Forget office properties--the new darling of many commercial lenders and investors is industrial. Concerns over office property overbuilding and finding replacement tenants have shifted industrial properties to the top of the list of desired properties for many. Experts in three top markets explain why.
INDUSTRIAL REAL ESTATE HAS ALWAYS BEEN THE GOOD, GRAY, UNSPECTACULAR asset-class content to quietly rack up solid returns while leaving the spotlight to its more glamorous cousins, such as office properties.
Well, not any more. The asset class has got new class and is earning new respect from investors and lenders.
Along the way, industrial has shed its rust belt-smokestack image as it upgrades to modern, hightech facilities in spacious, campus-like business parks across America. The industrial property profile is changing as well, with the appearance of huge bulk warehouses ranging up to 1 million square feet. They serve as regional distribution centers and are the result of consolidations from multiple locations. These giant facilities are seen by their thirdparty logistics operators as the keys to greater efficiencies, speed and cost savings in moving products to market.
Industrial is becoming a new property segment of choice for many commercial lenders, investors and asset managers who are shifting their attention to it from other asset classes.
Dramatic confirmation of this trend comes from the American Council of Life Insurers' (ACLI's) Commercial Mortgage Commitments survey for the second quarter of 2000. The ACLI reports that industrial properties accounted for 15.8 percent of total volume--the highest penetration into industrial properties at midyear since the survey began in 1966. Total overall commitment volume for all property types for the second quarter was $5.48 billion. Companies participating in the survey in 2000 hold about 70 percent of the life insurance industry's commercial mortgage holdings.
One close observer of the trend favoring industrial is Toby Martin, vice president, principal and manager of industrial sales and leasing nationwide for St. Louis-based Colliers Turley Martin Tucker. Martin says one of the underlying reasons favoring industrial is the perception that the office market is becoming somewhat riskier because the large amounts of new construction being delivered may soften the market.
That concern has opened the door to industrial as an alternative asset class for lenders and investors as they keep a watchful eye on the office market to track absorption patterns. Martin also points out there's been a shift away from a traditional manufacturing economy to a distribution economy in the United States, which has spurred the growth of industrial lending.
"There's been a move to larger industrial buildings and more centralized hubs, producing a bigger inventory of 200,000- to 300,000-square-foot and up buildings. That makes it easier for investors to find deals in the $10 million range," Martin says. "More markets with larger buildings become more attractive to investors. They're being more efficient in their allocation of resources because [fewer] deals are being done for the same amount of money."
To test the lending climate on industrial real estate, Mortgage Banking conducted its own survey of three major markets--metropolitan Atlanta, metropolitan Chicago and Los Angeles/Orange County. Several commercial lending executives in these markets confirmed the appeal of industrial. A sampling of their views on the rise of this market follows.
Kieran Quinn, president and chief executive officer of Atlanta-based Column Financial, Inc., commercial lenders, a conduit and subsidiary of Donaldson Lufkin & Jenrette, New York: "There's more emphasis on industrial, and it's becoming a segment of choice. Investors are becoming more gun-shy of office and looking more toward industrial."
Bernard O'Connell, managing director, CB Richard Ellis, Chicago: "Industrial is becoming one of the most desirable asset classes. …