Chicago Commercial Real Estate Chat Recap from Industry Leaders at ULI CHICAGO’s 5th Signature Event
April 6th was a highlight for the Chicago commercial real estate industry where we enjoyed a fireside chat with two of our industry leaders, Kim Adams and Mary Ludgin. They shared their career progression with key takeaways on rejection, perseverance and what to expect on performance in various asset classes. Not only was the featured speaker, Mary Ludgin, phenomenal but, wow, what amazing talent in moderating by Kim Adams! The mutual respect and genuine desire for each other to succeed from these two competitors was inspirational.
On rejection and perseverance, Mary shared that she was a political science major with no real job prospects. While she hoped to work in commercial real estate, she was met with rejection. From there Mary went to work for Harold Washington. Upon his death, she finished her dissertation and took a job she loved at Dominick’s ensuring that she remained near commercial real estate while continuing to strive for an industry position. A year into her job, JMB, surprisingly called her back with an offer for her dream job in research and investment. By embracing each of her bosses’ jobs as they left, Mary climbed the ranks of JMB which is now Heitman.
A few valuable insights she shared on asset classes is to expect storage and apartments to perform well given the nature of their short-term leases which will outperform in an inflationary environment. Mary saw this trend in 1996 and now has 15% of their core fund invested in medical office and storage with an additional large percentage invested in multi-family real estate. Recognizing the opportunity in niche asset classes beyond the major categories earlier than most of the industry was a key “win” for Mary. However, Mary’s unique humility shined through as she also admitted to not anticipating the hot industrial asset class due to its historical poor ROI. She taught us that experience can be wisdom as well as create a blind spot.
So, who are the other winners? Surprising to many, physical retail is a winner due to the fulfillment trend to buy online and pickup in store. Last year showed more store openings than closings. Trophy office is a winner seeing low cap rates and strong leasing with great examples being 110 N Wacker and the Old Post Office building. The main loser “soul sucking 70’s and 80’s buildings”. These will no longer be office buildings going forward. On LaSalle Street, operating expenses are higher than the net operating income. The City of Chicago has been advised to use its TIF to support redevelopment as solutions are expensive and returns are minimal making underwriting of these projects nearly impossible.
Valuable Advice for Commercial Real Estate professionals
Mary’s practical advice… Be credible. Admit if you don’t know something and come back after you know. Be accountable. Have humility and own your “bad calls.” Each of us makes a mistake or two at points in a storied career. Listen to younger colleagues. Bring your whole self to work. Be authentic.
Kim ended us with Frank Lloyd Wright’s, “The good building is not one that hurts the landscape, but one which makes the landscape more beautiful than it was before the building was built.”
Industrial commercial real estate (CRE) space fundamentals remain strong despite increasing construction costs. The demand for modernized industrial space is showing that despite these cost increases, the e-commerce fueled demand is keeping industrial warehouse space rents rising. Dallas-Fort Worth, the Inland Empire, Chicago, Atlanta, and Houston led the pack in industrial space under construction during Q1, 2021. The Urban Land Institute projects industrial rent growth to increase by 4% in 2021. In 2022, ULI projects 3.7% growth followed by 3.1% growth in 2023. Moody’s Analytics also predicts that industrial commercial real estate will have the highest rent increases of all asset classes this year.
While the common perception is the pandemic hurt all commercial real estate, that is simply not the case. Well located industrial space is clearly a winning asset class for industrial owners and investors. If you simply watch some of the top players doing acquisition and new development, the optimism for the future of industrial space is clear.
The Leaders in Industrial Commercial Real Estate Space
Several companies are taking the lead when it comes to industrial real estate acquisitions and furthering new developments within the space.
One such company well known in this asset class is CenterPoint Properties. CenterPoint acquires, manages, and develops premium industrial real estate. The commercial real estate it acquires is located near major transportation hubs, mainly focused on trucking infrastructure, large rails, and ports. It also helps government agencies create elaborate development projects, taking advantage of its security clearances that allow for projects to start faster. Their creative use of proprietary technology, innovative financing techniques, public and private partnerships as well as other innovative methods allows CenterPoint to provide their customers with a competitive edge to ensure their success. Since the first quarter of 2020, they have made over $1.3 billion in investments.
Another leading entity in the acquisition and new development of industrial real estate buildings is Dermody Properties. They have established themselves as veterans in the industry focused exclusively on developing, acquiring, and managing logistics, e-commerce, and industrial real estate for the past 60 years. Most recently Dermody closed its third commingled fund. Dermody Properties Industrial Fund III, L.P. (DPIF III) is a $1.1 billion fund comprised of previous investors along with new investors ranging from insurance companies to public and corporate pension funds. With momentum from its latest raise, Dermody Properties looks to continue to be a leader in this industry by acquiring, developing, and operating Class A, logistics-focused properties throughout critical hubs in the United States, per Les Shaver from Globe Street.com.
With properties in the Americas, Asia, and Europe, Prologis is also one of the top logistics real estate providers. Leading with its industrial real estate development experience, the Fortune 1000 company has acquired billion-dollar all-stock commercial real estate. It has also worked with companies such as Allianz for huge real estate investments. One service they provide is to suit industrial real estate properties to customers’ specifications and use renewable energy to promote a greener industrial environment.
Conor Commercial Real Estate focuses on community-driven real estate development. Their commitment to honesty and integrity is what has allowed them to build their reputation as a transparent developer in various asset classes, from industrial space to office space to multi-family and health care.
And of course, real estate icon Sam Zell’s announcement earlier this month that his REIT, Equity Commonwealth, is buying Monmouth Real Estate Investment Corp, a company that holds high-quality, net-leased industrial buildings, for $3.4 MM is quite a statement that Sam Zell who is known as the “grave dancer” and a visionary, clearly sees bright skies on the horizon for this asset class. Industrial real estate is no longer a simple search for “warehouse space for lease” or “warehouse space for sale”!
Technology Is Transforming the Industrial Real Estate Space
Innovation is revolutionizing the CRE industry and how real estate development is managed with companies such as those included above are creatively using proprietary technology and brownfield remediation models to stay a step ahead.
A few trends have become noticeable in CRE in 2021. Digital twins have emerged thanks to the mass data collected by the commercial real estate industry. Using data about the CRE building that’s being acquired as well as the Internet of Things (IoT) regarding building operations improves the efficiency as well as experiences of occupants.
Data and analytics are increasingly being relied on, especially with behavioral patterns and demand changing frequently. Industrial real estate companies use analytical data to inspect the risks and opportunities any demand and behavior changes present.
Artificial intelligence (AI) and robotics are being increasingly used. Leveraging technology is infamously slow in CRE and regularly tests the patience of those involved with CRE projects. Robotic process automation has sped up this process for companies. Companies use automation to reduce costs and boost the efficiency of day-to-day operations. Machine learning has also become a go-to digital transformation tool for industrial real estate companies to analyze building layouts during property management. AI can also help commercial real estate brokers with lead generation to help lease these properties quickly.
More Sustainable Technology Is Being Relied Upon
Another noticeable trend in industrial real estate development is the emphasis on introducing sustainable technology that makes properties safer and better optimized. More CRE entities are looking at improving energy efficiency, solar power, environmentally friendly roofing, and other technologies that boost value for investors and owners.
A tenant’s decision regarding a commercial real estate lease going forward could depend more on how many of these technologies are installed. They are cost-saving and are seen as major assets that will make buildings considerably more attractive to occupants.
Industrial real estate continues to evolve, and technology has made industrial space and warehouse space more sophisticated. To learn more about how the CRE industry continues to grow and to find space in your market, join us today!