effectively thanks to its access to major highways, rail and air. Though other areas of the country are ramping up their rail and developing intermodal terminals, Chicago has been a major transportation hub between the eastern and western United States since the 19th century and remains so today.
Increasing its industrial properties in Chicago made sense for other reasons as well. Duke Realty already had a large industrial presence here so it made sense for us to leverage our expertise in this product segment. Duke Realty has been in Chicago since 1997 and has built a solid reputation as a knowledgeable industrial partner and one that has a quality portfolio with space designed for efficiencies in product storage and movement. Our current 96 percent occupancy rate is indicative of the strength of the Chicago team and the quality of our portfolio.
Industrial’s impact
As a result of its acquisition and development activity in Chicago and throughout the country, Duke Realty is nearing its goal of having 60 percent of its investment in industrial properties. At the end of the first quarter of 2013, the company’s portfolio was 54 percent industrial, 27 percent office, 16 percent medical office and three percent retail. Our goal is to have our portfolio restructuring complete by the end of 2013. We’ve added high-quality, well-leased properties in Chicago that have contributed significantly to this goal and we continue to keep our eyes open for other opportunities in Chicago.
As senior vice president for Duke Realty’s Chicago office, Steve Schnur is responsible for the market’s industrial and office portfolios. In addition to leading the asset management and leasing operations, he works to identify new land positions, acquisition and development opportunities, and prospects for built-to-suit development.
