Q&A: Growing Industrial with JPMorgan Chase’s Troy Applegate
Elevated by rising e-commerce demand amid the ongoing COVID-19 pandemic, the industrial real estate sector has been one of the most resilient within commercial real estate during the last year.
We caught up with Troy Applegate, Head of Commercial Mortgage Lending (CML) at JPMorgan Chase, to discuss some of the broader nationwide trends as well as his outlook for the future.
Q. What high-level industrial real estate trends are you seeing across the JPMorgan Chase lending footprint?
A. In what should come as no surprise to anyone, online purchases reached record levels during the pandemic and there’s evidence this trend will continue. Coupled with consumer expectations for shorter, even same-day, delivery times, warehouse inventories continue to increase. These expectations have impacted the supply chain, leading to increased demand for first, middle and last-mile distribution channels. Beyond distribution and fulfillment, manufacturing demand is on the rise. Greater need for more efficient supply chains has resulted in more development and increased occupancies, as well as rent growth on existing industrial product.
Q. Economic fundamentals continue to show a faster rebound than originally anticipated. What impact is the current economic environment having on your borrowers’ portfolios?
A. Our CML program is primarily tailored to infill, multi-tenant industrial product and while this doesn’t generally include distribution or last-mile facilities, e-commerce certainly has an impact on our segment. Many of our borrowers invest in Class B/C infill product with 16- to 24-foot clear heights and serve local and regional light industrial and flex tenants. In the markets where we lend, we’ve seen replacement costs for B/C product increase dramatically, leading to prohibitive costs for building new, competing product. Labor shortages, rising materials costs and record land prices make construction of competing properties difficult to underwrite, particularly in infill submarkets. These pressures have increased demand for existing B/C multitenant product with some functional obsolescence (from both an investor and tenant perspective) but have also effectively decreased supply.
Though increased cash flow is favorable, it has a consequence. In this case it’s increased investor demand from historically uninterested capital. Institutional investors clamored for new construction, generally tilt-up with long-term leases and credit tenant exposure. But in the last few years, our clients have seen these institutional investors move up the risk spectrum and pursue older existing assets with shorter lease terms and local tenancy, driving down cap rates and making for incredible competition among acquisition opportunities.
Q. What does the future of industrial look like?
A. There is no indication that demand for industrial real estate will decline, it’s quite the opposite. For every $1 billion in e-commerce sales, there is a need for 1.25 million in industrial square footage. As e-commerce sales continue to increase, so will demand for space. Also, industrial real estate can be more attractive relative to other product types due to low tenant improvement and turn costs on units. Consider office space, where employers have alternatives at this point including direct lease, co-working and work from home. The hospitality industry has alternatives in the form of VRBO and AirBnB; retail has alternatives in the form of e-commerce. Industrial space and need, however, can only be replicated through innovation—and even then, we’ll always need to store, move and manufacture “stuff.” At this point, industrial mirrors the low risk profile that multifamily has traditionally provided, evidenced by cap rates. Take Chase’s industrial and multifamily term loan portfolio for example. In the last five years, the average cap rate on new originations of multifamily assets declined minimally from 4.52% in 2016 to 4.46% in 2020.
On our industrial origination portfolio, that decline went from 5.95% to 5.26% over the same time period. This illustrates both the downward pressure in cap rates in these asset types as well as the narrowing of spread between product types from 143 basis points to 80 basis points. With continued appetite from institutional investors and their increasing allocations for industrial real estate, industrial will continue to be a darling in the investment real estate world.
Q. How is Chase advising clients to maximize asset values and strategize through the next cycle?
A. We understand the industrial product type, so we’ve designed a loan program that lets owners do what they do best: manage their business. We provide permanent financing, which is really an insurance policy against rising interest rates and inflation, and we do that with a program designed for efficiency, a low cost structure and post-close maintenance as easy as any permanent finance vehicle in the market. We offer our clients the flexibility to optimize their equity, whether that’s cashing out as values increase, or structuring debt pay down for borrowers who place less value on leverage.
David Cohen is Southeast Editorial Director at Connect Commercial Real Estate. David is a media veteran with more than 10 years of experience in journalism, copywriting and communications across a variety of roles. He is responsible for covering commercial real estate news and trends in the Southeast, Florida, Washington D.C. and Boston at Connect CRE as well as specializing in the Student Housing sector.
Prior to joining Connect, David was the editor of Northeast Real Estate Business magazine and Student Housing Business magazine at France Media as well as spending time freelancing for ESPN and the Associated Press in the fast-paced field of live sports event production. He is also an owner and investor in multifamily real estate in Atlanta, GA.
David currently resides in Atlanta and graduated from the College of Communication & Information at the University of Tennessee Knoxville.