By Daniel E. Fogarty Jr.
Vice President-Conor Commercial Real Estate
Not quite sure if this is a good time to invest? A quick review of several key market indicators seems to make the conclusion clear.
According to Real Capital Analytics, there was a 37 percent global increase in real estate property transactions during the fourth quarter of 2012 – a remarkable improvement. On more of a micro level, the combined Americas experienced a 19 percent increase in commercial transactions in 2012 with $267.4 billion in activity. When solely measuring industrial real estate transactions, five of the top 10 most active cities in the world, by dollar volume of product trading over the past 12 months, are located in the United States. Ranking within the top 10 U.S. markets includes Los Angeles (1), San Francisco (2), New York City area (3), Dallas (7) and Chicago (10).
Over the past several quarters, “core” markets throughout the U.S. have witnessed the return of fundamentals to levels where new investment, particularly in the form of speculative development, is now justified. Given the significant amount of industrial absorption, this new investment should actually be considered a “must” in order to replace the ever-shrinking inventory. Within core and even B+ markets around the country, there is an absence of institutional-quality facilities available to organizations seeking to improve supply chain dynamics and/or gain operational efficiencies. There also continues to be an abundant supply of capital seeking to sponsor developers who are positioned to deliver quality product, well-located within these core markets. This indeed appears to be the right time to return to the market perhaps before the window of opportunity begins to close again.
Over the course of the past 12-plus months, developers in the Chicago industrial market, in partnership with various capital sponsors, have launched (or soon will) about a dozen speculative buildings totaling approximately 4 million square feet. There are also several projects on the drawing board likely to be revealed by the middle of this year.
Four years of relative inactivity (2008-2011) has created some welcomed pent-up demand. It has also encouraged the replacement of inefficient and functionally obsolete facilities in locations where land is at a premium. Capital partners (both equity and debt) have not forgotten the pain of the recession, but money is readily available. Today’s market fundamentals and project underwriting also reflect a return to the proper balance of risk and reward much more so than was demonstrated prior to the recession.
Members of the real estate community in all areas of expertise are currently enjoying this measured resurgence of real estate development activity. Institutions and lenders are placing more capital into sound real estate investments. Developers and contractors are earning market fees and profit from an increased volume of business and hiring more professionals to support this activity. Municipalities are benefiting from new facilities that add employees and offer increased tax revenue. Tenants are benefiting from an ever-improving quality of industrial inventory in which to expand operations and grow their businesses, thereby adding to this surge in momentum through more hiring and greater productivity.
We will always have to measure risk versus reward, but it’s clearly time to stop being overly cautious and to take advantage of the market conditions in order to make deals happen.
Dan Fogarty is a 20-year veteran of the commercial real estate industry with extensive experience in the acquisition, disposition, development, leasing and management of commercial real estate. During his career, Fogarty has participated in transactions affecting more than 20 million square feet of industrial and office space with a total market value in excess of $2 billion. He currently serves as Vice President of Conor Commercial Real Estate, a member of The McShane Companies, a national real estate development and construction services firm.