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MidwestCRE

Developers more confident as Chicago sees rise in spec projects

Bwasag April 5, 2017
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The Chicago area industrial market has seen a great deal of activity with a significant amount of construction slated to both begin and be completed within 2014.

According to preliminary data from CBRE Group Inc., ±8.41 million square feet of industrial projects are under construction in the submarkets that CBRE Chicago’s research team tracks and 50 percent of these projects are spec.

“In general, we’re seeing more development than we’ve seen in the past five years, even though we haven’t seen much in the past five years. In the last few years, there hasn’t been much development at all,” said Robert Smietana, vice chairman, chief executive officer of HSA Commercial Real Estate.

The numbers above contrast with the percentage of spec construction just a year ago where, of the ±2.72 million square feet of projects under construction, none was spec; and to five years ago where there was only 473,591 square feet of projects under construction with 0 percent of it being spec, according to CBRE. This increase in spec projects indicates developers are now more confident in the strength of the Chicago industrial market.

“The spec construction had effectively dried up for about the last four years. Very little speculative construction was done. Now, more people are going to the marketplace with spec buildings,” said Mark Augustyn, chief operating officer for Principle Construction.

Additionally, ±1.39 square feet of industrial projects in those submarkets have been completed in the first quarter of 2014, according to CBRE.  The submarket surrounding Romeoville, Woodridge and Bolingbrook is projected to deliver ±1.62 million square feet to the market within the year and the submarket surrounding Lake County and Kenosha is projected to deliver ±1.99 million square feet before the close of 2014.

Smietana said construction activity is improving as the economy continues to recover and new supply continues to remain low.

“I think the economy still is sort of lugging along, not necessarily fast, but it’s moving a little bit better than it was five or six years ago,” he said. “At the same time, because there hasn’t been any new supply, the market counts on new supply being added. Old buildings are becoming obsolete and are being taken out of service. Eventually there becomes a need, and I think we’re seeing that in the Chicago area. We’re seeing it in markets around Chicago like Indiana and Wisconsin as well.”

Nearly 9.2 million square feet of new industrial product was completed during 2013, with 47 percent of that new construction being build-to-suit projects, 41 percent being speculative development projects and 12 percent being building additions, according to an industrial market report by NAI Hiffman.

“There are some build-to-suits in the market, but I think historically industrial is one of the few product types that has always tolerated speculative construction well,” Smietana said.

“I think there are still companies that are looking for build-to-suit alternatives, but it’s also very specialized,” added Rick Daly, president of Darwin Realty and Development. “I think the majority of companies are going into existing properties or speculative properties.”

For its part, HSA Commercial Real Estate has two recent spec projects: a 218,500-square-foot speculative warehouse facility at Delany and Blanchard roads in north suburban Waukegan and a 180,480-square-foot speculative warehouse facility at Park 355 in Woodridge.

“We’re doing three speculative buildings right now and anticipate maybe two more getting started later in 2014,” Smietana said.

Smietana added that construction demand is occurring in multiple submarkets.

In the I-80/Joliet Corridor alone, more than 4 million square feet of new development was completed in 2013, with 37 percent of that space being speculative projects, according to NAI Hiffman. A total of 14 additional projects broke ground during the fourth quarter, amounting to more than 5.1 million square feet of new construction projects. Through the market, 30 projects are underway for a total of 8.7 million square feet.

The most activity is in the I-55 Corridor, NAI Hiffman notes, where four projects are under construction totaling 2.5 million square feet.

“I think I-55 has always been successful because that is where the majority of bulk warehouse is,” Daly said. “The demand is higher down there because of the newer more functional spaces.”

Several submarkets witnessed no new construction in 2013 including Chicago North, Chicago South, DeKalb County, I-290 North, I-290 South, McHenry County, North Suburbs and South Suburbs, according to an industrial market report by Colliers International.

Colliers also noted that two new construction projects in excess of 1.0 million square feet were completed in the Chicago area in 2013. Home Depot moved into a 1.6 million-square-foot property at CIC Joliet Business Park and Clarius Partners LLC (in a venture with JP Morgan) completed a 1.0 million-square-foot speculative bulk warehouse distribution facility at Clarius Park Joliet.

Augustyn said many of the projects that have been on the drafting boards for a while are now coming to fruition.

“The log jam probably has finally broken loose and a lot of projects are now coming out and there are a lot of anxious customers hoping to get started right away,” he said. “In this last year, at the end of 2013, I think many of the customers that we work for have realized that the economics are appropriate. The demand for the space is there. The vacancy rates are at a point where they can go forward with spec buildings. Basically, user demand for space has finally caught up.”

In its report, Colliers predicts that speculative development will continue in 2014 but not to the level seen in 2013. The report also expects that in-fill developments will be active in the North Suburbs and I-290 South markets, while the O’Hare market will continue to draw interest for build-to-suit opportunities.

“O’Hare has always had high velocity because of the amount of space and the diversity of companies out there,” Daly said. “I think in O’Hare, a lot of the velocity is in the smaller spaces from light manufacturing companies.”

Rent growth also is expected in 2014, according to Colliers, especially for well-located modern functional product in the 10,000- to 30,000-square-foot and 100,000- to 200,000-square-foot size ranges.

“We’re seeing a slight increase in rental rates probably for the first time since the recession,” Smietana said. “I think with that in mind, it’s probably becoming more of a landlord’s market, whereas it’s clearly been a tenant’s market for the last five years. There also is a lot of competition in certain size ranges and I think we’re seeing that in the Chicago area in isolated circumstances as well.”

“The supply of Class A properties has been diminished with the demand in the last 18 months and because of that there has been a rise in rents,” Daly added.

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