CHICAGO- The Chicago industrial market has been recovering for two years, according to Avison Young, and in 2013, as the prices for Class A properties continue to rise, investors will focus even more attention and dollars on Class B properties. “Furthermore,” the firm states in an April 2013 report, “the industrial market is giving the multi-family sector a run for its money as the preferred investment vehicle for institutional investors. This is due to historically steady cash flows, low capital/tenant improvement expenditures, and positive macro-economic occupancy drivers.”
Investors have long been attracted to Chicago's Class A industrial properties, buying $1.3 billion worth since 2007. Many industrial developers, however, still worry about the strength and endurance of the recovery and shy away from building new product. Nationally, from 2003 to 2007, developers put up about 200-million-square-feet of new product each year. Currently, only about 50-million-square-feet get built each year. Many expect this will push up Class A rents. The subsequent boost in returns, Avison notes, should increasingly make these buildings the cornerstone of many portfolios, and force investors to hunt around for other places to park their money.
In a March 2013 report, Prologis found that “new starts remain well below historical norms, which means new demand can quickly tighten the market. In fact, supported by robust new demand, the vacancy rate declined 30 basis points in the fourth quarter of 2012, the largest quarterly decline since 2006.” An April story in GlobeSt.com described this partial revival.
As the vacancy rates plunge for the Class A buildings, companies needing space will increasingly opt for Class B space and all those hungry investors should follow suit. Avison cites CoStar statistics that show sales of Class A properties in the overall Chicago market totaled $154.2 million in 2011 and $199.8 million in 2012. But Class B sales went from $451.2 million in 2011 to $742.6 million in 2012, a 65 percent increase.
“In step with the changing market fundamental and building characteristics,” the Avison study states, “we expect that the typical investor profile will also be shifting. While investors in Class B industrial assets historically have been regional and local investors, this segment of the market is catching the eyes of institutions.”
These institutional investors will likely focus on Class B product in top-tier markets like Chicago, New Jersey, Miami and Los Angeles. But other hot markets like Indianapolis, Columbus and Memphis should also attract attention, since warehouse and distribution facilities in these centrally-located cities have become increasingly important. And “the main targets for investors,” Avison says, “are properties that are fully stabilized-with 90 percent occupancy or higher-and those with strong value-add potential that include positive leasing momentum and approximately 75 percent occupancy.”
For example, in March, GlobeSt.com reported that the Sitex Group had started their latest investment vehicle, Sitex Fund VII, with financing from a major state pension fund and expect to spend about $300 million acquiring Class B properties in their targeted markets, the Chicago and New York-New Jersey metro area, over the next two years. Cary Goldman, the principal and partner in the firm's Chicago office, says “we now have the equity to go get these deals done.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
