Elgin Area Chamber Of Commerce: $30 Million Sale Near Chicago Highlights Warehouse Feeding Frenzy

Press release from the Elgin Area Chamber of Commerce:

October 19, 2021

This warehouse at 1900 S. Batavia Ave. in Geneva, Illinois, sold for $30.1 million in August. (CoStar)

By Ryan Ori
 
Even in a booming industrial market, one recent $30 million warehouse sale near Chicago stands out.
 

The Geneva building’s price nearly doubled in a five-month period between separate sales, highlighting the hunger of industrial property investors.

The dramatic turnaround by Cohasset, Massachusetts-based Pacer Partners was a combination of sticking to the firm’s moderate-risk investment strategy, soaring logistics demand and good fortune, CEO Jon Bourbeau said. “We definitely didn’t underwrite that we were going to sell at these returns, but the [tenant’s] credit and the sales market helped us go beyond our expectations,” Bourbeau told CoStar News.

In March, Pacer Properties bought the building in Chicago’s far west suburbs, which is fully leased by Houghton Mifflin Harcourt, for $16.8 million. Just over five months later, in August, Pacer Partners turned around and sold the 513,512-square-foot building for $30.1 million.

That’s a 79% increase in price in just over five months, according to Kane County property records, regulatory filings and CoStar data.

An encore won’t be easy, as competition to buy industrial real estate continues to intensify. That means Pacer and other investors may delve into new types of deals rarely seen before the COVID-19 pandemic, such as partial sale-leasebacks of office campuses, Bourbeau said.

“It’s extremely difficult to find value-add returns in industrial,” Bourbeau said. “For office, there’s more scrutiny, especially if you’re investing in single-tenant leases, because they’re not going back to the office. I think what we’ll see is groups that own a building and maybe want to do a sale-leaseback for part of it. We’re going to see some opportunities there.

“And then you’re going to see tenants that want out of their leases and want a buyout, and we may look at that as well.”

One partial sale-leaseback candidate could be insurer Allstate’s sprawling office campus in the northern Chicago suburb of Northbrook. Allstate recently announced plans to sell its headquarters, although the company didn’t make clear whether that means its entire campus — which includes its 850,000-square-foot main building at 2775 Sanders Road — or only parts of it.

Allstate said it wants to sell its suburban offices because many employees continue to work remotely.
The two Chicago-area properties show the varying fortunes among different types of real estate since the onset of the health crisis in March 2020. With many staying home, e-commerce orders have soared and many consumer staples have come in short supply, creating a run on warehouse space.

Shortages have caused retailers to stock up on larger amounts of some products, adding to demand.
U.S. industrial vacancy has fallen to a record-low 4.6%, according to CoStar data, pushing rents up 7% over the past year. Industrial building sales are on pace for a record total this year.

Logistics property sales are “on fire,” Eastdil Secured CEO Roy March said last week during a discussion of the U.S. economy at the Urban Land Institute’s fall meeting in Chicago. “With supply-chain issues, it may even add to that fervor, because now you’re going from just in time to just in case, at least in the interim,” March said

Meanwhile, questions about when office workers will return have hindered office leasing and property sales. Bourbeau, a former office and industrial tenant broker, formed his firm in 2015. Pacer specializes in buying single-tenant industrial and office buildings at risk of losing the tenant to a lease expiration, termination option or other circumstances.

Bourbeau describes Pacer’s acquisition targets as “transitional single-tenant” buildings. “We feel like we can find a solution for the tenant because we’ve sat on that side of the table,” he said.

Houghton Mifflin Harcourt’s lease in the Geneva warehouse expires in May 2026, according to CoStar.
Pacer zeroed in on the building at 1900 S. Batavia Ave. with the belief that Houghton Mifflin Harcourt, which sells textbooks and other educational products, would improve its credit, Bourbeau said. The firm also believed an undeveloped 12.5 acres of land next to the warehouse would add value, he said.

Pacer put the 37.5-acre property under contract in October 2020, but the deal wasn’t completed for half a year, in part because of the previous owner’s TIC, or tenant-in-common, ownership structure. There were 38 separate owners who controlled small stakes in the building, according to property records.

The long window to close allowed two of Pacer’s investment theses to play out. The tenant’s stock price rose from about $3 per share at the time the building went under sale to more than $6 on the closing date, before continuing up to almost $14 by the date Pacer resold the building.

Also during that time, Pacer drew up specific plans for assisted living or apartment developments on the land, Bourbeau said.

Time also allowed an already hot industrial sales market to intensify. The tenant’s improved financials also helped attract a big buyer, Boston-based Plymouth Industrial REIT. Plymouth expects a 7.8% annual return on the investment, it said in a regulatory filing.

“We spent a ton of time looking at their credit and thought it would improve,” Bourbeau said. “That’s essentially what happened. It was a combination of that, doing some layouts for the rest of the site, and industrial getting more and more expensive. There’s so much more money chasing industrial than when we put it under contract.”

Source: CoStar Group, www.costar.com

This press release was produced by the Elgin Area Chamber of Commerce. The views expressed here are the author’s own.