Earlier this year, Newmark Grubb Knight Frank hired Geoffrey Kasselman as its new executive managing director in Chicago to lead the firm’s national industrial practice. Kasselman recently spoke to Chicago Industrial Properties about his outlook for the Chicago industrial real estate sector in 2014.
Chicago Industrial Properties: How was the second half of 2013 in terms of market activity?
Geoffrey Kasselman: It was strong with healthy net absorption and continued decline in vacancy. I would even couple that with spot increases in lease pricing. In fact, we’re seeing upward pressure on pricing in lease rates, sale prices and land pricing.
CIP: What would you say is causing the upward pressure on lease rates?
Kasselman: It’s a combination of factors. Some are local and some are economic in nature. Chicago continues to be an ideal location for local, regional and national distribution depending on who you are and what you do. Access to a fairly dense population – whether you’re servicing just the Chicago metro area or whether you’re servicing the Midwest region as part of a national series of warehouses – is very beneficial as is our local transportation network. Economically, interest rates remain low and consumer confidence is on the rise. All of the economic trends for the time being are favorable, which is giving corporations confidence to come back into the market with some pent-up demand whereas before they were maybe sitting on the fence or waiting it out for more certainty in the market, and they’re starting to feel that is here now. Others are active because they see the inevitability of increased pricing and if they wait any longer, it’s going to cost them more. Stir in the fact that there has been little to no new construction until just recently. There’s a whole new spate of spec buildings, but before that, existing inventory was being gobbled up. So limited supply, increasing demand and all of those other factors combined have made for a very robust industrial marketplace locally.
CIP: What are you predicting the first half of 2014 will be like in terms of industrial space demand?
Kasselman: I think much of the same will continue because for a lot of companies, budget season is the fall and they open their doors in January with fresh allocations. That’s true of users looking to secure space for operational needs. It’s also true of developers and lenders. You need the capital, you need the development community and you need the users to contribute to market health and all are seemingly fairly flush with capital. So much of the same will continue in the first half of 2014 and then something interesting is going to happen. Either the market is going to stabilize because of the onset of new construction being completed and delivered to the market and ready for occupancy. Or the market might even retrench just a tad, peak and then pull back ever so slightly, not because the market is unhealthy but because there is a new equilibrium that will be established in terms of supply and demand. The demand will be steady, but there will be more supply to meet it very shortly that will put downward pressure on lease pricing as properties and developers slug it out to secure the tenants in the market.
CIP: What are some of the important economic factors determining demand right now?
Kasselman: Availability of capital and low interest rates, which work together but are not necessarily the same thing. We continue to have historically low interest rates. Consumer and corporation confidence is important. People do pay attention to that. Also, the dynamics for Chicago are strategic location and a considerable transportation network in terms of the ability to move goods on a wholesale or retail basis. The supply chain in America clearly runs through Chicago and that’s a really significant advantage for us.
CIP: What are some of the reasons to be optimistic about the Chicago industrial market in 2014?
Kasselman: It goes back to continued economic recovery and continued confidence. The lack of new construction until just recently helped to dwindle the supply of quality space. If you really want space in a modern, efficient building, there are fewer available for the time being. Several buildings are being built as quickly as people can pull together the money, the site and the contractors to get that space delivered to the market.
CIP: What are some of the other factors that will determine the success of the market in the first half of the year?
Kasselman: You need healthy velocity of demand and that appears to be the case in almost every submarket that we track in metro Chicago. Lake County is seeing tremendous demand. It is competing as fiercely as it can with Wisconsin, which has been aggressive in its own right. I-55 and I-80 remain active, I-88 and Central DuPage are active and O’Hare is always active. Even the city of Chicago, despite its older infrastructure and some facility obsolescence, is already seeing some resurgence in industrial properties. Barring an economic meltdown or something that’s big enough to cause the market to hiccup, we expect things to continue at a nice clip.
CIP: What is behind the stronger interest in industrial properties?
Kasselman: I think it’s the return of capital to the market and the return of CMBS. Now that CMBS seems to be back with a vengeance, the machine seems to be back. The whole development, build, lease, sell cycle is back with a vengeance.