Odd. Educational. Soft. Those are the words Matt Mulvihill, Vice Chairman of Industrial and Logistics at CBRE, used to describe the Chicago-area capital markets industry in 2023. He also called it “unusual.”
“We had experienced decreasing interest rates and cap rates for a few years in a row leading up to 2023. That momentum slowed in 2023 and we saw less volume of sales in the capital markets,” Mulvihill explained. “There were a handful of notable portfolios that traded, but many owners spent the year repricing portfolios based on the volatile debt markets and smaller buyer pools.”
Mulvihill identified the primary challenges of 2023 as the volatility in interest rates, cap rates and debt markets. Large and regional banks exhibited hesitancy to lend on acquisitions and developments.
“Thus the only lending opportunities were with private groups and life insurance companies, which is expensive. This meant that the industrial speculative development pipeline shrunk materially and thus created more of a supply issue,” said Mulvihill. “Additionally, for stabilized and/or value-add portfolios, the volatility and rapid increases meant that an acquisition that worked in June might not have worked by the time a loan could be finalized in July.”
Erik Foster, Principal and Head of Industrial Capital Markets for Avison Young, added that buyers and sellers struggled to align on value, primarily due to increased debt costs for buyers. This discrepancy in expectations contributed to a decline in prices.
“But Chicago fundamentals still are fairly solid,” he added. “While we’re seeing a little bit more vacancy in some submarkets, we’re still seeing historically low vacancy throughout the market and we’re still seeing sustained tenant demand.”
Foster predicted those low vacancy rates will strengthen in 2024.
“We’re seeing developers continuing to be eager to put a shovel in the ground and develop new product because there is that sustained demand, yet the equity and debt markets are still beginning to rebound,” he said. “I think you’ll see that sustained low vacancy here for at least the first half of this year, if not the second half of this year, because there’s just not going to be a lot of product delivered.”
Mulvihill echoed the significance of strong rent growth for all product classes, which he said helped offset the challenges associated with more expensive debt.
Discussing other highlights of 2023, he added, “For our industrial business, we saw an uptick in sale-leaseback transactions based on the low cost of capital relative to floating rate debt with banks. Additionally, we feel developers are more motivated than ever and spent 2023 doing homework and planning to ramp back up in 2024.”
Mulvihill also mentioned a silver lining of riding the industrial roller coaster of the past few years: “We all learned a lot going from the record low interest rate environments of 2021 and 2022 to the challenging increasing rate environment of 2024. We real estate professionals are much smarter now and better positioned to help our clients achieve success and remain successful.”
Rolling into 2024, Kurt Sarbaugh with JLL Capital Markets remarked that institutional capital plans to be much more active on the buy-side this year.
“We’ll continue to watch for a couple months of stability in the treasury markets, but the general downward trend in the 10-year we saw in December really helped with liquidity and confidence,” he said. ”We’ll also continue to monitor leasing activity and the construction pipeline; overall though we’re expecting a pretty strong year for capital markets in 2024.”
That’s one of the reasons Mulvihill might choose “Optimistic” to describe the year ahead.
“We’re hopeful to see more speculative industrial development as the debt markets become less volatile, especially since we’re still feeling occupier demand outpacing the supply,” he said.
Similarly, Foster anticipated a higher sales volume in the back half of 2024.
“This year will be better than 2023,” he said with confidence.
