INDUSTRIAL SECTOR BOUNCING BACK

by:  Bruce Kaplan

The umbrella catch phrase “commercial real estate” encompasses office, retail, multi-family and industrial product types. All have been hurting for the better part of three years even though the Federal government officially announced the end of the recession in June of 2009. One of the brightest of the commercial property types is the INDUSTRIAL sector which is showing signs of as resurgence. An April, 2011 article in Benuzzi’s Industrial Guide by Elise Couston of Paine Wetzel reported comments from three Chicago based experts who sounded very upbeat based on what they see and experience. Sales and leasing activity is trending upward, vacancy rates are dropping, net absorption has turned positive…all indicative of DEMAND in the market. Investment sales in the first quarter of 2011 tripled compared to Q12010. Although we are slow to see these trends in McHenry County, we have noticed an increase in showing activity which is commonly a pre-cursor to increased sales and leasing activity

Reasons cited for the resurgence of the industrial sector are several: 1) PENT UP DEMAND-may companies have been parking their profits due to the uncertainties in the economy and sitting on the sidelines waiting for the right moment to make their next move. Businesses by nature can’t stand still; they need to grow. Eventually they need to DO something that propels them forward. More and more companies are reaching a conclusion that they can’t keep sitting on the fence. 2) SUPPLY CHAIN EFFICIENCIES- many companies have taken the position that they need to get “lean and mean” from top to bottom as a survival strategy. Sometimes the process of becoming more efficient leads to an EXPANSION, sometimes a RE-LOCATION (getting closer to customers or suppliers; other times a CONSOLIDATION or even a CONTRACTION. Certainly there are many companies who have done absolutely nothing to trigger a need for larger or smaller manufacturing or warehousing facilities, but many have been forced to buy or lease other space because of this quest for supply chain efficiencies. We in the business call that a (“cha ching”) transaction and it’s what we live for.

Other factors that enter into the comeback process are: 1) transportation costs, 2) cheaper lease rates and 3) inventory re-stocking. High gas prices drive freight costs up and these costs get passed on to the consumer. This condition forces some companies to try to locate new distribution facilities closer to the end consumer so transportation distances and costs are kept lower. Cheaper lease rates are hard on landlords but beneficial to manufacturers striving to keep occupancy costs down. If they can’t get their current landlords to lower the lease rates, they often will move to another building to save $1-2 per square foot, sometimes more. Retailers went thru a de-stocking period where inventories shrunk and the need for warehouse space diminished. Now the trend is reversed and retailers are re-stocking their inventories due not only to US demand for products, but foreign demand as well. It is interesting to note that the Institute for Supply Management gauges the growth of the manufacturing sector of the US economy and as of their latest report, the manufacturing sector expanded in April for the 21^st  consecutive month. Couple this with three consecutive months of private sector job growth averaging 250,000 new jobs per month and you start to see why I can feel the momentum building.

This is all very gratifying to those of us in the brokerage business who have weathered through the recession and the last 21 months of “crawling from the wreckage”. All that said, there are some extraordinary buys in the local McHenry-Kane-Lake County markets, where we focus combined with relatively low interest rates. If you are ready to make your move, now is the time to take action.