Nothing is hotter than industrial, and nothing is fueling that more than e-commerce, which is driving up demand for logistical and fulfillment properties. For that reason, approximately 200 people headed out to McDonald’s Hamburger University in Oak Brook, Illinois last Friday to attend the 15th annual Transportation & Logistics Conference.
Michael McKiernan, principal, Cawley Chicago Commercial Real Esate, moderated the first panel, which looked at the state of the market for transportation and logistics-related real estate. Joining him were Jim Clewlow chief investment officer, Centerpoint Properties; Dan Fogarty, senior vice president, development, Becknell Industrial; Larry Johnson, senior vice president in CBRE’s advisory and transaction services; Adam Moore, senior regional director, First Industrial Property Trust and Adam Roth, executive vice president, NAI Hiffman.
The strengths of the Chicago market, according to the panel are two-fold: a robust tenant base and a solid, far-reaching infrastructure. “With what’s happening in transportation, Chicago is capital of rail,” said Roth, pointing out that the region’s status as the nation’s largest inland port goes a long way to driving investment and development of industrial properties around Chicago, especially near the Joliet and Elwood intermodal facilities.
While many in the state have feared that secondary or tertiary markets in Wisconsin and Indiana could siphon off market share due to deeper labor pools, lower taxes and a sounder political climate, the Chicago market in particular has persevered despite all of these hurdles.
Clewlow pointed to the variety of product type available in the region. “People look at Chicago as safe because it is so diversified,” he said. “It’s hard to tell which market will pop, so diversity matters.”
The discussion then turned toward efforts to raise the minimum wage, and whether that could impact bottom lines enough to discourage real estate investment in Illinois. “Anytime you do something to artificially mess with the market, it’s not good,” Moore said. “However, labor is such an issue everywhere, it is almost becoming a non-issue. That said, you don’t want to do anything to hurt it.”
The second panel looked into development and construction trends. Brian Liston, president, Liston & Tsantilis moderated the discussion and he was joined by Brett Bridgeland, implementation manager, ComEd Energy Efficiency Program; Geoff Kasselman, SIOR, LEED, AP, executive managing director, Newmark Knight Frank; John Noak, Mayor of the Village of Romeoville and Michael Sullivan Jr., CEO and founder, Peak Construction Corporation.
The panelists touched on a number of new or forthcoming trends and technologies for which the implications on industrial real estate cannot be ignored. From renewable energy to a larger adoption of drones, there’s a lot that developers and investors have to take into account these days.
“The premise of future proofing is that by the end of a ten-year lease, the world will have changed,” said Kasselman. “If you’re building to the considerations of yesterday without thinking about tomorrow, you’re going to have valuation problems.”
One way to future-proof a building is to lay the groundwork for on-site energy production. An over-engineered roof and access to smart grid can set up an industrial property for a money-saving solar panel system. But, Bridgeland, points out, energy supply is only half of the equation.
“Don’t forget about the demand side; we should be reducing consumption in the first place,” Bridgeland said. “If you’re not doing LED in the high bays, you’re behind. To make sure you’re not overlighting the space, program the lights to dim on occupancy. There are still more gains by adding insulation to wall panels.”
According to Mayor Noak, data infrastructure is a major concern for real estate, even industrial, and he pointed out that Romeoville one of the only communities in Illinois that has two fiber optic systems to offer. But energy and data transparency aren’t the only worries that builders will have to wrangle with in the future.
“Water will be one of the biggest issues for this region going forward,” said Noak. “The demand on water continues to increase, the availability of aquifers decrease and communities need to have plans.” If an industrial property wants to woo, for example, a food processor or bottler, access to water is a real issue that may curtail the number of tenant prospects.
The final panel of the conference—moderated by Georgia Kokkinias, president, Ellas Commercial Real Estate—addressed the investing and financing strategies for transportation and logistics facilities. Speakers included Daniel Barrins, vice president, Associated Bank; Scott Klug, senior vice president, business development at SomerCor; Scott McKibben, chief investment officer, co-founder and managing principal, Brennan Investment Group and David Piasecki, chief investment officer, ElmTree Funds, LLC.
The panelists all agreed that capital is pretty readily available for industrial projects. There are some new sources of funding like insurance companies and debt funds, but for the most part the same actors are driving the flow of money into Chicago’s industrial real estate.
“Foreign investors don’t want to write small checks,” Piasecki said. “If you aggregate enough of a pool, Asian insurance companies will come in.”
Many have wondered what impact cap rates, tariffs and rising interest rates will have on real estate in the months or years ahead. On the last point, Barrins believes that the market is smart enough to have incorporated change into their projections.
“For interest rates, the Fed has been transparent in the quarter-point bumps that we’ll see into 2019,” Barrins said. “Developers are realizing this and putting rates into the models, so interest rates won’t have that much of an effect.”
Until this development cycle begins to slow down, and maybe even after that point, the industrial asset class will remain strong. This is largely due to the might of e-commerce and the resulting reliance on logistics. With an unmatched infrastructure system in place, the Chicago market will benefit for some time.