Top professionals within the industrial real estate sector across the greater Chicagoland area gathered in person on April 23rd to discuss the state of the market and provide predictions for what’s to come in the near term future at the 18th Annual CIP Industrial Summit.
The event, which was held at the Hyatt Lodge in Oak Brook, was the first summit for the Chicago area to meet in person since the beginning of the pandemic over a year ago. The list of panelists included nearly two dozen industrial insiders with a diverse experience set and expertise.
And with the industrial market as strong as it has been in recent months, there was a lot to discuss.
The summit kicked off with keynote speaker Adam Marshall, senior managing director of Newmark’s Chicago office, 2021 President of the SIOR Chicago chapter, and REjournals contributor.
“There’s no doubt about it that the Chicago industrial sector is booming,” Marshall said, kicking off the event. And the numbers presented by Marshall back it up. For Q1 2021, the industrial vacancy rate was 6.2% and absorption was 5.7 million square feet. The absorption number was significant, Marshall noted, when compared to the 3 million square feet during Q4 2020 or the 1.52 million in Q1 2020.
Additionally, 20 million square feet of new industrial space was under construction, which Marshall highlighted as being one of the highest amounts of all time. The average size of a new facility was roughly 275,000 square feet and retailers and consumer goods represented a big chunk of the activity with 25% of the total square feet leased in Q1 2021.
The first panel included the following professionals: Josh Hanna, partner at Kirkland & Ellis; Beverly Hayes, senior advisor at SVN; Brian McKiernan, SVP of development with Centerpoint Properties; Jim Stanton, interim Secretary of Commerce for the State of Indiana; Rene Circ, senior managing director and COO of GID Industrial; and Adam Moore, senior regional director for First Industrial Realty Trust.
A lot has changed in the world and the Chicago region in the last twelve months, and the group was initially posited with discussing some of the impacts of the pandemic that they have witnessed on the job.
“The pandemic helped accelerate some deals,” said Beverly Hayes. And the momentum never really fell off, according to others. “On the industrial side, the fear was short-lived,” said Rene Circ of the early days during the pandemic. “The COVID discount lasted five days.” But there are still challenges to face, Adam Moore added. “Steel pricing is still up significantly and one of the other issues is the entitlement process,” Moore said. In response, Jim Stanton quipped, “You can come to Indiana, we’re open.”
The discussion moved on to what the future of the industrial office and workplace looks like. One of the biggest challenges the industry will face is bringing new talent into the fold and getting them up to speed, suggested Brian McKiernan of Centerpoint.
“I think the interesting thing is going to be the younger group who needs the apprenticeship and networking,” said McKiernan. “We can run the business virtually and you can scale and deploy more capital with less people, but I think everyone in the industrial space is trying to recruit talent and understand how do you get younger people in and how do you get them to build their networks and understand the investment thinking and logic?”
Adam Moore believes that there may be more requests to build office space within industrial facilities for businesses to consolidate space and staff. “We’re not sure what it looks like as far as the timeframe goes, but we’ve learned how to communicate and work efficiently electronically,” Moore said of the big return to the workplace. “From an industrial standpoint, I think we’ll see more people asking for more office build outs.”
There was also discussion on how federal COVID relief helped businesses, municipalities and even state governments. Interim Indiana Commerce Secretary Staton says that Indiana remains strong and competitive, even after the economic fallout from the pandemic. “Indiana came out of the pandemic fiscally stronger,” said Staton. “But our biggest challenge is figuring out what to do with this lottery winnings, so to speak, and how to channel them into long term investments.”
Staton elaborated, indicating that the state plans to invest half a billion dollars into economic development across the state by providing $50 million to 10 regions to create economic acceleration programs to help bolster manufacturing and other industries.
But one of the biggest investments expected from the federal government will be in infrastructure, which panelists see big opportunities for private industrial businesses. “At Centerpoint, 15% of our capital deployment is in infrastructure and we’re hopeful that this will increase public-private partnerships and increase the investment appetite in infrastructure,” said McKiernan.
Despite all of the investment and interest in industrial real estate across the Chicagoland region, there’s perhaps some skepticism among institutional investors on whether Chicago is still a good bet.
“Chicago is a little bit challenging,” said Rene Circ. “You have two schools of thought about Chicago. One is that it’s the second largest industrial market in the US: It’s huge and easy to invest capital here, and depending on your platform, you almost have to be here. And the other school of thought is, well, we don’t really buy buildings, we buy cash flow, but the buildings generate that cash flow.”
“Instead, you look at growth and population and Chicago suddenly starts to fall off that list,” Circ added. “Chicago has had negative population growth for a while and post COVID, it could be more negative, but hopefully it stabilizes. I’m still a believer that Chicago has the critical mass — 10 million people stayed, so it needs to have the infrastructure to support that population.”
However, Chicago makes more sense when you look at a broader, more diverse portfolio of industrial investment as the region offers something for everyone, Moore suggested.
“Chicago is an interesting market because it’s both the bottom and the top tier of the national market,” Moore said. “You have to look at the cap rate. What’s that threshold where money really starts flowing in and where’s that threshold in relation to other marquee markets such as LA and New Jersey? Is a 4.5 in Chicago better than a 3.5 in LA?”
The value in investing in Chicago may not necessarily be the exponential growth or aggressive cap rates, but instead, Chicago may offer the stability that some investors really depend on to round out their portfolio of properties, Circ believes.
“The more certainty on the return, or the rents that I placed, makes it more interesting than other places,” Circ said. “That’s sort of how Chicago stays in the mix — you’ll buy Chicago like you buy a lot of the other midwest markets, which is more of a yield play and then you buy the other markets for growth.”
To watch the rest of the 18th Annual CIP Industrial Summit and hear the other panel discussions, head over to the REjournals Youtube channel for the complete upload.