Ahhhh…Whats Up Doc? Positive? For How Long?

Everyone has an opinion including yours truly.  Well not exactly my opinion but those of the 16 men and women that work in our firm.  In general terms the news is positive but we are NOT sure how long.

The industrial market has recovered nicely from the Great Recession of 08 & 09.  Occupancy levels for all classes of property across most of the suburban sub markets have increased.

A number of factors have contributed to this result.  First and foremost there has been no new speculative construction since 2008.  Second when there is a downturn in the real estate industry there is a natural flight by tenants to move from B and C class space to class A thinking prices are depressed so why not, as long as the company continues to be profitable move to nicer space.
The industrial market reflects this perfectly as class A space has the highest occupancy rate in years and years.  Basically there is no class A industrial space available in any of the sub-markets.  There are 7-10 in fill build to suit or spec developments currently underway.  O’Hare leads the way with Panattoni, Duke and Prologis followed by the 55 Corridor where Pizutti is considering a spec and recently signed a 900,000 sf build to suit and Panattoni has started building 200,000 sf in Bolingbrook.
Land is being purchased all over Chicago’s suburban market where West Cook county has seen most of the action with nearly 100  acres of land under contract for potential build to suits and spec development.
The third piece to the puzzle is of course financing and the banks in particular seem to have an appetite which includes for the first time since the crash, investment deal financing.  They have been providing financing for the owner user space and have now expanded back into the investment water.  Institutional money is everywhere and many of us are scratching our heads wondering how we got back to the sub 6 cap rates so quickly.  It hasn’t been long enough for us to forget how we got in the trouble we did when pricing went through the roof; based on cap rates.  Well we’re back there and class A industrial space is trading for all time high numbers and the appetite is voracious.  Institutions are trying to buy vacant spec developments and taking the lease up risk.  And it’s not just happening here folks.  It’s across the country.  Some institutions are only buying on the coasts leaving the blood bath of Chicago to others.
What does it all mean this time?  I have no idea.  Here is my guess;  rental rates will continue to grow in all sub markets in particular for class A space.  B and C space will make a modest recovery for short-term deals and spec development will double within 12 months.  Cap rates will remain constant and may seep into the class B and C industrial packages.
If I’m a tenant I’m in the market 2 years in advance of my lease expiration to insure availability of quality space.  If I’m a broker I’m calling tenants like crazy to read this story to them.  If I’m an owner I’m pushing higher rents on every renewal and making less concessions and longer term deals because you can get them.  Learn to say no to tenants.  If I’m a banker our rates will continue to rise and prudent owners and buyers are refinancing and somebody is going to make the deal so don’t be waiting for better rates; this is it!
Lastly the overall economy seems to be slowly recovering and there are lots of companies making lots of money.
At some point we will over build again but if everything stays the same it will take 3 years so there’s the window.
Play hard but listen closely for the music to stop!
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