The first half of the year for industrial real estate has gone quite well, according to Jerry Rotunno, senior vice president and relationship manager at Associated Bank. Although the cold winter delayed a lot of the leasing seen on Associated Bank’s properties for a month or so, it picked right back up.
“It was just pent up demand,” Rotunno said. “What we have seen is a lot of demand for food related industrial users, e-commerce around the O’Hare Airport, and a pickup in manufacturing, which we have a long history of here in Chicago.”
For the second half of the year, Rotunno said he expects more leasing of industrial space and more development of industrial space. Due to that, he says, it is Associated Bank’s job to watch and make sure the development does not outrun the leasing.
“What we do when we make a speculative construction loan,” he said. “Is have monthly leasing calls with our developers to keep abreast of the market and the showings that they have, and hopefully, eventually, the leases that do get signed.”
As far as new developments in the pipeline go, Rotunno said he has been told that the capacity for pre-cast concrete is less than it was in 2007 prior to the recession.
“There are some large construction projects that are using up that capacity. So I’m told that some speculative development will be delayed because they cannot get the pre-cast in time.”
He added, “Recent new development projects have not used all the budgeted interest expense. Interest rates are low and are not rising. The construction budgets have a cushion to protect against higher interest rates. We expect that cushion will be larger in the future. Interest rates will rise someday and we need to be prepared.”
Although the I-55 corridor has been hot, and Rotunno says Associated Bank is watching it very closely.
“There is new development,” he said. “But so far the leasing to take the space that these new developments provide is keeping pace with the development. We have to watch that closely, which is why I said we have the monthly calls with our developers to see what is going on with the showings of these existing spaces.”
“I’m told it is getting harder and harder to find a developable site along I-55 in the Bolingbrook area. So that is making it a better place to invest because there are barriers, like finding a developable site, that make it hard for everybody to build a building at the same time.”
A good trend Associated Bank is seeing is that buildings are being sold vacant when they are completed.
“That is without signing any new leases,” he said. “The buyers of these properties, these institutions, pension funds and REITs, are really better able to assume that leasing risk, than our developer customers are. It takes money to manage leasing risk and the institutions have it.”
He added, “We like to lend on what institutional investors call “core industrial” real estate. Lenders make loans with a specific method of prepayment in mind. These institutions (that is, pension funds, life insurance companies, REITs and university endowments) provide a broad, national and liquid market. I have yet to make a construction loan on a Chicago industrial property that was repaid with another loan. It has always been repaid with an all cash purchase by an institution.”
Rotunno says they are seeing buildings sell when they are empty, even though they have a budget to lease the buildings so they can sell them fully completed.
“Our developers are good at managing the entitlement process and the construction risk,” said Rotunno. “To do this they need to be nimble and creative, and the developers excel at that. Once the process is over they are often happy to sell the property to the institution, which is better able to manage the leasing risks.”
Rotunno has had a successful 20 year career in the industry. Although his lending on industrial projects was on and off, he has lent on several different property types.
“The off part would be from 2008 to 2011 where there was not any demand for new properties. We are construction lenders, so we make a loan to build the building. There was not any demand to do that. The companies that occupied these buildings were not expanding.”
An advantage Rotunno says, at Associated Bank, is keeping in touch with his counterparts in the “commercial & industrial” part of the bank, because they lend directly to the companies that occupy these buildings, and can see what the economy is doing.
“If they are telling me that the companies they are lending to are starting to expand”, he said. “That tells me a few months out that those kinds of companies are going to need more industrial space. Therefore I will have some opportunities to lend on a new building.”
Rotunno has seen many changes in his 20 year career, with technology having a huge impact in the industry. He says the best is yet to come.
“Imagine a world with driverless trucks controlled by satellite,” he said. “Now imagine how this will increase our trucking capacity on expressways. It will eliminate the current driver shortage. With driverless trucks you can have the trucks driving the highways without any concerns over a driver’s fatigue, or leaving his family for longs periods of time.”
He added, “Our air freight carriers, such as Federal Express, deliver at night to the airports because that is when passengers do not need to the use the airports. Imagine if we had driverless trucks driving the freeways at night when there is no commuter traffic. It will massively increase our efficiency.”
Rotunno does not know how soon driverless trucks will be on the roads, but he has been told it is coming. Another huge innovation he has been told about by brokers is radio frequency identification.
“It is a device you can put on a container, the container may come from China,” he said. “It’s loaded off the ship in Long Beach, then sent by rail to Joliet where it would then get on a truck and eventually end up in a store. No matter where it is the manufacturer and retailer will be able to determine at any time where the goods are because the device will give off a radio frequency that will let them know its location.”
Overall, Rotunno said that in Chicago, industrial real estate is an exciting business to be in.
“In Chicago we are blessed with extensive, irreplaceable, transportation infrastructure. For example, the largest railroads are called Class one Freight Railroads. Six of the seven class one freight railroads have tracks in Chicago. We also have intermodal yards all over the southwest suburbs of Chicago, and our interstate highways connect Chicago to all three coasts.”
He added, “These large investments now under construction at O’Hare Airport, and the surrounding interstates, will prime us for the e-commerce revolution that is here and growing. I just hope our political system reforms itself, and shepherds these assets, so that we can all grow and prosper.”