It may be difficult to improve upon last year’s numbers, but industrial construction levels should continue to improve in 2012 with an increased level of build-to-suit projects.
Industrial development activity more than doubled from 2010 with 3.4 million square feet completed in 2011, according to an industrial market report by Cushman & Wakefield.
While those numbers are an improvement, only time will tell whether that translates into additional new construction in 2012, according to Bob Smietana, vice chairman and chief executive officer of HSA Commercial Real Estate.
“There is a lot more conversation about construction picking up than there is actual construction, at least on the industrial side,” he said. “The activity that I’m seeing is mostly build-to-suit activity. The spec construction activity is very limited, even though there’s a lot of conversation about seeing more spec construction in the third or fourth quarter of this year.”
In fact, build-to-suits will be the norm for the long term, as speculative construction has been halted until the market has absorbed the empty space brought online from the last wave of speculative deliveries, according to Paine/Wetzel TCN Worldwide.
The firm notes that several build-to-suits are slated for completion in 2012: Winpak Portion Packaging Inc. is building a 267,000-square-foot building at LogistiCenter at Sauk Village (South Cook submarket) with expansion plans for a total of 600,000 square feet in the future. Home Depot, Clorox, and Wirtz Beverage will have new homes in the near term as well. Combined, nearly 2.85 million square feet of new and occupied inventory will be delivered to the market in 2012.
Paine/Wetzel TCN Worldwide also pointed out that in the fourth quarter of 2011, two new buildings were delivered to the market, both build-to-suits. In the Kane submarket, a 147,000-square-foot distribution center for Northern Illinois Food Bank was completed. Danfoss also took occupancy of its 100,000-square-foot manufacturing and logistics center in November.
In 2011 there were several other substantially sized build-to-suit deals delivered: Clorox Company’s 1.3 million-square-foot facility in University Park, Home Depot’s 657,600-square-foot building in Joliet and 3M’s new 650,760-square-foot distribution center in DeKalb, according to an industrial trends report by Grubb & Ellis. Edward Don & Company signed on for a 20-year lease for its new 362,500-square-foot building in Woodridge. McShane Development is building a 100-acre business park (Union Pointe) where the restaurant supply company will build its new headquarters. Edward Don’s building is poised for delivery in the summer of 2012.
While build-to-suits are currently in demand, that demand eventually is going to move toward speculative construction, according to Smietana.
“There’s a certain size and a certain tenant type that makes sense to do build-to-suits, but if you’re a smaller user, you’re not going to get a lot of people interested in building a building for you, but you still need space,” he said. “That’s where speculative construction and inventory buildings come into play. A tenant who has 25,000 square feet of space may need 40,000 square feet of space. They may have to move into another building, and some of those spaces aren’t as readily available as they used to be.”
Smietana added that because there hasn’t been a lot of new construction over the past several years, the time is right for the vacancy numbers to decrease.
“In certain size categories, there’s a lack of product,” he said.
Mike Yungerman, vice president of real estate development for Opus Development Corp., said the overall market has improved.
“There’s still quite a bit of vacancy out there, but there are a lot of users out there right now considering build-to-suits or doing some retrofitting of their spaces,” he said. “In the last few years, our vacancy rate hit an all-time high in the Chicago market, but the overall market is definitely improving. We’re seeing activity on the leasing side as well as construction activity.”
Vacant industrial supply made a noticeable improvement from the 2010 year-end total of 153.3 million square feet, dropping 14.5 million square feet to 138.8 million square feet, according to an industrial market report by Colliers International. The year-end 2011 vacancy rate measured 10.6 percent, a significant decrease from the 11.68 percent reported at the end of 2010. The report notes that strong 2011 leasing activity contributed to the decline in the vacancy rate. The Chicago industrial market also witnessed only 48.4 million square feet of space re-entering the market in 2011, the lowest total of the past five years.
“The fundamentals are improving every month,” Smietana said. “The manufacturing industry is continually expanding, the overall economy in general has gotten better, and consumer spending is up. I think all of those things contribute to the right mix for the industrial real estate industry.”
