The View From I.CON: Key Takeaways From I.CON ‘15

Fall 2015
A full house of I.CON ‘15 participants discussed current and future industrial real estate trends and opportunities.

There are still more opportunities than challenges for industrial real estate.

THE 600 ATTENDEES at this year’s I.CON: The Industrial Conference, held in Long Beach, California, on June 10 and 11, learned that the industrial market continues to be strong, even “frothy.” Speakers told attendees to expect further cap rate compression, prices that exceed replacement costs by as much as 25 percent, an insatiable appetite for industrial properties among investors (particularly foreign investors) and the construction of more new speculative projects.

Many attendees also participated in one of I.CON ‘15’s two pre-conference tours: a boat tour of the Port of Long Beach and a “Follow the Freight” tour, which offered attendees a firsthand look at how cargo gets off the ship and to its final destination.

Industrial Is Hitting on All Cylinders. Even though the industrial market is beginning to look frothy, these seem to be the best of times for industrial real estate. But what will happen if interest rates suddenly jump and alternative investments become a better buy? asked Carl Panattoni, chairman, Panattoni Development Company Inc.

“Right now, the amount of money chasing deals is high, but if interest rates start going up, what happens to alternative investments? That is one of the big fears that we all have.”

Developers Are Turning to New Projects. Industrial real estate prices are at or near historic highs. I.CON panelists reported that in some markets, properties are trading at 25 percent above replacement costs. According to Nicholas Anthony, executive vice president and chief investment officer, Duke Realty, that means this is a great time to be developing projects.

“For example, in Indianapolis, the per-square-foot price was always $45 a square foot. Now $55 and $65 have become the new $45 in this market,” Anthony commented.

End Users Need Close-in Infill Sites as Speed-to-Market Hastens and Road Congestion Grows. Retailers of every stripe are seeking close-in warehouse sites around urban centers, according to I.CON panelists.

Andrew Mele, principal, Trammell Crow Co., said that since the dawn of the modern age of industrial development, new inventory has been largely developed on greenfield sites far from urban centers. However, “after 25 years, the changing landscape may be reversing or at least slowing this trend. The Holy Grail of same-day delivery has put a premium on proximity like never before.”

Jay Olshonsky, president, NAI Global, lives on Manhattan’s Upper West Side and said that what is driving the infill trend is the 200 boxes that arrive at his apartment building each day and the 53-foot Fresh Direct refrigerator truck parked on Columbus Ave. There is only a three-day supply of food on Manhattan Island, he said.

“When you look at it from the point of view of the user,” he noted, “they need to be close. The size of the box [warehouse] doesn’t really matter, because they will make it work. They just have to be close. That is what is driving infill development. That is happening in Los Angeles, Chicago, London and a lot of other cities.”

five speakers sitting at a table

James Carpenter, executive director, Cushman & Wakefield (far right), moderated a panel that explored the outlook for industrial investment. Panelists (from left) Thomas Wang, partner, Exeter Property Group; Christopher Chang, vice president, Goldman Sachs Group Inc.; Nicholas Anthony, executive vice president and chief information officer, Duke Realty; and Stanley Alterman, executive managing director, USAA Real Estate Co., discussed how and where large amounts of capital are now flowing into industrial real estate.

Do Tenants Really Want 40-Foot Clear Heights? James Klein, president, Klein Commercial, who moderated the “CEO Power Panel,” posed this question. Jeffrey Phelan, president, DCT Industrial, told the audience that some tenants do want the 40-foot clear height ceiling but, in his experience, the only time that this has happened was in a build-to-suit project.

“I have gone in my career from 24-, 30- to 36-foot clear,” he said. “Gene [Gene Reilly, CEO, the Americas, Prologis, and a fellow panelist] is king, because he is now building the first speculative 40-foot clear [structure] in Tracy, California. He is very brave.”

“That project is well underway,” explained Reilly. There are three users looking at it, one of them really wants 40-foot clear and will lease our building or do a build-to-suit.”

Foreign Investor Appetite for Industrial Real Estate Is Strong. Not long ago, foreign investors focused primarily on shiny office buildings in major CBDs. Now they are adding industrial real estate to their portfolios, according to Christopher Chang, vice president, Goldman Sachs Group Inc.

“These investors are after yield,” he said. “Further, the decision-making process has become more sophisticated. In the past, foreign investors wanted to co-invest with certain parties. Now they have opened offices in the U.S. and built their own investment platforms.”

Spec or Build-to-Suit? That Is the Question. With the industrial market surging, should the smart developer build spec or build-to-suit? Carl Panattoni wisely prefers “tenants in search of a building rather than a building in search of tenants,” but Jim McShane, CEO, McShane Companies, is enjoying the best of both worlds:

“When we buy land, we want to build spec: we want to get it entitled and go,” he said. But, fortunately for McShane, as development of a would-be spec building gets underway, a tenant usually appears to make a deal. “The last five out of six times we have done this,” he continued, “we wound up with a build-to-suit. We [then] have a choice: we can build a spec building or demand a higher price for a build-to-suit.”

Seaports Are the Weakest Link. At a panel titled “Connecting the Links: Supply Chain Strategies for Success,” moderator Craig Meyer, president, JLL’s Logistics and Industrial Services Group, Americas, asked panelists what the weakest link in the global supply chain is.

“Without a doubt, the weak link is the seaport,” responded Bill Mongelluzzo, senior editor, Journal of Commerce, “not just here in the U.S., but at all of the major gateways in the world. The velocity with which carriers have been producing the larger ships — 18,000 to 21,000 TEUs — has far outstripped the ability of the ports to plan for them.” He added that although many East Coast ports remain ill prepared for these larger ships, those ports offer the best opportunities for industrial real estate investors. Panelist Lange Allen, executive director, U.S. industrial and logistics development, USAA Real Estate Co., commented that his company is investing in markets like New Jersey, Baltimore and Charleston, South Carolina.

Is There More Manufacturing in America’s Future? I.CON speakers answered this question with a resounding “yes!” Concerns that America has lost its manufacturing base since the 1970s may become increasingly muted as the impressive impact of the country’s natural gas supply and production boom is fully realized within the next few years.

“The U.S. this year has taken away Russia’s crown as the No. 1 producer of natural gas,” said Steven Schellenberg, senior vice president, business development, IMS Worldwide Inc. “Polyethylene [a plastic used in packaging] and polypropylene [a thermoplastic polymer] are two products that are a result of natural gas. In the next five years, we will add 22 billion pounds of new production of polyethylene and polypropylene in the U.S. That means that around 400,000 containers of these products — 800,000 TEUs — will need to be exported from the U.S., which will also require 40 million square feet of warehouse [space] as export centers.”