While industrial has been an attractive asset class for many years, owners, developers, and investors have had their own challenges raising capital. In an effort to focus on shifting trends with this asset type, ConnectCRE fielded questions from Byline Bank’s Senior Vice President, Team Lead Matt Robertson, to provide clarity on the issues.
ConnectCRE: What trends are you seeing in the national industrial commercial real estate market, and how are they shaping deal structures and underwriting standards?
Matt Robertson: The market is experiencing a flight to quality for both sponsors and deals. All lending sources are aggressively bidding on top-tier market deals. Regional banks, which have traditionally focused on value-add or construction loans, are competing for stabilized deals as well, given the highly competitive environment and desire to make safe, profitable loans. The rise of private credit and the more recent compression in credit spreads across all lending sources have created a more aggressive lending environment from a rate perspective, and for loan structures.
Another trend is a shift toward smaller buildings, commonly referred to as “small bay” properties. These structures are typically under 100,000 square feet and are being developed in newer industrial parks as well as infill locations where it may make sense to replace an older building.
ConnectCRE: Why is there a move to the smaller bay building type?
Matt Robertson: Smaller buildings require fewer dollars and are quicker to build, meaning greater speed to market. This can reduce risk amid concerns of a recession or market slowdown. Additionally, vacancy rates are generally lower for these properties due to a larger network of potential users, making them attractive to banks and investors.
In contrast, large bulk properties are expensive to build in what is a high-cost construction environment today. Also, many times these large buildings require land assemblage or zoning changes that take longer to come together, which adds risk due to uncertainty over time.
ConnectCRE: What do you consider to be some of the most critical elements of a successful industrial deal from a lending standpoint?
Matt Robertson: Sponsorship experience is a critical factor. Thoughtful design, thoughtful layout and future-proofing enhancements (e.g., electrification, appropriate clear heights and dock positions, expanded truck parking) are also important, as is flexibility in building use to allow both single-user and multi-tenant layouts. Location also remains essential: lenders are looking for properties in no-brainer locations at this point in the market cycle, in markets that have clear barriers to entry and consistent demand.
ConnectCRE: How have interest rate volatility and inflationary pressures changed the kinds of industrial deals that your team is seeing, particularly in the middle market?
Matt Robertson: While higher interest rates and inflation have not changed the types of deals being made, they are increasing the amount of equity needed in the capital stack. As the cost of deals rises, it’s important to have more equity to protect the bank’s position, especially with higher interest rates.
ConnectCRE: Have you noticed any other trend that’s worth keeping an eye on?
Matt Robertson: We’ve seen a rise in user sales where companies are purchasing their own properties to avoid rent increases and control their own real estate rather than answer to a landlord. Additionally, industrial outdoor storage (IOS) is an emerging industry that’s becoming more institutionalized after being user-owned and fragmented in the past. We’ve done maybe $150 million to $200 million of that business over the last 18 or 24 months, so that’s something to watch.
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