Opportunities and Trends Within the Industrial Arena
RE Journals | April 29, 2019
Last Friday, over 325 people went out to Oak Brook, Illinois to once again hear knowledgeable speakers discuss the hottest asset class this cycle: industrial. The 16th annual CIP Industrial Summit, hosted by REjournals, has become a trusted mainstay and this year’s attendees soaked in the expertise.
One of the day’s panel discussions focused on the opportunities and trends within industrial, everything from financing and Investing to design and management. The speakers concentrated on the changes to the Opportunity Zone program, applications for energy efficiency at industrial sites and the latest trends affecting new development and redevelopment alike.
Ever since the Opportunity Zone program was introduced, it has been beset by questions as investors sought guidance from the U.S. Treasury as to how the program will actually work. The Treasury recently released a “final” set of guidelines, so investors can now go into a project with more knowledge, and this applies to industrial sites as well.
Among the new information revealed as part of the Treasury’s latest disclosure, there was clarification that, though the capital invested in Opportunity Zones can be created anywhere, once placed in an Opportunity Zone the funds have to go into an approved fund.
“The first step up is this July so to get the full benefit, you have two months,” said Reggie Greenwood, deputy director, Chicago Southland Development Corp. “Once the money is in a Qualified Opportunity Fund, you can refinance it and take money out, but you have to put it into another Opportunity Zone … to maintain the tax shelter.”
As Peter Tsantilis, partner at Liston & Tsantilis and the panel’s moderator, pointed out, since the program was introduced at the end of 2017, the land value in some Opportunity Zones has risen 20 percent, before a single penny is invested. This has the potential to doom the program before it really begins.
“As an investor, we’re somewhat pessimistic about Opportunity Zones,” said Sam Isaacson, managing director, JCR Capital. “We haven’t seen a lot of deals that make sense because the tax benefits have been wiped out by the rise in property values. It was easier for those that jumped on this right away or that had a deal underway when it came out, but we haven’t seen deals that make any more sense than a regular real estate deal.”
The Future Energy Jobs Act (FEJA) was signed into law in 2016 but only got a full roll-out last year. FEJA has a number of lofty goals, including the protection of 4,200 jobs, preservation of $1.2 billion in economic activity, the addition of 3 GW of solar power generation within the state by 2030 and the earmarking of up to $750 million for low-income communities.
Critical to ensuring that credits are distributed evenly across rural and urban areas throughout the state, FEJA is set up with a renewable energy credit adjustable block program. Tom Johanson, senior program manager with ComEd Energy Efficiency, assured attendees that—though it may seem counterintuitive for an energy utility to advocate lower energy use—FEJA is a robust program that won’t be going away any time soon.
“FEJA is a 10-year program,” Johanson said. “As an owner or developer, you can rely on these programs and know that they won’t be gone in a year.”
There are a lot of different program offerings around new construction, and Johanson said that the earlier someone gets involved the better. There are also programs that target renovations, such as changing out a lighting array, improving the envelope or upgrading the HVAC system.
Scott Howe, senior vice president at Solect Energy, pointed out that in other markets around the country, such as in California and Massachusetts, some jurisdictions now require solar panels on new construction. “It’s avoidance of energy use,” Howe said, “and it’s exciting seeing that get built in.”
The industrial sector has seen a number of construction trends over this cycle. As Howard Green, executive vice president at Meridian Design Build sees it, one of the latest trends is increased awareness of a warehouse or logistics site’s security operation.
“Security has become a growing concern. The users have trucks coming in the yard and they want to make sure its secured,” said Green. “They also don’t want crossover between auto and truck parking, which makes laying out the property more difficult.”
The panel also discussed the concept of turning empty retail locations into some type of industrial use, as these are the asset classes on the decline and ascent, respectively. Though this has been a frequent thought experiment, the panel could point to few real world applications, as there are a number of issues at play.
First is community push-back. Regional malls are almost always encircled by residential areas, as these were the customers they served for the past few decades. But those residents balk at the idea of trailer trucks traversing their roads with more frequency. The basic infrastructure is often not in place for these trucks anyway, meaning a clean switch over to industrial is a long shot.
Another issue is that, for as dire straits that malls are in these days, what of smaller strip centers? There’s simply no space for any sort of industrial use in these locations. The panel pointed out that that there have been some successful self-storage applications in former storefronts, and this may be the future of converting retail, rather than some sort of “last mile” industrial use.