Yes, industrial real estate remains one of the strongest commercial sectors. This doesn’t mean, though, that this asset class didn’t face challenges in 2023. Higher interest rates slowed sales activity. An influx of spec buildings in the first half of the year boosted the sector’s still-low vacancy rates. And those same higher interest rates resulted in a slowdown in new industrial product during the last quarter of the year.
What will 2024 hold for this sector, especially now that the Federal Reserve Board has said that it is no longer increasing its benchmark interest rate? We spoke with industry veteran Susan Bergdoll to find out.
Bergdoll understands the industrial market. Senior vice president and partner for the Midwest industrial region at the Chicago office of CRG, Bergdoll has logged more than 25 years in commercial real estate.
Here’s what she had to say about the state of the industrial sector as 2024 gets its start.
Now that the Federal Reserve Board has said that it is done increasing its benchmark interest rate, do you expect to see more industrial sales in 2024 than we saw last year?
Susan Bergdoll: The start of the year is always a little intimidating to us. We start over at zero again. It’s fun and exciting, but at the same time it’s always daunting at the beginning of the year when you have a zero on your scorecard. How do we get to our goals for the year when everything resets to zero in January? Somehow, though, we always manage to get there. I think that will be the case again this year: We expect 2024 to be a busy year for us and the industrial market.
The biggest drag on the industrial market is uncertainty. By having the Fed state its plans, saying that we are done with rate hikes, it takes some uncertainty out of the equation. It doesn’t remove uncertainty 100%, but it does remove some. I think we will start to see more sales activity in the industrial market in the first quarter of this year.
That uncertainty is a killer. How do you underwrite a project? What kind of numbers can you expect? There is question after question when there is so much economic uncertainty. That is what stops people from moving forward with projects and acquisitions. Being able to say that we at least know this one piece of the equation brings more certainty to the market.
Susan Bergdoll, Senior Vice President, Partner, CRG
How about with new development? Do you think we will see an increase in new industrial construction throughout the Midwest in 2024?
Bergdoll: I do. Both development and sales and leasing will pick up in 2024. Last year was still a good year. If you look at the numbers compared to 2022 and 2021, yes, 2023 doesn’t look as successful. But if you look pre-pandemic, we were still in the same ballpark in 2023. The 2023 leasing numbers are on par with 2019. We were all saying that the market was terrible last year, but it really wasn’t, not historically. Rent growth was still strong. The supply was more constrained in 2023 because people weren’t building as much. But the rental numbers went up. Vacancy rates remained low. The metrics for 2023 were still OK.
I think that 2024 will continue that solid path. We will get that activity started again. It will take a little while, but construction activity will start to increase. Of course, you are talking to someone who is a developer at heart. The glass is always half-full with me. Developers find a way to look at things positively. It’s what we do.
Is the demand for industrial space still high from tenants?
Bergdoll: It is. The big thing in 2023 was that people hunkered down and renewed their industrial space. Renewals dominated industrial leasing activity last year. Given the choice of relocating versus staying, unless there was some other driving force, tenants stayed where they were. If something was driving them such as labor issues or supply chain issues, then they relocated. But a lot hunkered down and stayed where they were.
Is the reshoring trend leading to more demand for industrial space, too?
Bergdoll: Overall, we are seeing a focus on reshoring. But this doesn’t happen as often in the Midwest as it does in port cities. Given their geography, West Coast and East Coast cities are seeing more of this than we are seeing in the Midwest.
Are there any Midwest markets that are particularly strong right now outside of Chicago?
Bergdoll: Louisville is strong today. Nashville is strong. Columbus and Indianapolis given their locations will always be strong. Indianapolis is temporarily oversupplied with certain industrial product right now. They have overbuilt a bit with the bigger buildings, buildings of 500,000 square feet and above. But that is just temporary. Indianapolis will always be a strong industrial market.
What type of industrial product was developed last year?
Bergdoll: Developers in 2023 pulled back on building some of the bigger buildings. Building bigger requires more capital. There is bigger risk. With that size range, developers decided last year to sit tight and see what happened in the market. But we have still seen a lot of industrial space of 250,000 square feet and below. That has been the biggest size range for leasing activity. Developers who developed in that size range have continued to see good success. They have continued to see rent growth in those properties. They leased up in a reasonable timeframe.
When the market is uncertain and you can develop in an ‘A’ location in a size range that is easy to finance, meaning it is under 600,000 square feet? You can do those projects all day long. Just look at the O’Hare submarket in Chicago. That will always be one of the hottest submarkets in the city because it is an ‘A’ location.
How strong is the Chicago industrial market today?
Bergdoll: Chicago is the engine that drives the Midwest, no doubt. Vacancy continues to fall in the Chicago market. I think it will continue to fall in 2024. There weren’t that many projects started in the second half of 2023 because of the uncertainty in the economy. The Chicago industrial market will be in a good position in 2024.
How have developers adapted to the changing industrial market during the last year?
Bergdoll: CRG’s strategy has been to develop large buildings of 500,000 square feet and above. While that will continue to be a focus, we’ve also said that it’s important to build smaller properties, too, infill product in the 75,000-square-foot to 200,000-square-foot range. That has been our focus for the past couple of months. If you can build a product of that size in a plus location, there is always demand. You can finance a project of that size in that location more easily. I think that some folks have had to pivot a little bit on their strategy and find a new niche. Of course, no one is going to stick with one thing forever. For the next 12 months or so, though, that will be our focus in Chicago.
The other thing that some developers have focused on is sustainability. A lot of clients are interested in LEED certification. They want to locate in a green building. They want electric truck charging stations. They want to know that developers are using sustainable construction materials. Sustainability is something that is more appealing to potential tenants. Because of that, developers have focused more on it.
Why has the industrial market been so resilient for so long?
Bergdoll: We are all buying so much stuff. Think of how many times the Amazon truck comes to your house every week. Consumer demand is driving the industrial market. Even though we’ve had this financial uncertainty, look at consumer spending. It has continued to rise. That is pushing the industrial market. We are all buying stuff.
