Real-Estate Executive
Loves Current Market

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It may not be a banner year for First Industrial Realty Trust, the Chicago-based industrial ownership/development REIT, but it won't be all that bad either. While the industrial market has grown soft in its occupancy, sales are going strong, reports president and CEO Michael Brennan. This activity is fueled largely by pension funds looking for relief from a lagging office market. Their interest, coupled with a demand base that has emerged largely in the wake of the tech drop-off, makes for a market with "solid fundamentals," according to Mr. Brennan. Naturally this, in turn, makes for solid REIT performance. First Industrial posted 2001 FFO results at $3.66 per unit share fully diluted -- totaling $169.2 million. That compares to $3.33 per unit share -- or $151 million -- for '99, which translates into a per-share FFO increase of 10.1%. In all, as Mr. Brennan recently told GlobeSt.com, "I'm loving this environment." He explains why.

GlobeSt.com: We've noticed a fairly large spurt of industrial deals lately -- both in terms of leases and sales. Why?

Brennan: There's a healthy and liquid marketplace for industrial properties. They're desired by pension funds and private investors and REITs because, despite the slowing economy, industrial properties continue to exhibit their characteristic stability.

GlobeSt.com: For instance?

Brennan: For instance, on a national basis, occupancy is 93% and rental-rate growth ranges from 4% to 8%. There was a drop-off in absorption of about 10 to 15 million square feet, but it bottomed out there and we're returning to normal levels. While there is some construction, it's significantly down -- nearly half -- of what it was two years ago. Also, low interest rates are making these transactions quite finance-able. Good fundamentals and low interest rates make for extensive interest.

GlobeSt.com: How much of that interest is coming from investors shying away from the office market?

Brennan: A lot. It's certainly the case with pension funds, which have told us that they don't want any more office and are going after industrial and apartments. In the first quarter of 2001, we did 27 sales transactions all around the country. About a third were with pension funds, a third were with private investors and a third were with users. The beauty of the sector is that there is so much liquidity because there are so many buyers.

GlobeSt.com: We talked about rental rates. What are sales figures doing?

Brennan: Sale prices have actually increased in industrial by 5% to 8%. Again, lower interest rates and greater demand from pension funds are making the sector a preferred asset type.

GlobeSt.com: It wasn't all that long ago that you -- and other industrial developers -- were saying how technology was changing the face of the industrial market. What's the story now in the months after the tech bust?

Brennan: That's an interesting question, and frankly, technology is going to continue to play an important and positive role in industrial absorption. What isn't happening is the absorption of space by B-to-C web firms; they're no longer viable. But tech is having its positive effect in the B-to-B arena, where major companies are harnessing technology for transactional purposes -- companies like Ford Motor and Dell Computer.

GlobeSt.com: Can you be specific?

Brennan: It's the age of collaborative manufacturing. Major manufacturers -- Ford, Dell, GE -- want to become brand owners and not engage themselves where they no longer have a clear, competitive advantage. It used to be that Ford would build engine housing. Now, Tower Automotive, which specializes in that area, is a collaborative manufacturer for Ford. Flextronics is a supplier for Dell. These are the companies that are taking industrial space. And we just completed a 250,000-square-foot build-to-suit for Tower near Detroit and 420,000 square feet for Flextronics close to Dell's manufacturing facility in Nashville.

There's also activity coming from the retail sector -- especially such firms as Wal-Mart, K-mart and Best Buy -- that continue to build up their capability for customer demand through the Internet. They're disintermediating dealers, retooling their distribution chains and growing in their use of warehousing in strategic locations.

GlobeSt.com: So development these days is mostly build-to-suit.

Brennan: Actually, about half of it is spec, judiciously placed in submarkets that continue to show strength.

GlobeSt.com: Do the spec facilities display similar characteristics from market to market?

Brennan: Mostly they're 50,000 to 100,000 square feet, which appeals to middle-market companies. In our June 20 investor conference, I noted 1,000 middle-market regional firms that accounted for as much employment growth as major national companies and the government from 1990 to 1999. So, there is growth in this sector. About 20% of the industrial marketplace is made up of national companies trying to consolidate their warehousing. The other 80% is made up of the mid-cap firms serving a local or regional market -- the Flextronics or the Tower Automotives.

GlobeSt.com: Do you think the industrial sector will remain largely independent of the economic slowdown through the duration of the slump?

Brennan: I'm not a doom-and-gloom sort of guy. I'm more bullish on our company than ever before, and I'm loving this environment. I get an analyst on the phone and I concede that there has been a bit of a slowdown and then I talk about the things we're doing and how we're growing.

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