GlobeSt.com is partnering with SIOR for its Fall World Conference Oct. 24-26 in Chicago, IL. SIOR LIVE will provide coverage of the event, featuring pre-event articles, live video interviews on site and post-conference analysis. To help kick off the conference, GlobeSt.com spoke with IDI's Timothy J. Gunter on what's ahead for industrial assets in 2014.

CHICAGO—In the past few years, many large investors have found industrial property appealing due to its lower risk. And according to Timothy J. Gunter, the president and CEO for Atlanta-based Industrial Developments International, this appeal will probably widen in 2014 to encompass more markets as the economic recovery continues and confidence grows.

“We're able to start and stop industrial development really quickly,” he says, certainly much quicker than the construction of more capital-intensive products such as office towers or multifamily developments, and that flexibility originally brought in many investors made leery by lingering economic uncertainty. And the recent construction of giant distribution centers by well-respected corporations such as Amazon and Walmart “has probably raised the profile of industrials even more,” Gunter adds.

But until recently that appeal had some limitations.

“What we've been seeing is a lot of focus by institutional investors on the coastal markets,” he says. However, as the economy has gotten stronger, many of those same investors have decided they need geographic diversity. “It's hard to do it if you're only in the coastal markets,” and places like Chicago, Indianapolis and Memphis are receiving more attention. “What we're starting to see is that folks are loosening up a bit.”

According to Real Capital Analytics, the dollar volume of industrial investment activity in Chicago is nearly 10 percent higher than a year ago—$838 million for the first six months of 2013, compared with $763.4 million for the same time period in 2012. And the number of transactions increased by 24%, from 102 in 2012 to 126 in the first half of 2013.

That investment has followed significant strides made by the city's industrial market. According to Avison Young statistics, during the first half of 2013, it experienced nearly 7.9-million-square-feet of absorption and had a vacancy rate of 8.4% at the end of June. This was the lowest vacancy rate since 2007.

Speculative construction has also restarted in many markets that mirror Chicago's progress, and Gunter expects that trend will also spread out and deepen in 2014.

“We call it inventory space; spec makes it sound like you don't know what you're doing, like it's a big gamble. We really look hard at user demand and the vacancy rates on different building sizes and try to get in front of that demand.” In any case, once a developer sees a market's vacancy rate drop below 10%, and prospective tenants find it harder to find optimal space, these types of projects become a safer bet, he believes.

Many coastal cities and regions have already long-passed these benchmarks and seen speculative construction. As reported yesterday in GlobeSt.com, Orange County's vacancy rate for third-quarter 2013 was 4.4%, the lowest in the nation, and a decrease of .8% from a year ago. Other markets in the top 10 for lowest industrial vacancy were Greater Los Angeles; Lakeland, FL; Denver; San Francisco Peninsula, CA: St. Petersburg/Clearwater, FL; Oakland, CA; Philadelphia; Inland Empire, CA; and Tampa, FL.

But Gunter says that a tipping point has also been reached in Midwestern markets that provide good access to transportation networks. IDI has started what Gunter calls inventory projects in places like Memphis, Indianapolis and Cincinnati.

The industrial market around the Cincinnati airport, for example, has experienced a lot of recent leasing activity. By the end of this year's second quarter, the industrial vacancy rate had shrunk to just 4.89%, according to data from Colliers. And the industrial vacancy rate for the entire Cincinnati metropolitan area was 7.85%, down from 8.12% after the first quarter.

“The biggest challenge will be the limited supply of high-quality bulk industrial space that is available in our market,” Colliers adds. “As the limited product continues to decline, it will be an opportune time for a major developer to take a chance on speculative construction and meet market needs.”

In fact, this wave of industrial revival has now hit nearly every region. “Atlanta has been a little slow,” Gunter says. “It's the last major market to come back, but we're seeing a substantial increase in absorption here,” and with a rapidly dropping vacancy rate “you should soon start to see inventory development.”

Chicago was a little slow as well, he adds, but mostly because developers put up a lot of industrial buildings just before the crash, causing a bit of a glut that took time to absorb. But as the overall vacancy rate has gone down, many speculative projects have broken ground. Clarius Partners LLC, for example, recently delivered the area's first 1.0-million-square-foot speculative facility, located at 3851 Youngs Road in Joliet, since the first quarter of 2008, according to Colliers. In addition, Gunter's IDI is planning a 602,600-square-foot building at Bolingbrook Corporate Center West, a suburban business park.

And he believes this type of development will continue nationwide in 2014, but at a relatively modest pace. “In 2007, developers were building more than we were absorbing,” and had to learn a hard lesson when demand collapsed. So far, development “has not gotten out of control yet.”