Patrick Gallagher, senior vice president at The Alter Group, heads up the firm’s national office and industrial development program. Throughout his 27-year career, he has has completed more than $1.6 billion of office and industrial transactions. Gallagher believes that the market is starting to heat up, and, industrial spec development is taking place in some parts of the country. He believes that Chicago could be ready for spec development in 2012.
1) According to Cushman & Wakefield’s 4 th Quarter Market Report (attached) new leasing activity in the Chicago industrial market increased 11.8 percent in 2010 and reported 27.4 million square feet of leasing activity compared to 24.5 million square feet in 2009. What are some of the contributing factors for this activity?
The numbers for 2010 were better than 2009, because 2009 was such a dismal year. 2010 was better and we did see some activity in Chicago, but they were painful deals. The economics behind those deals were not great. They were not necessarily healthy deals, but I think that trend is changing. Toward the end of 2010 and into early January 2011, someone turned the lights back on in the market. There has been a lot of positive action locally and nationally including some larger transactions in the Chicago market in the last quarter
2) What industries are showing particular strength at this time? Are any markets leading this turnaround?
Nationally, retailers are active. There are multiple different reasons for that. We are finally starting to see the effects of Internet retail on industrial distribution. Some big names, like Amazon, Home Depot and Macy’s are doing transactions across the country. You will see activity in this industry continue. In Chicago, the logistics industry is showing signs of growth. During the low point of the down turn, some of the smaller companies may have not made it through. Those that did survive are beginning to grow now and pick up more market share. In 2010, southern California, the top market in the country, experienced 30 million square feet of activity and 11 million square feet of net absorption. We are actively pursuing new land acquisitions in the Inland Empire to build over 2.6 million square feet in southern California that I would start today if we could. California was first to recover nationally. I am seeing similar trends in Chicago now. I think 2011 will be a substantially better year for Chicago maybe some spec product by late 2012.
3) What can volatile fuel prices mean for the industrial distribution industry?
Higher fuel prices can have many effects on the industrial markets. First increase fuel cost could slow consumer spending and consumer confidence which has a direct impact on companies need for industrial space. Lower consumer spending leads to lower inventory levels not only for retailers but for all of the suppliers up and down the supply chain. A drop in consumer confidence often leads to a reluctance by corporate decision makers to expand and grow. Increase fuel cost can also have effects on the logistical matrix for industrial users. Certain locations may be more or less attractive due to the cost associated with getting product to the distribution centers. If you are closer in means you may be able to get more rent because of the offset of lower transportation cost. By contrast if your further out you may get less rent because it now cost your tenant more to ship product to your location.
4) What are a few factors that could stymie any form of recovery?
Any substantial dip in consumer confidence would spook corporate America. Spikes in oil prices will cause some concern as well, which would cause them (corporations) to temper expectations. Any reason for corporate America to pull back on the throttle would cause concern. 2009 and 2010 were about growing confidence, and, right now, corporate America is showing confidence. We are optimistic that will continue.
5) What is going on in the industrial investment market?
Last year, the story was all about who had capital to take advantage of the limited opportunities. In Chicago, KTR (Capital Partners) and Cabot picked up some nice opportunities. They not only saw the value in what they were buying, they also had the capital to invest. There was more interest in the costal markets, like Southern California, but for the most part, a lot of capital was on the sidelines. In 2011, numerous firms are looking to invest in industrial. The markets have thawed considerably. There are only so many properties in the costal markets. I think a lot of buyers who didn’t get the deals in costal markets last year will start to focus on other markets and Chicago ranks high on the list. The additional product coming to the market will help establish where values are. We have seen some extremely low cap rates in other markets recently.
6) What trends you are seeing in development right now?
In Chicago the only substantial developments you saw were a few build-to-suit projects. However, in Southern California there are several spec buildings getting ready to break ground. The key behind these developments is that there is a lack of space for big tenants. In the case of the California market, there are no empty, existing buildings larger than 600,000 square feet in the Inland Empire. All of the announced spec buildings are 600,000 square feet or larger. We have already seen developers competing for land sites that can accommodate larger buildings. The spec scenario will probably come to Chicago in late 2012. Chicago still has large chunks of space available in areas like the I-80 corridor. Investors took note of the lack of barriers to entry in the Chicago I-80 corridor because of the abundance of land which will become an issue for new spec in that market. The answer will be to be close to the intermodal or infill sites but there will be a disconnect for buildings with thousands of acres of corn fields around them.