For Chicago’s spec submarkets, this is not a repeat of 2008 Matt Baker June 19, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email The first phase of Crow Holdings’ Veterans Point development in Bolingbrook, Illinois is a 573,758-square-foot, cross-docked warehouse scheduled for completion this quarter. It’s not your imagination—we are officially in the midst of a recession. Though it is early in this crisis, the industrial sector has so far been the least impacted commercial real estate asset class, propped up by a surge in e-commerce usage. But what of all the large, speculative warehouses that have recently gone up—or are wrapping construction now? New leases and investor activity have both slowed down, so will an uptick in online shopping be enough to absorb all of this new, Class A supply? “The best indicator we have is what happened during the last major downturn in 2008, and what followed for the next several years,” said Jason West, vice chair in the Chicago office of Cushman & Wakefield. “We think that was a much bigger crash than what we’re seeing today.” Focus on I-55 and I-80 With industrial vacancy rates trending much lower now than than they were in 2008, in Chicago and around the country, this historical analysis does provide context for the current situation. In particular, contrasting the events of 2008 with 2020 provides perspective for what is likely to occur in Chicago’s two major spec submarkets, the I-55 and I-80 corridors. Using I-55 as an example, the vacancy rate at year-end 2008 was 12.6 percent. Today the vacancy rate in the I-55 corridor is 8.9 percent. Lower vacancies at the onset of this downturn means that the coming pain will be reduced and an eventual bounce-back should come sooner. There are a number of large speculative projects underway in the Chicago market, such as the 573,758-square-foot, cross-docked warehouse that Crow Holdings is finishing up in Bolingbrook, Illinois—the first in a four-building planned development. Dreamed up before anyone had ever heard of COVID-19, are projects like these doomed to create an overbuilt environment? West feels that supply and demand are fairly in balance throughout the Chicago market and in the I-55/I-80 corridors in particular. The Chicago industrial market saw 34 million square feet of leasing activity in 2019. During the first four months of 2020, before the effects of the pandemic could be felt, there was already 24 million square feet of leasing activity—nearly a third of which occurred in the I-55 and I-80 corridors. “We’re on much, much more stable ground right now,” said West. “The fundamentals in the industrial world—with supply and demand being in balance and vacancy rates being significantly lower than they have been historically—puts us on pretty good footing so we can we can absorb a little bit of space coming back to the market without it being a big catastrophe.” Another difference between now and the 2008 crash is the levels of risk backing new construction and acquisitions. The last boom cycle was never going to end, the thinking went, and most commercial real estate deals were highly leveraged. Compare that to the situation in 2018, 2019 and early 2020, when—even as the engine was chugging along—most in the industry were waiting for the bottom to drop out and they acted with a bit more caution. “There’s a lot more cash and equity in the field today, where before banks were lending up to 100 percent,” West said. “I think people learned their lesson. The banks are requiring more equity in the deals and a lot of institutional owners are all cash or maybe 50 percent debt-to-equity as opposed to 90 or 100 percent debt like they had been before.” Doubling down on e-commerce The stay-at-home orders and shuttering of stores as a countermeasure to COVID-19 has resulted in a lot of late-adopters turning to online shopping, as it was the only way to acquire many goods. Even after the pandemic is behind us, many of those new users will be converts and the source of so much logistical and distribution demand in recent years will only intensify. There is a possibility, however, that the sheer volume of companies shutting down for good because of the pandemic may offset any gains in e-commerce. There were 17 bankruptcies filed last year by major retailers. Halfway through 2020, there have been nearly as many already—14 in total, with nine of those occurring by mid-April or later. As COVID-19 is having a clear impact on businesses, many won’t make it to the end of the year. Even those firms that are able to tread water will look to shed space as a cost-cutting measure, bringing a lot of second-generation industrial space to market. Despite this, the end result for the consumer should remain unchanged. There will likely be a lot of consolidation, as well as extant firms filling the vacuum left by extinct ones. Either way, the current of goods should only ebb and flow in sync with consumer confidence and the demand for warehouse space will stay steady. Second life for second generation space Last year, Tradelane Properties acquired a Class B, 254,425-square-foot industrial building in Bridgeview, 2.5 miles from the I-55/1st Avenue interchange. The company poured capital into the 50-year-old property to reposition it for modern users—and it didn’t take long to get a bite. West was part of the team at Cushman & Wakefield who, along with brokers at NAI Hiffman, recently secured a long-term lease with a leading e-commerce company at the property. This deal is proof that for online retailers, demand for distribution space is strong enough that second-generation infill locations are viable opportunities. Chicago’s spec submarkets may even benefit from a reshoring of manufacturing jobs. Many are hoping these jobs will return as companies grow wary of foreign governments—notably, China—and seek to shorten their supply chain to American consumers. “I-55 and I-80 historically have been primarily distribution submarkets,” West said. “However, there are some manufacturers that occupy these areas, and it is a good place to be for manufacturing.” West pointed out that manufacturers are just as drawn to the geographical advantages of these submarkets as logistics users, such as the access to intermodals and major interstates, as well as strong rail and utility infrastructures. While older infill properties may fit the bill for these companies, some may look to build a greenfield site along I-55 or I-80 to suit their needs.