“One thing is affecting every property type in every geography, no matter who you are and how special you are,” KC Conway told the Connect Industrial Midwest 2023 audience. That one thing is “the capital lockout. The Fed has basically said to the banks, ‘lending is an economic activity and economic activity causes inflation, so stop doing it.’”  

About one-third of the industrial projects on which the Red Shoe Economics founder has been consulting have stalled for that reason. “It’s only going to get worse as the year goes on,” said Conway. 

Absent that lockout, it should be an opportune time to develop, since industrial remains among the most favored asset classes. “The demand side and the fundamentals of your business are stronger than they were last year or at any time in the past five years,” Conway told the audience of more than 250 real estate professionals. “It’s just that capital is locked up.” 

Bankers believe that industrial is overbuilding and therefore aren’t lending on new development, said Conway. “They’re incredibly wrong,” he said. “Supply is going to get constrained in the next two years,” due to a combination of projects stalling and tenants sensing a dearth of new product and scooping up whatever they can.  

Conway recalled that when he first got into real estate, he was told that the only two things he needed to know were location, location, location and that cap rates are 10 plus or minus two. Both truisms are wrong today. “It’s no longer LLL: location, location, location,” he said. “It’s LTC: location, timing and capital. You can have the best location in the world, but if your timing is wrong, like it is right now, and you can’t get capital, you don’t get to do a transaction.” 

Conway cited a recent report from CBRE which found that the Chicago region was second only to the Inland Empire in amassing the largest number of big leases in 2022. He also cited the Urban Land Institute’s latest Emerging Trends report, which ranked industrial as the number one property type investors want to buy or own, followed by multifamily and hotels.  

In the ULI report’s discussion of industrial, “you can’t find a negative comment” about the sector, said Conway. Demand still outpaces inventory. “Oversupply risk is still low.”  

He disputed the idea that industrial is overbuilding. “We’re building industrial in places it wasn’t needed before,” he said. “We are remaking our supply chain from one that was anchored in L.A. and Long Beach and moved east, to now moving north-south.” 

Citing a study he did five years ago at the University of Alabama, Conway said, “If you want to understand where warehouses, e-commerce and logistics are going, follow logistics infrastructure.” That includes inland ports, and Conway pointed out the nation’s largest such port is located not far from the site of Connect Industrial Midwest, Joe’s Live in Rosemont, IL.  

“We are moving all of our redundancy in ports, in logistics infrastructure, north-south,’ said Conway. The pending merger of the Canadian Pacific and Kansas City Southern railroads will set the seal on an infrastructure corridor running from Canada down to Mexico. He said that any issues with supply-chain disruption could be nullified within 24 months if only the Fed would single out industrial real estate for lending. 

He pointed to two directional arrows on a PowerPoint slide. One highlighted the I-85 corridor between Atlanta and Charlotte, which has more industrial development going on than any other Interstate in the U.S. The other is from Wichita to Little Rock—two key points in a manufactturing and transportation corridor. Both arrows, of course, pointed from north to south.  

Conway highlighted the Golden Triangle, a concept which he’s been “preaching” since 2014. It’s the area extending from the Great Lakes south to the Gulf and Atlantic ports. Fifty percent of GDP and 70% of U.S. population is there. “So if you want to do logistics and supply chain, you want to be in the Golden Triangle,” he said. 

Watch these pages in the coming days for more coverage from Connect Industrial Midwest 2023.