Event: NAIOP Chicago: Where is the Chicago Industrial Real Estate Market Headed?

NAI Hiffman’s Dan Leahy, executive vice president with the NAI Hiffman’s industrial services group and Managing Director of NAI Global Logistics, is moderating today’s NAIOP Chicago Panel, “Where is the Chicago Industrial Real Estate Market Headed?” Speakers include: George Cibula or Darwin Realty & Development Corporation, Mark Goode of Venture One Real Estate and James McShane of The McShane Companies.

8:40 a.m. – Leahy: The theme we are going to discuss today is where is the market headed. All of the indicators are positive. Where are we today and where do you see us going over the next 18 months?

8:42 a.m. – McShane: Things have certainly gotten better over the past 18 months, but they really couldn’t have gotten any worse. There is still a lack of confidence in the economy. I think we will continue the cycle of seeing things get a little better, but then cooling off again. I’m not at all pessimistic in the next year or two, but I’m not overly exuberant and aside from Texas, I don’t see any significant job growth on the horizon. The economy is ready to go, the only thing holding a real recovery back is Washington.

8:48 a.m. – Cibula: We think the market is getting better, but that’s relative. 2008 through 2010 were just horrible, akin to 1981 when we had a recession that in some ways was worse than the recent one, but shorter in duration. This recession, in my opinion, is still in effect. If you look at the GDP last year, it was revised down to 1.8% growth, but we added almost 1% to our total population, suggesting that we should grow by at least 1% just based on population growth. That means the economy grew by only 0.8%… suggesting that conditions are still effectively flat. Things are starting to improve, however… we’re seeing the end of draconian free rent and other concessions and rental rates are no longer dropping.

8:54 a.m. – Goode: We are trying to buy buildings anywhere from 15,000 SF to 300,000 SF, but we always look to find a competitive niche. We can close very quickly and act fast. We can take a building that needs new lighting or a new roof and do that. You can’t buy a class “B” or “C” building in the market and immediately lease it, otherwise it would have already been leased. You have to improve the building.

8:58 a.m. – Leahy: What’s your take on investing in Cook County?

8:59 a.m. – Goode: There is still a ton of demand for functional buildings in Cook County, and we do try to get 6B incentives.

9:00 a.m. – McShane: I agree, we used to shy away from buying in Cook County, but 6Bs are more readily available now and the city has a lot of TIF districts. Without those incentives, it doesn’t make a lot of sense.

9:02 a.m. – Cibula: The real estate process has really changed. It’s become more efficient. What took us days to accomplish in the 1970s can now be accomplished in 15 minutes. We used to carry around rolls of dimes to make calls from the road – when the calling card came along it was a life-changing invention. Now, information is constantly at our fingertips, so we have to differentiate ourselves somehow else.               

9:12 a.m. – McShane: Development decisions are very submarket-specific. The mid-sized developers are the ones putting up the speculative product right now, not the big institutional owners. There isn’t much well-located land left, so you either have to go to the collar counties or tear down an older building and re-build, which is what we’re seeing in Elk Grove Village right now. However, development decisions are all about the rents you can obtain. There has to be a tenant that is willing to move into a new building and pay a little more in rent.

9:15 a.m. – Goode: It doesn’t matter how active the market is, if there is significant supply, rents will move. We continue to see the younger generation moving into the city and starting families. They want to work close to home. We will continue to see construction in infill submarkets and even the city because companies want to tap into that young employee base that is the future of our economy. These companies will pay a premium for that access.

9:19 a.m. – Cibula: Over the midterm I think rents stay depressed, but thereafter there should be a solid increase in rents. The infrastructure in Chicago is laid out so that everyone has to come through here and that infrastructure is already in place versus places like Rochelle where it will have to be built… demand will continue to increase.

9:20 a.m. – McShane: I think interest rates will stay intact for the next 18-24 months. There is always some crisis that effects the real estate business. The key to success is being able to adjust to the effects of these crises. It’s important to stay abreast of the trends in the market and stay in front of those trends.

9:24 a.m. – Cibula: We’re losing less business to neighboring states due to the budget and political issues in Illinois than is being reported. Indiana is doing a good job of drawing companies across the border, but companies continue to move into the Chicago market. There are many reasons to locate in the local market.

9:25 a.m. – Goode: I agree. We have a 1.3 billion SF industrial market in Chicago. You’re not going to take 1.3 billion SF and move it to Wisconsin. We have the depth and product that neighboring markets can’t compete with. The geographic size of the Chicago market continues to expand. It’s no longer just located in Illinois, our market extends from Wisconsin all the way around the lake to southwest Michigan.

9:28 a.m. – McShane: We still have this problem with the national government. The country is poised for growth, we’ve never had this many countries or investors looking to invest in the country.

9:32 a.m. – Goode: The bottom line is that we are doing more business in this country than we were over the past few years. The published unemployment figures are no longer relevant because many of the unemployed are simply unemployable due to technology advancements.