It’s that time of year. Kids are back in school, summer office hours have reverted back to full day Fridays and playoff baseball and football are in full swing.
The march to year end is underway. Regardless of a company’s role in commercial real estate, the focus now is pushing to meet year-end goals (or get as close as possible) and/or working to build a pipeline for 2024. It’s an annual ritual that has been made more challenging by economic factors that have seen year-over-year activity levels fall from the recent boom period.
“When the year is done, and all transactions have been recorded, the industry datapoints will show a very good year on the heels of several outsized great years,” said Robin Stolberg, managing director of acquisitions, Clear Height Properties. “And, we still have work to be done and opportunities to pursue.”
Pesky inflation and interest rate increases have led to a widespread slowdown in development, lease and sale activity. When viewed through a narrow window of time, as opposed to a 10-year average, one might characterize activity as volatile. Contributing to that, industrial activity in Chicago, and in most markets across the country, can easily be skewed when the volume of substantial portfolio sales and gigantic distribution center leases falls off.
Stolberg notes that Clear Height, which focuses on multi-tenant industrial investments, is on track to achieve its leasing and acquisition goals. He also reflected that the company and the industry in general are working harder to close deals.
“There is still competition for most every acquisition, but instead of having half a dozen suitors for a deal, there may only be three,” Stolberg said. “It’s a bit of a reality check, especially for smaller, non-institutional private sellers who don’t transact a large volume of deals.”
Hugh Williams, managing member, KWILL Merchant Advisors, said, “Whether you represent tenants or landlords it’s important to get m deals done and not have them linger. We live in a market where deals are getting more difficult to uncover. This is a time that is testimony to the old real estate adage that time kills all deals.”
Williams also noted that KWILL’s real estate division, a relatively new entity, is in a different situation than many older and established firms. “It’s not just a matter of completing the deals that are out there, it’s also focusing on building the business. That requires maintaining something of a chip-on-the-shoulder edge to make things happen whether it’s dealmaking or relationship building.”
We are building a brand, which means we are forced to be contrarian by necessity and grow, it’s a lovely place to be.
As companies look at production goals and how the year has taken shape, there has been a lot of talk about the weakness of the market. Although there is a reality to that, Williams says the facts are the facts.
“If you are a big developer, investor, or user in the market, you may not have to do anything. Big guys can weather the storm a little differently. But if you are small to md-size, you must slug it out or risk the alternative. The alternative being exiting the business.” Williams said.
Stolberg, a veteran of Chicago’s industrial sector, is relatively unfazed by the current factors influencing the market. “There always seems to be something going on,” he said. “The market takes notice and adjusts. It’s all about rolling with the changes.”
The dynamics of the current industrial market are polarizing to some in the industry.
Alfredo Gutierrez, the founder and CEO of SparrowHawk, said, “I have never been more excited and at the same time, more concerned, about the industrial market than I am now.”
He explained by saying he’s grateful to be an investor in industrial real estate where there is positive cash flow, strong fundamentals, and still plenty of long-term runway for growth.
“We’re also seeing the effects of great inflation on tenants and the economy,” he said. “Clearly, we don’t want things to break. It’s not broken yet, but we could be on the brink.”
In Chicago SparrowHawk’s portfolio is fully leased. With the cost of funds for acquisitions high and the bid-ask spread still wide, Gutierrez characterizes this as a time when patience is the operative word.
“This is not a normal time. For a lot of people, it’s still pencils down,” he said. “We will get back to normal, but the markets need flushing out.”
For companies like Industrial Outdoor Ventures (IOV), laying the foundation for the next year may be as much about creating their own opportunities as anything else.
IOV has been one of the frontrunners in the explosive industrial outdoor storage (IOS) segment of the industrial market. Traditionally the firm has primarily focused on targeted acquisitions of existing product across the country.
Increasingly, however, a significant focus of the firm has been to launch and/or execute several redevelopment and ground-up development projects which are setting the table for leasing activity in 2024. Part of that pipeline includes a significant new IOS development in Zion, to serve industrial users at the Illinois-Wisconsin border. Combined, the two projects at IOV’s Trumpet Park, could offer almost 1,200 truck trailer parking spaces, more than 26,000 square feet of maintenance and service buildings and have a total project cost in excess of $35 million.
“We’re not necessarily looking to accelerate the close of 2023, but we are really excited about the prospects of 2024,” said Tom Barbera, CEO, Industrial Outdoor Ventures. “We’ll be delivering new projects in Illinois, South Florida and California and aggressively looking at acquisitions. It looks to be an exciting time.”
Adding further perspective to “slugging it out” to meet sales goals, lay next year’s foundation and navigate prevailing market conditions, Williams said, “The challenging times are when you see the separation of talent and creativity in the market. When everyone is fat and happy it’s easy to feel good about yourself. We all need to be a little, or more than a little, hungry.”
