CHICAGO—Industrial real estate has become one of the nation's hottest property sectors as demand escalates for both manufacturing and distribution facilities. In fact, according to JLL market data, sixty tenants from across the nation are currently looking for big box warehouses of one million square feet or more, a level of demand that outstrips available sites by a nearly three-to-one margin.
That tremendous demand makes it important to understand the lending trends in this sector. GlobeSt.com spoke with Brian Walsh, a Chicago-based senior vice president in the capital markets group at JLL, on the five trends having the most impact on lending in industrial real estate.
“There are a lot of groups out there that utilize conservative financing strategy,” he says. REITs and other institutional investors own a big portion of the sector's stable assets and many use little-to-no mortgage financing. Instead, these big players employ bond proceeds, credit facilities, or even all cash. “That takes a lot of product off the table for lenders that want that exposure.”
But the relatively small loans needed for single–asset industrial properties means that many lenders already in the space are under-allocated, Walsh adds. For example, a modern distribution building with one million square feet will probably be valued somewhere between $50 per square foot and $75 per square foot. Therefore, a 50% advance against a very significant and valuable new industrial facility will only generate a $37.5 million loan. “That's still a pretty small loan amount.” But a one million square foot office building could soak up hundreds of millions.
Lenders are also under-allocated to the sector due to what many perceive as the greater risk associated with single-tenant properties. “There is a pretty wide group of lenders that do not do single-tenant financing,” says Walsh, which leaves out many bulk distribution buildings.
“Multitenant is always better from a lending perspective,” he adds, since it eliminates a possible “go-dark” scenario that can develop if a single-tenant occupier runs into trouble. And industrial properties gathered up into portfolios with diverse sets of tenants are also “more palatable to those lenders.”
“Generally speaking, the more granular the rent roll the better as there is less rollover risk,” according to a JLL report on industrial financing. Furthermore, “while there are many opportunities to spread small amounts of capital amongst several properties, most lenders would opt for the efficiency of making one large loan.”
Many lenders will take a chance on single-tenant industrial financing if the product offers one or several of these factors: extremely low leverage; a strong sponsor; a strong location; a tenant that makes a significant investment in the building; a lease term that goes beyond the loan maturity, or “an understanding and comfort with the value of the real estate in a go-dark scenario.”
One significant advantage of industrial real estate is the relatively low cost of ownership. Facilities typically need less maintenance than other property types. And re-tenanting even the largest buildings is comparatively cheap. “In a worst case scenario, ownership is not a capital-intensive endeavor.”
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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.
