COVER STORY, APRIL 2010

MIDWEST INDUSTRIAL UPDATE: SPRING 2010
Compiled by Amy Bigley

Industrial markets in the Midwest are experiencing a consistent lack of demand from space users. Lease rates have fallen 25 percent in the last 3 years, with additional lease concessions further deteriorating net effective lease rates. In relative terms, Midwest markets have fared better than many of the industrial markets that benefitted from excessive investment capital in 2005 to 2007, such as Southern California, Miami and New Jersey. The primary difference in the fortunes of the majority of Midwestern markets versus other core industrial markets is the difference in the fortunes during the 2004 to 2007 period when Midwestern markets lagged those core institutional markets.

No Midwestern market is poised to offer continued industrial development opportunities in the foreseeable future, with the exception of unique opportunities that cater to contained economic development or special-use development. Virtually every Midwestern market is still trying to absorb development projects from years past. The Midwest region is challenged by the loss of its manufacturing base, which is only highlighted by the automobile industry. The loss of its strong manufacturing sector will have a dramatic effect on every Midwestern industrial market.

The investment market in the Midwest is in a frozen state. Buyers are seeking opportunities that reflect the soft market fundamentals, while owners and sellers are unwilling to accept the current market valuations. Opportunities for buyers should increase as distressed owners are forced to accept the current market valuations.

Investors with committed capital, who have local market experience and expertise, will have acquisition opportunities during the next 12 months. These opportunities may require work in repositioning the assets in the marketplace or stabilizing the investments, but they will offer buyers opportunities not seen in recent investment cycles. Although scarce, development is under way but current development does not appear to be industry or regional specific, but rather project and company specific.

It is anticipated that overall industrial development will remain stagnant for at least the next 18 months. Thereafter development should improve, but not approaching the average activity seen in the 2000 to 2007 period.

As for specific cities and areas, Detroit is not faring well for obvious reasons, while second-tier markets such as Cincinnati, Nashville and St. Louis appear to have hit bottom, although there are several years worth of normal absorption contained within current vacancy levels.

Overall, the near future has no hidden industrial market opportunities in the Midwest. Today’s economy will not offer such clear opportunities to investors or developers. Whether auto drive markets will witness another “shoe dropping”, is a concern not to be underestimated. Long term the Midwest industrial region will lag its coastal competitors; however, it will present select investment opportunities for the patient investor.

— Ryan O’Halloran and Kevin Brennan are research analysts for Brennan Investment Group in Chicago.

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