The industrial sector has long been the darling of the commercial real estate world. That hasn’t changed today, even though higher interest rates have slowed the number of industrial sales taking place.
Why has industrial been so strong for so long? Steve Schnur, chief operating officer with Chicago-based CRG, pointed to the sector’s strong fundamentals: Companies still need to distribute their products quickly to their customers. That requires plenty of warehouse and distribution facilities across the country.
We recently spoke with Schnur about the resilience of the industrial sector, even during challenging economic times. Here is what he had to say.
These are obviously challenging times for commercial real estate. But are you still seeing strong demand from tenants for industrial space?
Steve Schnur: We are. If you go back to the core main drivers of our business, you’ll see that they are still strong. Ecommerce is a big driver. Companies rethinking their supply chains and inventory levels has been a big driver. The reshoring of manufacturing to the United States has been an important driver. All those drivers are still in play.
The industrial sector is not completely resistant to what is going on in the economy, not by any means. More people are pressing pause if they can do so. That’s just demonstrating good financial corporate responsibility. But there is still good demand for industrial space. Leases are still getting done. There are a lot less buildings under construction today than a year ago, so the demand for existing space is still high.
But some deals are getting kicked out a little further. If you can press pause and not make a capital investment today to see how this economic situation will shake out? You’ll probably do that.
Is that what a lot of companies and investors are waiting for today? More certainty with interest rates and the economy?
Schnur: I think the feeling now is that interest rates have sort of topped out. Most people would say that. Hopefully, we will see some easing of rates later this year. Most economists think we are near the top of what the Fed wants to do to curb inflation. But there are geo-political events happening, too, that are giving people pause, whether consumers or CEOs making decisions about their supply chains. People want as much clarity as they can get before making capital investment decisions.
What about demand from investors for industrial assets? Have high interest rates slowed the number of industrial sales across the Midwest?
Schnur: Activity has definitely paused. The capital markets have seen a pullback, especially after what has happened with some of the banks in the headlines. Lending has been pulled back. There is less capital out there. Fewer transactions are getting closed today.
But what comes out of this in the U.S. economy is ingenuity. What used to be done with traditional bank financing is now moving toward debt funds. Life insurance companies are more active in the market today.
I think 2023 will still be a strong year for industrial transactions. The capital side will get itself figured out. And the reason for that will be the health of the underlying fundamentals of our business. The industrial sector still has a low vacancy rate. Rent growth is still outpacing inflation. People still want to get into the industrial market.
I don’t want to be blindly optimistic, but I will tell you that when compared to other property types, industrial is a relatively inexpensive investment. As an investor, you are not overpaying for improvements. You are buying highly functional space. Multiple users can come in and use that space without spending significant dollars to retrofit it. The rent-growth story has been phenomenal. Industrial has been the darling of the commercial real estate industry for a long time.
When it comes to newer industrial facilities, what type of amenities and features are end users looking for?
Schnur: The big need is still for additional trailer storage. Users are also looking for flexibility in how this trailer parking can be used. Some users want to stage product outside in trailers. Power is more critical today, too. Tenants are asking for more power than they probably need knowing that with where the world is going with AI and data, that more power is probably something they are going to need during the terms of their lease.
Companies are having trouble finding warehouse workers. So they are getting creative with amenities in their industrial facilities. When we do fit-outs for tenants in our buildings, we see stuff today that historically we never saw. There are outdoor basketball courts, bike racks, walking trails, workout rooms, locker rooms, showers. Employers and users of the space are adding things that we wouldn’t have typically thought of as warehouse amenities to attract employees today.
At the end of the day, everyone is competing for workers. Companies don’t want to lose warehouse employees. Finding good employees is the number-one challenge of most of our users today. So they are adding the amenities that workers want.
How difficult is it today for end users to find the industrial space they need?
Schnur: Every real estate brokerage company puts out a report. But in Chicago, the industrial vacancy rate is sub 3%. On a national basis, it’s somewhere in the 3.5% range. You can make an argument that the industrial sector is under-supplied. If you dove into those vacancy stats, you’d find that some of the vacancies are in buildings that are borderline functionally obsolete. The lack of space can be challenging for tenants that need to find new, modern space.
I think the larger facilities, such as 400,000 square feet and up, have the most demand today. The larger buildings, especially those close to population centers, are especially in demand.
Are there any industrial products that CRG is working on today that have you especially excited?
Schnur: We have a lot going on. We are working on a million-square-foot building just north of Minneapolis. It’s a great location, and the building should be complete in the third or fourth quarter of this year. It’s a phenomenal project.
We recently finished a million-square-footer in the Columbus market that we leased to a major brand-name company, and we are getting ready to start a 250,000-square-foot building just to the north of the Columbus market.
In Chicago, we are building out the tenant interiors for a major company. That building will hit the market later this year.
