It has been a “full speed ahead” start for industrial real estate so far this year, which is largely a result of the pent-up demand caused by the major pandemic-induced pause in 2020. We figured it would be as good a time as any to check in with several of the top developers in Chicago to see what their thoughts are going forward, asking each the same three questions.
That is the first of a two-part series, so keep an eye out next month for additional insight from these industry leaders.
What are your prognostications for the real estate markets in 2021 and 2022?
Mike Yungerman, Senior Vice President & General Manager of Opus Development Company: The speculative construction boom will continue, but sites are more difficult to find and entitle today. Steel and precast lead times continue to push out. Because of that I don’t see us hitting the spec space numbers we saw in the 2008-‘09 peaks. Class A rents will continue to grow at a modest pace, primarily due to increased construction pricing. With Class A rents rising, the gap in rents compared to second generation space and Class B product is widening. This could steer more tenants toward second generation spaces and slow down the absorption velocity in new product.
Neal Driscoll, Midwest Region Partner of Dermody Properties: We continue to see a ton of growth ahead across the entire country. Efforts to improve the supply chain and logistics efficiencies will continue to increase demand for highly functional infill locations as well as on the periphery of major metropolitan areas. This is true of both primary and secondary markets.
Jeff Lanaghan, Senior Vice President & Partner, Midwest Region of CRG: We expect the industrial space to stay robust for the near term as tenants continue to rethink their supply chain logistics. Amazon will continue to be a huge consumer of industrial product and many of their competitors will try to close the gap.
Don Schoenheider, Senior Vice President & Market Leader, Midwest Region of Hillwood: With strong user demand, continued low interest rates, and capital continuing to look for opportunities in the industrial space, we don’t expect much change over the next couple of years.
Susan Bergdoll, Vice President of Leasing & Development of Duke Realty: While the end of the pandemic is in sight thanks to mass vaccinations, we do not see the demand for well-located high quality logistics space waning anytime soon. Customer and market share gained by e-commerce companies will not be lost. All retailers and consumer products companies are investing hundreds of millions of dollars to upgrade their logistics facilities and supply chain networks across the country. Chicago’s supply and demand have remained in check for the past couple of years. We remain hyper-vigilant of the market pace. We are prepared for changing market dynamics and an increase in demand for more conveniently located logistics facilities and last-mile e-commerce distribution centers.
Matt Goode, Principal of Venture One Real Estate: We have observed two major drivers of value in industrial over the past 12 to 36 months that we believe will continue to push values upward in the coming years. First, there is a lack of supply of functional industrial space, driven by increased demand from e-commerce users and a lack of high-quality sites to build new product. As a result, we have seen low vacancy rates and strong rental rate growth. Second, investor demand has never been greater for industrial. This is the result of strong performance within the asset class and poor performance in competing asset classes such as office and retail. Because industrial values are lower than office and retail, investor demand has outpaced supply, and driven prices upwards.
With record high rents and record low cap rates, we are seeing values for industrial that are shattering prior high-water marks. We believe this will continue in 2021 and into 2022.
Tony Pricco, President & Partner of Bridge: The real estate market will continue to be made up of the haves and have-nots. Industrial, specifically well-located warehouse/distribution facilities, will continue to thrive as e-commerce continues to grow. Amazon will continue to lead all users in absorption nationally, but we assume other major retailers will get into the mix as well this year.
Part 2 of the “Industrial Insider” will feature the developers’ perspectives on these two additional questions: What’s Hot and What’s Not, and What are the biggest challenges the industry faces in 2021. Stay well and stay tuned for Part 2!
This article also appears in the March 2021 issue of Chicago Industrial Properties.