Column By Jess Knigge, Regional Vice President of Development, DCT Industrial Trust
The current state of the Chicago industrial development market has continued to enjoy a healthy dose of growth for both speculative and build-to-suit projects.
Chicago’s industrial market delivered nearly 18.6 million square feet (SF) of industrial development at the end of 2015 with 13.7 million SF currently under construction, according to NAI Hiffman’s Industrial Market research for Chicagoland, Southeast Wisconsin, and Northwest Indiana. There is a combination of institutional and merchant development occurring throughout the Chicago marketplace. For the projects currently under construction in 2016, there is a balanced mix, approximately 50 percent, between speculative and build-to-suits.
While there has been a steady uptick in volume over the prior years, speculative supply remains relatively constrained in the core submarkets: O’Hare, Central DuPage, I-55 Corridor, and Chicago City South. This is due to a dearth of quality industrial development sites in these core Chicagoland areas. Due to the submarket constraints, tenant demand continues to outpace new speculative development supply in these same markets.
Greenfield development is certainly still present throughout the Chicago industrial market place, focused primarily where raw land exists: Fox Valley, I-88 Corridor, I-90/Northwest, I-80/Joliet Corridor and SE Wisconsin. However, I have witnessed recent growth in development on well located sites, with superior accessibility to major interstates, ample labor force, proven absorption and anticipated rental growth. This has lead to a concentration on redevelopment opportunities within the infill and land-constrained core Chicago markets.
My recommended approach to the lack of quality sites is to redevelop sites that are under-utilized and/or functionally obsolete. An example of a redevelopment in the works is a speculative industrial development in the O’Hare submarket that is now 100 percent stabilized. This project was a redevelopment of a functionally obsolete, 1950’s vintage building with low clear heights and a challenging site layout. The existing improvements were demolished in their entirety and a Class A, 32-foot clear, 112,000 SF cross-dock was constructed, with dedicated off building trailer parking and secured truck courts with modern truck maneuvering. This project was pre-leased during the shell construction based on a well-executed redevelopment plan in a market with low supply of new industrial product.
As Chicago is the nations’ most centrally located, densely populated transportation hub, sites with easy access to rail, air and truck freight have always been sought after. But recently, I have seen demand for developments suited for Less Than Truckload (LTL) customers. One recent example is the redevelopment of sites at 4800 S Central Avenue in Forest View. This 56-acre site included more than 80-year old structures that were well beyond their useful life. It is currently being redeveloped as a build-to-suit for a large LTL freight user and is ideal for LTL operations because of its easy access to I-55 with a new four-way interchange at Central Avenue, and proximity to multiple intermodal yards and the central business district.
The recycling of well-positioned real estate will allow for modern industrial product to repeat the process and serve a new and more sophisticated customer base.
These aforementioned industrial redevelopment projects represent the challenges that Chicagoland developers have in searching for their next core market industrial development. Competition for redevelopment sites is fierce, but the lack of supply of these opportunities keeps speculative development in check.
Rental growth will continue to allow for these opportunities to happen. As functionally challenged buildings and sites are ultimately being purchased for land value inclusive of demolition and site remediation costs. Even with these challenges, I expect to see a healthy amount of industrial redevelopment continue in 2016 and into the foreseeable future.