For this month’s column, we continue our discussion with Mike, Neal, Jeff, Don and Susan on the challenges for the 2021 review, and the hot topics in the market right now. Click here to watch the first segment of this series.
We would like to thank Mike Yungerman, Senior Vice President and General Manager of Opus Development Company; Neal Driscoll, Dermody Properties partner for the Midwest region; Jeff Laraghan, senior vice president and associate, midwest region of CRG; Don Schoenheider, Senior Vice President and Market Manager, Hillwood Midwest Region; Susan Bergdoll, vice president of leasing and development at Duke Realty; Matt Goode, director of Venture One Real Estate; and Tony Pricco, President and Partner of Bridge for their views on what the commercial real estate markets will look like this year and for the next 24 months.
Q: So, what is hot and what is not?
Mike Yungerman, Opus Development: The entire industrial sector has been white-hot for several years now. Demand for e-commerce drove most industrial sectors up, but other sectors such as food and building materials were also very strong. E-commerce users have high labor demands that require an abundance of parking and proximity to the people who make up their workforce. This focused on filling sites throughout the city and suburbs.
On the not-so-hot side, with the exception of Southeastern Wisconsin, specification development in peripheral growth markets has been slow to nonexistent. This is largely due to the cost of infrastructure and the lack of manpower. But, as rents continue to rise and sites become harder to find, these growing markets may start to catch the eye of developers again.
Neal Driscoll, Dermody Properties: The highly functional (not always new) and well-located industry is, and will continue to be, hot. The functionally obsolete industry is losing ground. Tenants continue to demonstrate that they are willing to pay for the space that best meets their needs. As an industry, we’ve been talking for years about rent falling far behind the cost of doing business, far behind labor, transportation, etc. I think we’re finally seeing this come to fruition as more companies improve their supply chains. and logistics expertise.
Jeff Lanaghan, CRG: Many of the same types of products will continue to be in high demand: bulk products, cold storage and filling developments. Even in the less targeted product, user and investor demand will keep them active.
Don Schoenheider, Hillwood: Everything seems to attract attention. Certainly, logistics, e-commerce, and food-related developments seem to be at the top of everyone’s list. In addition, the secondary markets are experiencing rents and prices that we have never seen before.
Susan Bergdoll, Duke Realty: Our customers want fast delivery. They don’t wait for buildings – they need facilities for immediate occupancy. We work under tight deadlines to meet customer demands for developments and renovations. In addition, the need to deliver more products to consumers within 24 to 48 hours drives the need for larger and more technologically advanced facilities. And one of the main selling points of the facilities for our customers is the truck terminals and trailer parking. Our customers need space to move inventory quickly and efficiently.
Matt Goode, Venture One: Functional and well-located infill properties continue to perform well within our portfolio. Overall, industrial vacancies are low and rental activity is strong, but we are seeing the strongest rental rate growth in small infill properties. Rents have gone up 20-40% in these spaces over the past five years, even in the MSA of Chicago. This type of product is very difficult and expensive to manufacture, so we believe that supply will continue to be limited in this sector of the market.
Tony Pricco, Bridge: The industrial is hot, particularly modern, the warehouse / distribution of the last mile in the first 20 MSA. Brick-and-mortar offices, hotels and retail will continue to struggle in 2021. The question is how long this will last.
Question: What are the biggest challenges facing the industry in 2021?
Mike Yungerman, Opus Development: From a developer’s perspective, the biggest challenges are construction prices and fierce competition here in Chicago. Today, almost everyone is aware of the volatility of the steel and lumber markets. We have seen the price of steel materials more than double in the last three or four months alone. It’s a challenge to research sites for speculative developments and quote custom builds, as contract underwriting changes every few weeks, forcing developers to make expensive long-term commitments sooner than we are. usually. Finding opportunities has been as competitive as I can remember in my career. Most of the development sites entering the market have more than 5 proposals that require a subscription to be at the top of the market exit caps and rents up to be competitive, leaving no room for error.
Neal Driscoll, Dermody Properties: Two things: First, escalations in construction costs are out of control at the moment, driven by supply and demand constraints; and, second, the exciting dynamic that is emerging in many markets on how to satisfy everyone’s desire to deliver e-commerce while keeping those delivery trucks invisible. There is a lot of anecdotal evidence that shows e-commerce delivery is more beneficial to communities in terms of traffic and air pollution than residents driving from store to store. A home delivery vehicle picks up from a store or distribution center, then delivers to 30, 40, 50 homes. If all of these households go out and buy goods for themselves, the relative impact in terms of additional automobile pollution and traffic is evident.
Jeff Lanaghan, CRG: Material deliveries will be a major determinant of industrial sector performance in 2021. Steel prices have climbed more than 200% in the past three months and deliveries are expected six to seven months after the order is placed. Precast also offers extended delivery dates. As a result, projects looking to lead the way in the second quarter will likely be delayed until the end of the third quarter or later.
Don Schoenheider, Hillwood: The rising price of raw materials and the resulting increase in construction costs are already creating headwinds. Finding land that is or could be eligible for industrial development will also continue to be a challenge.
Susan Bergdoll, Duke: We find that the prices and deliveries of steel have an impact on our projects. Extended deliveries, in some cases up to eight weeks, negatively impact our construction schedules more than price increases. The lack of skilled labor has also been a problem for several years. Our customers are seeing labor shortages in many parts of the country. A large e-commerce facility could employ several thousand workers.
Matt Goode, Venture One: Inflation, rising interest rates and distress over the fallout of more than a year from the pandemic are factors. While many industries are poised to grow as we emerge from the pandemic, some will be threatened by the depletion of government subsidies. We are also concerned about the health of some cities and local municipalities which have had significant expenses due to the pandemic and reduced revenues due to lower sales taxes and revenues. This could lead to an increase in property taxes. That said, we have a positive and not a negative outlook for 2021.
Tony Pricco, Bridge: Rising interest rates and inflation keep construction costs rising. Both can be overcome if we combine economic growth (i.e. growth in rents) to offset them.
We would like to sincerely thank all of the developers who took the time to provide valuable information for this month’s column. We all look forward to a strong second half of 2021 and next year. – Élise A. Couston