”As our previous speaker said, we are now the golden child of the real estate market.” With that allusion to KC Conway’s keynote address, moderator Ed Lowenbaum, managing principal of Cresa, kicked off the “View from the Top” panel at Connect Industrial Midwest 2023.  

Being a most favored asset class isn’t without its challenges, though, and the panelists candidly addressed those challenges in the 45-minute discussion that followed at Joe’s Live in Rosemont, IL. 

Among the hurdles to overcome is the bid-ask gap. Based on the expectations he’s been seeing among sellers recently, Aaron Martell, EVP and partner at Logistics Property Co., said, “The information is not getting to them. The brokers aren’t educating the sellers that the prices have come down.” 

Jack Hennessey, senior managing director, Central region at Link Logistics, concurred. “There’s still price discovery going on,” he said. “We’re still trying to figure things out ourselves, but we’re looking at  many different options on the buy side.” 

Both Martell and Robert Smietana, CEO of HSA Commercial Real Estate, have been buying up developable land. However, both cited elevated costs for land and Martell noted that in order to bring returns into line with the expectations of investors in Logistics Property Co.’s funds, “The land has to adjust.”  

He added, “There are still deals to be done. The equity is still there. It’s just that the land price has to make sense.” 

SVP Shannon Wroblewski at Old National Bank noted changes in the lending environment lately. “The leverage has definitely come down,” she said. “We may have lent 65% loan-to-cost a year ago, and in some cases we may have done it non-recourse. Now, we’re not looking at that.”  

Fifty-five percent loan-to-cost now seems like the right number to make the debt service coverage work in a loan. “It really comes down to the equity partners, and their sponsors, and their access to capital,” Wroblewski said. 

Asked whether current economic uncertainty is giving tenants pause, Hennessey said, “So far, we have not seen a huge impact on economics” when it comes to leasing. “Occasionally, there’s been an impact on terms,” where the tenant may choose a shorter term versus a longer term.”  

What Hennessey and his team are seeing is that tenants are taking longer to get across the finish line when it comes to finalizing a lease. These delays are happening at the C-suite level as senior management scrutinizes the lease terms to make sure they’re comfortable with the commitments. 

Looking beyond the current environment, Lowenbaum asked the panelists at the Feb. 22 event where they’re seeing opportunities in the next couple of years. “We’ve invested heavily in Minneapolis,” said Hennessey. “It’s a very unique market; it’s kind of like a Midwest version of Boston” in the sense of being an atmosphere for business incubation. He added, though, that there are also several other Midwest markets that are seeing newer industries. 

Smietana said HSA continues to like southeastern Wisconsin and Indianapolis. He noted that one reason for southeastern Wisconsin’s appeal is that it’s convenient to the Chicago-area workforce but isn’t subject to Chicago-area property taxes.  

HSA has also been developing in Fort Myers, FL. “That’s a market that’s so out of balance in a good way,” because demand is considerably higher than supply, Smietana said. “The money is going there, the people are going there, and I think the supply chain is starting to catch up. The Amazons and the Ulines are starting to go down there.” 

For Old National’s part, Wroblewski said, “The bulk of our business is still here, but a lot of our clients are starting to look outside the Midwest.”