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Midwest Industrial Construction Soars

May 2021

Industrial Construction Continues to Rise in Midwest

The Midwest industrial engine continues to grow, with construction moving at a strong pace despite an unprecedented increase in materials pricing that is straining the development sector. This activity is occurring in many large markets as well as growing secondary markets, such as several in the Midwest, stretching from Nashville to Indianapolis to Kansas City.

According to a May 2021 Market Report from Avison Young, Nashville has 10 msf of new industrial space under construction and has had more than 1.4 msf of new product delivered in each of the past three quarters.

“We continue to see industrial development increasing in many Midwest markets, as companies expand e-commerce and logistics operations in strong regional distribution hubs,” said Erik Foster, Avison Young Principal and leader of the firm’s National Industrial Capital Markets Group.

Nashville Construction Overview

The Nashville market is witnessing its largest growth cycle on record, with expansion coming at an exponential pace, according to Avison Young research. Motivated by steady tenant demand and tight market conditions, developers remain bullish on Nashville, with over half of the projects underway being built on a speculative basis. Even as new speculative construction adds inventory to the market, all submarkets continue to record sub-5% vacancies.

Soaring demand for warehouse and logistics space across the market has largely kept up with a record amount of supply coming up over the past few years. The Nashville industrial market recorded over 1.6 msf in YTD net absorption at the end of the first quarter.

Indianapolis Grows Its Logistics Hub

Indianapolis’ industrial market has nearly 12 msf currently under construction, consistent with the level of new construction underway for the last 15 months. Larger tenants have recently shown an interest in Indianapolis because of its central location and lower tax structure, but much of its recent construction has been driven by speculative projects. Large speculative projects under development range from the 1 msf building in I-70 West Commerce Park by Sunbeam Development to the 767,000 sf building in Whiteland Exchange, I-65 and Whiteland Road, by Jones Development.

Other Midwest markets experiencing industrial growth include Kansas City, which has 7.9 msf under construction; Cincinnati, where 6.1 msf is under construction; Louisville, which has 5.2 msf underway; and Minneapolis, which has 2.5 msf under construction.

Construction Prices: Steel, Lumber See Sharp Increases

The Avison Young report notes that skyrocketing costs on steel, plywood and other building materials are not enough to significantly slow the industrial pipeline, which currently exceeds 300 million square feet (msf) nationally.

This strong activity continues despite a 12.8% increase in the overall cost of construction input items from April 2020 to February 2021. While many broad material categories have increases below 10%, key individual materials have seen sharp increases — including lumber and plywood, which rose 62%; copper and brass mill shapes (37%); and steel (20%), according to the Associated General Contractors of America (AGC) trade association.

Construction across many U.S. markets is expected to keep a strong pace into 2021, as developers try to meet demand from major retail fulfillment centers to food grade cold storage facilities. Consumer expectations are setting the standards for speed and diverse inventory from e-commerce, and those expectations are unlikely to diminish as delivery conveniences have now become commonplace.

COVID-19 Vaccine Rollout: Ranking the States

Feb. 28, 2021

As the COVID-19 vaccine distribution ramps up (and a third vaccine is approved), there is progress being made — and also glitches in the supply chain delivery that are leaving states, municipalities, and, ultimately, residents, without the necessary vaccines. Here’s a look at how the supply chain is faring and what some commercial real estate experts have to say about the how to improve distribution.

According to the “Shots in Arms” update from the NPR COVID Vaccine Tracker, the top state by percentage of population receiving at least one dose is Alaska, with 22.3%, up from the 15.1% shown in the graphic above. New Mexico (21%) and South Dakota (20.2%) are the second and third states, respectively. This compares with late January when Alaska was still at the top, but West Virginia and Connecticut were second and third.

At the end of February, there were 96.4 million vaccines distributed, with 75.2 million doses administered, according to the Centers for Disease Control and Prevention (CDC). This totals 14.6% of the U.S. population vaccinated with at least one dose. (The two first vaccines approved each require two shots over several weeks.)

COVID-19 Vaccine Update: Solving Supply Chain Challenges

As the federal government moves to increase vaccine distribution, logistics and commercial real estate experts talked with Bisnow about the importance of involving businesses such as Amazon, Target and FedEx that have mastered supply chain issues and last-mile delivery. Given their expertise in moving products quickly to multiple destination points, could they have an impact on vaccine delivery?

Amazon Distribution is Not the Only Solution

Supply chain and analytics experts caution against thinking we can just plug in Amazon and create a more efficient system, however. According to this Modern Distribution Management story by Jonathan Byrnes of MIT and John Wass, formerly of Staples, the problem revolves around trying to push through a massive distribution effort within our existing fragmented system. Changes to the current distribution flow should include integrating more supply chain professionals into the public health process and using overlapping management, likely through the Defense Production Act, to improve end-to-end organization and results.

Among the solutions they present are more extensive advance planning to match patients, vaccines and locations and rewards, such as free transportation or cash, for vaccine compliance and perhaps negative rewards (limited access to restaurants, schools, and transportation) for those who refuse.

They also suggest adding a robust public relations campaign that reaches the population at multiple demographic touch points. Millennials would be more responsive than older Baby Boomers to social media outreach, for example. Success stories from early adopters would be amplified to reach residents in varying communities.

COVID-19 Cases: Still too High

In a late February CBS News COVID-19 vaccine update, Dr. Anthony Fauci, warns against being too complacent about the virus. While cases are stabilizing or slowing in many locations, a plateau of around 70,000 new cases per day is still a concern. “That’s exactly the thing that happened during previous surges,” he said. “As it peaked and started to come down, people withdrew some of the intensity of the public health measures and it kind of stabilized at a very high level. That’s very dangerous.”

BOMA Study: Office Space Vital, but Reductions Likely

COVID-19 Back to Work Update

January 2021

Office Space is Vital, but Reducations Being Considered

With COVID-19 vaccines in the spotlight, office building owners and tenants are carefully evaluating their return to work strategies. The good news is that in-person workspaces are considered vital to business operations — according to nearly three-quarters of respondent to a COVID-19 Commercial Real Estate Impact Study by BOMA International, Yardi Systems and Brightline Strategies.

The caveat, though, is that many tenants plan to reevaluate their space needs in the next six to 12 months. Will they reduce office space or shift it around to support pandemic safety measures? That’s the big question for office building owners in 2021.

The survey collected feedback from more than 3,000 office space decision makers during Q3 and Q4 of 2020.

Office Space: Reduce or Repurpose?

Image courtesy of Brightline Strategies

 

The study shows that 74% of office users believe office space is vital to the operation of their business. But, 61% say they will reassess those needs soon, while 19% are unsure. Out of that 80%, more than half (54%) say they will reduce their square footage.

Sixty-five percent of respondents said that they are personally comfortable with or supportive of returning to the office, but only 59 percent believe that their employees or colleagues feel the same way—an intriguing gap that hints at psychological projection.

 

Among the favored office space planning options are:

  • Reducing office space set aside for common areas to make more room for private offices or cubicles
  • Reducing the size of private offices or the number of conference rooms
  • Adding hoteling or flexible space for employees who spend more time at home.

The good news for building owners is that more than half of tenants (55%) plan to renew their leases, mostly because they are happy with how owners have handled the pandemic. Many say that landlord communication is a driving factor.

COVID-19 Safety a Must

Looking toward the future, office tenants say they’re more likely to stay in a building that:

  • Maximizes fresh air in the HVAC system
  • Includes large, prominent disinfecting stations and
  • Offers multiple disinfections per day using chemicals and ultraviolent wands

Despite a massive rollback in office space usage during the pandemic, the outlook for office building owners is not dismal as it once looked. While many employees and tenants may plan to work from the office less, they still see the importance of available collaborative space and distraction-free zones. Office building owners are hoping to see the resiliency of the office sector return in 2021 and beyond.

See this Commercial Property Executive story for more.

 

Retail to Industrial Real Estate Not a Sure Bet

October 2020

Prologis Report: Retail to Industrial Real Estate Not a Sure Bet

Wondering whether that empty retail anchor store would work as an ecommerce site? While industrial real estate is booming and bricks-and-mortar retailers are on the downslide, conversions are not always a sure bet. According to a recent Prologis report, retail-to-industrial real estate conversions will likely account for less than 1% of all retail space across the country over the next decade. This is because there are economic, political (municipal opposition and other factors), physical, and legal challenges.

According to the Prologis report:

  • The COVID-19 crisis fueled five years of evolution in the retail sector — in less than five months. The massive demand for consumer goods, groceries and other household items forced the industrial sector to respond quickly. This accelerated the adoption of ecommerce (to wider audiences and many new users) and pushed companies to focus on their “just-in-case” inventory.
  • Online spending is driving significant demand for logistics space, which is seeing correlating rental rate increases.
  • Online sales have skyrocketed and are on pace to reach $340 billion globally in 2020.

See this Bisnow story for more details.

DePaul University Survey: When Will Real Estate Recover?

Fall 2020

When will the real estate market recover? Not very quickly, according to many commercial real estate experts surveyed and interviewed for a recent report from the Real Estate Center at DePaul University. As noted in this Bisnow real estate story, more than 60% of survey respondents are either concerned or trending toward concerned about the market’s direction.

COVID-19 Commercial Real Estate Outlook

The Third Annual Mid-Year Perspectives on Chicago Real Estate Markets report also showed that less than one-third are either optimistic or moving toward optimistic. “COVID-19 has dealt every market across the country a set of challenges and circumstances no one could have anticipated,” said Charles Wurtzebach, the Douglas and Cynthia Crocker endowed director of the Real Estate Center at DePaul University. “Yet people want to be optimistic; they are tired of COVID and want it to be over.”

Among the biggest concerned noted in the survey are:

  • the unknown duration and intensity of the pandemic
  • the financial crunch on state and local governments
  • rising unemployment and
  • the uncertainty about the timing of a vaccine

Given these factors, survey participants pointed to a slow “Nike swoosh” recovery versus a rapid “V” recovery. This is due to the stable Midwestern mode of Chicago, which typically sees moderate-growth for commercial real estate versus the stronger extremes seen in coastal markets.

While many survey participants addressed the concerns with today’s marketplace, Brian Forde, Partner, O’Keefe Lyons & Hynes, LLC chose to highlight some of the glass half full and big picture aspects of the current situation.

“Real estate developers and brokers are as creative a group of professionals as you can imagine,” Forde says. “They adapt, they innovate, they don’t sit still. Given everything that has happened, there will be difficulties, but in response to those challenges, there will also be creative adaptation. Difficult challenges tend to bring out the best in real estate professionals.”

Cook County Tax Increases: The ongoing market threat

Chief among the market threats is the Cook County tax situation, which is different than any of the other 101 counties in Illinois. Before the pandemic, the Assessor showed his hand in Evanston in terms of how valuations and the valuation process would change. It was viewed as a precursor of what is to come. Looming large on the horizon are the valuations for downtown properties, which won’t be completed until 2021.

Forde believes Cook County property taxes will continue to be a real threat to property investors and business owners. “As long as Cook County uses a classification system where commercial and industrial real estate is assessed at 2-1/2 times that of residential properties, property taxes will always be a challenge, and it always will be so long as the system currently in place persists,” Forde says. “That will be further exacerbated when coupled with the inability of taxing officials to manage the sheer volume of valuing 1.8 million parcels. There is just no one size fits all solution.”

For more, see the DePaul University Mid-Year report.

Amazon Fuels Chicago Industrial Growth

July 2020

The surge in consumer goods shopping during the pandemic is having a significant impact on Chicago industrial expansion at mid-year 2020, according to a Q2 2020 Chicago Industrial Report from Avison Young.

Amazon leads the pack in the ecommerce space race, adding more than 2.4 msf in the first six months of 2020 and on track to add another 4.3 msf by year end. This will bring Amazon’s total Chicago industrial space commitment to 15 msf. Amazon is just part of the story, however, as consumers gravitate to buying goods online from a variety of businesses.

(more…)

NAIOP Survey: Industrial Real Estate Remains Strong

June 2020

A recently released NAIOP survey shows continued optimism about the industrial real estate sector, along with improving rent collection and development activity since April. This was the third survey of the organization’s U.S. members since the onset of the COVID-19 pandemic.

The June survey results also provide insights into rent collection and rent relief, which are top of mind for investors in these challenging times. The good news is that 69% to 74% of respondents reported on-time, full payments by 90% or more of their industrial and office tenants in June. (Note that the survey also covered multifamily and retail properties).

Tenant requests for relief declined across all asset types from April to June, with industrial and office real estate showing similar results –moving down from approximately 50% in April to about 38% in June.

Industrial Real Estate Development Outlook Improves

The survey also notes that the impact on current development projects continues to soften,
with fewer reports of leasing declines, delays in financing or government restrictions impacting construction. While 66.1% of NAIOP survey respondents note delays in permitting or entitlements due to COVID-19, the percentage

of respondents reporting a decline in leasing dropped from 57.2% in May to 49.4% in June; reports of delays in financing also dropped from 23.3% to 16.1% in June.

The industrial sector remains the strongest of all sectors, including multifamily, office and retail. The percentage of respondents noting new industrial development more than doubled since April, to 43.3% from 18.5%.The survey tracks sentiment from investors, lenders, developers, among other CRE practitioners.

Gap Announces Retail Store Closures, COVID-19 Approach

May 2020

COVID-19 Issues Mount for Retailers

How will retail store closures fare due to COVID-19? When Americans emerge from their homes, it may be to a completely new normal, particularly in the retail shopping sector. According to GlobeSt, Gap announced that, despite several tough choices, some retail store closures are likely in the months ahead.

Aside from not paying rent for North American stores in April, a $115 million savings, Gap also:

  • Furloughed workers
  • Suspended stock repurchases and dividends
  • Cut executive pay
  • Reduced capital expenditures by $300 million
  • Tapped its entire $500 million revolving credit

100,000 Retail Store Closures by 2025

Also, a recent client note from UBS projects as many as 100,000 retail store closures by 2025. This is a dramatic increase from the 9,548 stores that shuttered in 2019 (according to Coresight). That’s partially because consumers have already shifted the vast majority of their buying to online platforms, and they will need some time before they feel safe and comfortable visiting crowded shopping venues again.

Some Retail Stores Emerge as Winners

The potential good news is that 91% percent of consumers say they plan to visit restaurants, movie theaters, gyms, salons, stores and banks as stay-at-home orders are lifted, with about 32% reporting that they plan to shop more after the pandemic ends, according to a recent survey by Momentfeed. Big winners will include big box retail stores such as Target, Costco and Walmart, which are already seeing a boost in sales during the pandemic.

The Momentfeed survey also showed that 28% of consumers plan to continue increasing their online shopping. As online shopping continues to impact bricks-and-mortar retail stores, the supply chain will have to shift to keep up with more deliveries to more locations than it had previously. This may result in a higher demand for warehouse space as retailers work to keep inventory close to their customers and available for quick delivery.

COVID-19: Online Grocery Sees Growth

May 2020

As COVID-19 deals a harsh blow to many industries, there are also some, such as the online grocery sector, that are seeing a silver lining. The acceleration of ecommerce during the pandemic has been a boon to online grocery shopping, as well as sales of apparel, and electronics. 

According to the recent Adobe Digital Economy Index (DEI), which tracks the state of ecommerce, online shopping has become the main source of commerce during the pandemic. Consumer brands have shifted strategies to focus on giving consumers quick and easy delivery of products, including those in the apparel and electronics segments. Click here for more.

The index found that online shopping and store pickup orders surged more than 200% year-over-year in April as consumers looked to gather goods while limiting exposure to the pandemic. 

Also, the index showed that ecommerce sales jumped nearly 50% between early March, when state shutdowns occurred, and the end of April. Among the gains were in curbside pickup and e-grocery. Daily online grocery sales increased by a whopping 110%, with electronic sales jumping 58%. Instacart, an online grocery delivery service, saw its first profit and sales of $700 million worth of groceries in the first two week so April, according to The Information. This shows the power of online grocery shopping and the industrial sector’s ability to meet consumer needs during the pandemic. 

COVID-19: Industrial Real Estate Shows Resiliency

April 7, 2020  

There are some positive signs as the commercial real estate industry works to navigate the COVID-19 pandemic. Many believe industrial real estate can weather the storm. Here are a few recent examples:

While the U.S. supply chain has been put to the challenge in recent weeks, there are long-term signs of the resiliency of logistics real estate. According to a Prologis report, continued e-commerce adoption, diversified manufacturing locations and other factors point to a positive long term view.

Among the key indicators are: rising inventory levels, continued adoption of e-commerce (particularly in this online grocery shopping frenzy), and the diversification of manufacturing locations.

Amazon Still Leads Industrial Real Estate Activity

Fully leased Amazon facilities continue to attract investors, as noted in this GlobeSt. story. Industrial Logistics Properties Trust closed on the final property of its $680 million joint venture with an Asian institutional investor by acquiring an Amazon leased warehouse in Ruskin, FL. The 12 properties total 9.2 msf across nine states.

Industrial Investment Returns Should Outperform

Tenant demand for new industrial space hasn’t slowed significantly in the wake of the coronavirus, according to Pensions & Investments. The market could see pressure on returns, but the sector is expected to continue to outperform other investment options. Warehouses earned 13.4% returns in 2019 and were the only sector with double digit returns, according to the NCREIF Property Index. While new warehouse construction and increasing rents may cause a short-term lag, the long-term outlook is positive.

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