Few commercial real estate professionals would point to 2020 as a banner year. But those working in the industrial sector are an exception. Even with the COVID-19 pandemic spreading across the country, last year was a busy one for industrial.
It’s not surprising, then, that the panelists participating in the industrial break-out session during the 19th annual Commercial Real Estate Forecast Conference held by Real Estate Publishing Group on Jan. 7, expressed plenty of optimism that 2021 would be a strong year, too.
Daniel Cawley, president, chief executive officer and founder of Cawley Chicago, served as the moderator of this panel, asking industrial specialists a series of questions about 2020, the pandemic and the future.
For those looking for good news, this panel, not surprisingly considering its focus on industrial, provided plenty.
Alfredo Gutierrez, founder and president of Houston, Texas-based SparrowHawk Real Estate Strategists, said that he and his fellow CRE pros spent much of 2020 focusing on the needs of the tenants in the industrial buildings they acquired.
This is always important, Gutierrez said. But during a global pandemic? Understanding the needs of tenants and doing everything possible to help them reach their goals became an even more important task, he said.
That’s largely because the pandemic is impacting every tenant in a different way.
“Some of the tenants, if they were supplying products to CVS, Walgreens or Amazon, were doing fine,” Gutierrez said. “But if you were a tenant supplying products to the hospitality or entertainment industries, you were largely shut down.”
Gutierrez said he and his fellow SparrowHawk professionals had several long conversations with the tenants in their buildings throughout 2020.
Those long talks were often quite frank. But by identifying challenges, SparrowHawk was more likely to help these tenants survive the difficult times of 2020.
“It was about figuring out quickly what we could do together as a team to get on the other side of this pandemic,” he said.
Not all tenants responded equally to SparrowHawk’s overtures, Gutierrez said. Not coincidentally, not all of them are still tenants, either.
“The tenants we were able to get ahold of in 24 to 48 hours are still tenants,” he said. “The ones I couldn’t get conversations with, where the weeks turned into months, those tenants have not made it. We have seen more bankruptcies in our portfolio in 2020 versus 2008 or even 2000.”
Gutierrez said that SparrowHawk lost 5 percent to 6 percent of its base of tenants last year.
“It was a lot of regional distribution guys supporting the restaurant business and hospitality business,” he said. “They didn’t have a lot of staying power. Those guys went out of business. You hate to see that happen.”
Gutierrez said that he’s seen signs of hope during the last 60 to 90 days because of the several companies coming out of the ground and starting new businesses, even with the pandemic still spreading across the country. That, Gutierrez said, is encouraging, even if these businesses are smaller and leasing less space.
Collections have been solid, even during the worst days of the pandemic, Gutierrez said. He said that SparrowHawk arranged deferment programs for about 5 percent of its tenants during 2020.
Those programs have worked, Gutierrez said, with every tenant that took advantage of a deferment offer having paid back any help they took during the pandemic. Gutierrez pointed to that as another encouraging sign for the industrial market.
Dan Barrins, senior vice president in the commercial real estate group of Associated Bank, said that his bank, too, has been trying to work with commercial developers and tenants throughout the pandemic.
“We are trying to be as generous and humane as possible considering all the issues going on in the market,” Barrins said.
Barrins said that many of Associated Bank’s landlord clients say they are giving 60-, 90- or 120-day deferrals to their tenants. Associated Bank is taking the same approach, Barrins said.
“We want to help developers get to the other end of this,” he said. “There haven’t been a lot of foreclosures.”
Barrins said that one of the challenges with lending during the pandemic is the uncertainty. As he said, it’s difficult to forecast when a deal will actually start and when it will wrap up.
And in the Midwest? Winter weather makes lending even more challenging.
“In Chicago, for instance, we have a pretty set construction season,” Barrins said. “If you miss it, you miss it. No one wants to break ground in December.”
Thomas Boyle, principal with Lee & Associates of Illinois, agreed that the pandemic hasn’t hit every company equally hard.
“The economy shifted when the pandemic hit,” Boyle said. “I realized that when the economy shifts, there are winners and losers. Who will be the winners?”
Boyle said that he figured out — and, as he says, this wasn’t a surprising revelation — that any company that distributed, packaged, manufactured or handled logistics for any product going to a grocery store, CVS or Walgreens was going to be a winner during COVID.
“As the rest of the world was shutting down, those clients were running third shifts,” Boyle said.
Many of the winners in 2020 will remain strong during 2021 and beyond, Boyle said. Consumers will demand it, he said.
“Even smaller companies are doing 24-hour delivery today,” Boyle said. “The direct-to-consumer model benefits logistics companies. They are going to be the beneficiaries of this. New layers of logistics will emerge to better serve the small- and medium-size customer.”
Joshua Hearne, principal with Cawley Chicago, said that industrial construction continued throughout 2020, with the year actually being a business one for new development in the Chicago area.
And for 2021? Hearne said that he expects this year to be just as busy if not more so.
“I think we will continue to see a wave of development in 2021,” Hearne said. “And a lot of that development will be going to high-density areas.”
Doing business through the pandemic, of course, presented challenges. But Hearne said that there was at least one benefit: Municipalities were able to get projects approved and developed in less time.
Why? As Hearne said, many of the suburban municipalities in the Chicago area pivoted to virtual meetings in 2020 because of the pandemic. This meant less debate from community members. This often led to faster approvals from planning commissions and councils.
“There was a lot less chatter from the community,” Hearne said. “Municipalities could actually push through projects faster than what has historically happened.”
That doesn’t mean there weren’t hiccups throughout the year. Because of the pandemic, it often took longer for developers to complete their due diligence on projects, Hearne said.
Matt Reardon, owner of MCR Partners, Ltd., said that different municipalities have handled the pandemic better. He said that many jurisdictions across the Chicago area were prepared to operate in virtual mode before the pandemic hit. Others were not.
“There have been some municipalities where it’s been, quite honestly, problematic to get a transaction through,” Reardon said. “Those communities that were prepared prior to the pandemic, though, really succeeded and exceeded expectations.”
Reardon said the same can be said of individual businesses. Many businesses were flexible and used the incentive opportunities offered by federal governments to survive the worst days of the pandemic.
“The ones that were paying attention and had relationships with lenders and investors were able to get by,” Reardon said.
Reardon works the Northwest Indiana market, and his company is based in the center of this region, Hammond, Indiana. He said that his company, and the Northwest Indiana region as a whole, enjoyed plenty of success in 2020.
That’s largely because the industrial projects that did reach the construction stage last year were of the highest quality.
“Because of COVID, the projects that were meritorious moved ahead,” Reardon said. “In Northwest Indiana, I am pretty well out of inventory these days.”
In the coming months and years, Reardon said, he expects to see states push for an expansion of high-speed Internet technology for industrial buildings.
“We are going to see an investment on the public side in traditional infrastructure, but also an investment to increase the cybertechnology necessary so that people can work efficiently at these warehouses,” Reardon said.
Reardon said that a growing number of tenants will demand this high-speed Internet capability in warehouses and other industrial product. This will be a change that CRE professionals will have to adapt to, he said.
“It used to be that as long as a building had a sprinkler in it, you were good to go,” Reardon said. “I’m old enough to remember that. The demands now are changing. It becomes part of the discussion. Will I have fiber? How good is it? Does this manufacturer need access to high-speed Internet to make its operations work better?”