On June 19, the Chicago Chapter of The Society of Industrial and Office Realtors (SIOR) hosted its Speaker Series luncheon “The Chicago Industrial Landscape—Current Trends and Future Projections” at The Glen Club in Glenview, Illinois.
I was pleased to moderate a candid discussion with leading commercial real estate experts in the manufacturing and supply chain industries. The panel included Michael Clewlow, vice president of acquisitions at Venture One Real Estate; Joe Macchione, vice president at Brennan Investment Group; Caitlin Sullivan, senior vice president and market officer at Link Logistics; and Robin Stolberg, managing director of acquisitions at Clear Height Properties. They discussed the macro economy, the strength of the Chicago area market, and more.
I inquired about the current state of the industrial market considering recent economic and market conditions. Sullivan emphasized the difficulty of cutting through the headlines to understand the true impact of the macro economy on daily operations.
Bill Lussow
Treasurer of SIOR Chicago Chapter
Principal of Bespoke Commercial Real Estate
“Some of those things are definitely impacting customers and their decision-making and how much risk they’re willing to take on. But I think the fundamentals of industrial, specifically, are still really strong,” she said.
Sullivan noted that Chicago’s industrial submarkets have different strengths, availability and demand drivers. She added that overall, in Chicago, the market has been strong and will continue to be so.
Panelists noted that often, transaction volume is a key measure, but the sentiment can vary daily based on experiences. “We try to combine hard data with feedback from customers and the real estate community to get a comprehensive understanding,” Sullivan said. “While the overall volume in Chicago has decreased year over year, our portfolio shows an increase in deal count, indicating more movement in smaller transactions.”
Macchione explained that older and smaller properties are performing better when compared to new construction, consistent with national trends. He noted that properties built in 2020 and later currently have a 21% vacancy rate when compared to Chicago’s overall vacancy rate of about 5%.
How Investors Are Navigating Volatility
Over the past 12 to 18 months, the capital markets have remained volatile, posing both challenges and opportunities for investors in industrial real estate. Clewlow highlighted that, particularly last year, many institutional investors stayed on the sidelines because of interest-rate fluctuations and market uncertainties. This presented a unique opportunity for his firm to adopt a contrarian strategy and capitalize on undervalued deals. As a result, it executed more transactions in the last year than in 2021 and 2022 combined.
Currently, the state of the capital markets is showing signs of improvement, he added. “From an institutional investment standpoint, deals that are on the market attract 10 to 15 offers, a significant increase from the three to five offers seen last year, indicating a healthier market environment.” However, he added that securing financing remains a significant hurdle, with lenders maintaining stringent conditions and cautious approaches.
In the long term, Clewlow said that industrial real estate is expected to receive increased allocations from institutional investors, such as pension funds, which historically allocated around 5% to real estate. The sector is attracting both new and long-term buyers, he explained, suggesting a promising outlook over the next 10 to 20 years.
Flexible Leasebacks Drive Successful Acquisitions
When discussing recent acquisitions, Stolberg revealed that Clear Height Properties has acquired eight assets this year, with two more under contract. This brings the company’s current total to 94 assets, aiming to reach 100 by year-end. He emphasized a preference for acquiring individual assets experiencing generational changes, where new leadership prefers not to own the real estate.
“We have found success in flexible, short-term leasebacks, offering 12- to 18-month leases with early termination options, which are attractive to both the current and incoming businesses,” Stolberg said.
Shifts in Rental Rates, Occupancy Time
Panelists indicated they are grappling with the rental rate discussion. Overall, large deal volume is down, but velocity in smaller transactions is helping maintain or even increase rental rates. Macchione, whose properties are primarily in Chicago, has observed robust rental growth from the onset of COVID-19 to the present, although it has recently tapered back. “We are in a bit of a stabilization or plateau,” he said. “It does seem like there’s a bit more pushback coming from tenants lately, but we are still bullish. We are still closing deals at or above what we were yesterday and the day before.”
Clewlow touched on the impact of prioritizing retaining occupancy over driving rental rates. “It will be interesting to monitor how larger institutions on a national level handle this and how it affects our rental growth.”
Diverse Market Needs Drive Growth
When it comes to demand, Stolberg said that Chicago is fortunate with total inventory of more than 1 billion square feet, but that headlines paint a misleading picture of the city, suggesting a migration to the suburbs driven by demographic shifts. Additionally, the rise of omni-channel retail, he said, with its complex customer interactions and varied modes of buying, is driving the need for more space, benefiting portfolios with units in the 10,000- to 30,000-square-foot range. He also pointed out that there is notable growth in the service industry, including HVAC and plumbing businesses, as people invest more in home improvements. “These businesses have experienced robust cycles recently, contributing to the overall demand in the market.”
Tech’s Influence on Operations
Technology has changed industrial real estate from an operational standpoint. Macchione explained that EV charging stations, LED lights and anything that is making buildings more efficient like ESG initiatives are mostly tenant-driven.
Sullivan agreed and pointed out that especially with the larger customers, “They have ESG initiatives that we are constantly engaging with to understand their goals and determine how we can support them.” Basic offerings, like LED packages, are just the beginning, she said. Sullivan noted that in their new developments they are implementing solar roofs, EV chargers and other sustainable solutions to exceed market expectations and achieve LEED certifications.
Overall, the SIOR Speaker Series luncheon provided valuable insights into the industrial real estate market highlighting key trends and projections, such as the strength and resilience of the local market, the impact of economic conditions on investor strategies and the role tech and ESG initiatives play in shaping the future of the industry.
Bill Lussow is treasurer of the SIOR Chicago Chapter and principal of Bespoke Commercial Real Estate in Chicago.
The Chicago Chapter of the Society of Industrial and Office REALTORS ® (SIOR) boasts 165 elite commercial and industrial practitioners in the Chicago metropolitan area real estate market. Real estate professionals who have earned the SIOR designation are recognized by corporate real estate executives, commercial real estate brokers and agents, lenders, and other real estate professionals as the most experienced, capable and ethical practitioners in any market. The global SIOR organization holds more than 2,800 members in 480 cities in 20 countries. A professional affiliate of the National Association of REALTORS®, SIOR maintains a commitment to business and industry by providing outstanding professional services, publications, and educational programs. For more information, visit our website or follow us on LinkedIn, Instagram or Twitter.
