CRG’s Steve Schnur: The industrial sectors fundamentals are still strong
The industrial sector has long been the darling of the commercial real estate world. That hasn’t changed today, even though higher interest rates have slowed the number of industrial sales taking place. Why has industrial been so strong for so long? Steve Schnur, chief operating officer with Chicago-based CRG , pointed to the sector’s strong fundamentals: Companies still need to distribute their products quickly to their customers. That requires plenty of warehouse and distribution facilities across the country. We recently spoke with Schnur about the resilience of the industrial sector, even during challenging economic times. Here is what he had to say. These are obviously challenging times for commercial real estate. But are you still seeing strong demand from tenants for industrial space? Steve Schnur: We are. If you go back to the core main drivers of our business, you’ll see that they are still strong. Ecommerce is a big driver. Companies rethinking their supply chains and inventory levels has been a big driver. The reshoring of manufacturing to the United States has been an important driver. All those drivers are still in play. The industrial sector is not completely resistant to what is going on in the economy, not by any means. More people are pressing pause if they can do so. That’s just demonstrating good financial corporate responsibility. But there is still good demand for industrial space. Leases are still getting done. There are a lot less buildings under construction today than a year ago, so the demand for existing space is still high. But some deals are getting kicked out a little further. If you can press pause and not make a capital investment today to see how this economic situation will shake out? You’ll probably do that. Is that what a lot of companies and investors are waiting for today? More certainty with interest rates and the economy? Schnur: I think the feeling now is that interest rates have sort of topped out. Most people would say that. Hopefully, we will see some easing of rates later this year. Most economists think we are near the top of what the Fed wants to do to curb inflation. But there are geo-political events happening, too, that are giving people pause, whether consumers or CEOs making decisions about their supply chains. People want as much clarity as they can get before making capital investment decisions. What about demand from investors for industrial assets? Have high interest rates slowed the number of industrial sales across the Midwest? Schnur: Activity has definitely paused. The capital markets have seen a pullback, especially after what has happened with some of the banks in the headlines. Lending has been pulled back. There is less capital out there. Fewer transactions are getting closed today. But what comes out of this in the U.S. economy is ingenuity. What used to be done with traditional bank financing is now moving toward debt funds. Life insurance companies are more active in the market today. I think 2023 will still be a strong year for industrial transactions. The capital side will get itself figured out. And the reason for that will be the health of the underlying fundamentals of our business. The industrial sector still has a low vacancy rate. Rent growth is still outpacing inflation. People still want to get into the industrial market. I don’t want to be blindly optimistic, but I will tell you that when compared to other property types, industrial is a relatively inexpensive investment. As an investor, you are not overpaying for improvements. You are buying highly functional space. Multiple users can come in and use that space without spending significant dollars to retrofit it. The rent-growth story has been phenomenal. Industrial has been the darling of the commercial real estate industry for a long time. When it comes to newer industrial facilities, what type of amenities and features are end users looking for? Schnur: The big need is still for additional trailer storage. Users are also looking for flexibility in how this trailer parking can be used. Some users want to stage product outside in trailers. Power is more critical today, too. Tenants are asking for more power than they probably need knowing that with where the world is going with AI and data, that more power is probably something they are going to need during the terms of their lease. Companies are having trouble finding warehouse workers. So they are getting creative with amenities in their industrial facilities. When […]
