Illinois Real Estate Journal recently spoke to a pair of veteran Chicago-area industrial pros in Mark Augustyn, co-founder of Rosemont, Illinois-based Principle Construction Corp., and Geoffrey Kasselman, executive managing director and national industrial practice leader with the Chicago office of Newmark Grubb Knight Frank, about the strength of the industrial market in and around Chicago. Here is some of what they had to say.
Illinois Real Estate Journal: I know this is a broad question, but how busy is the industrial market right now in Chicago and its suburbs?Mark Augustyn: We are seeing a big need for new products from two main segments of our customer base, the professional real estate developers and the build-to-suit end users who elect to build industrial projects on their own. The developer market has absolutely seen a surge in the last year. That continues. The build-to-suit market for end users is also on the rise. We are seeing demand for projects as small as 8,000 square feet and up to 400,000 square feet for end users.
IREJ: What is behind this increase?Augustyn: What we find is that our business increases along with any general increase or improvement in the economy. As the economy goes, so do we. We are on about a one-year lag. When the economy improves, we see an improvement in about a year. When the economy declines, it takes us about a year to see a decline in our market. So the improving economy has been a big part of the improvement in the industrial market. From 2008 through 2013, there was modest if any investment in increasing the capacity of industrial facilities. Some people did it, but for the most part there was very little growth going on in the industrial community.
The reality of the financial crisis had rippled through our business, which has quite a need for capital. When capital constraints are such that you can’t access loans for various reasons, it can make investing in large buildings very difficult. The end users that we deal with, they are reluctant to expand their businesses when they can’t be assured that the business will still be there. It is a long-term investment to buy a building, so end users were cautious. They stretched the physical capacities of their buildings as far as they could. Finally, when the economy was improving, and they could see that it was improving, they felt confident that their investments could pay off. That’s when we saw a big surge in business. Now that the economy is recovering, we are taking advantage of that. We are enjoying the flood of work, I can tell you that.
IREJ: What are developers and end users looking for when it comes to newer industrial facilities?Augustyn: The old adage is so true, location, location, location. Anything close to the interstate system does well. The I-55 and I-80 corridor is doing particularly well. That is a market that is in high demand. We are also starting to witness more activity in some of the older markets. Because the financial crisis that we went through, some buildings that you would say are functionally obsolete in and around the O’Hare market or in the city are being tagged for redevelopment now. That seems to be a very viable market right now. There is a growing amount of second-generation use occurring on many of the older industrial sites. Buildings that were too small, under docked, under clear-heighted or functionally obsolete for the needs of today’s markets are being replaced.
IREJ: What are investors in industrial real estate looking for today?Augustyn: They are looking for something that is appealing to large users. They want buildings with 32-foot to 36-foot clear heights. They want high-quality concrete floors designed to support rack loads for the appropriate clear heights. The buildings that people want today tend to be 250,000 square feet to 600,000 square feet. Million-square-footers are not uncommon. The investors are all responding to the sophistication of the end users who will ultimately occupy these buildings.
IREJ: Are there any industrial projects that your company is involved with that have you particularly excited?Augustyn: One project that we are especially proud of is the Saia project in Grayslake. That project involved a 30-acre site, all concrete-paved. It is a cross-docked facility. Cross-docking does not have a good reputation in the marketplace. Generally, cross-docking is not a very aesthetically pleasing solution. But I always tell people that the Saia building was not your father’s cross-dock building. It has a prairie-style office façade to it. The roof has unique features to it so that it doesn’t look like a traditional cross-dock building. The landscaping and the amenities for the employees were quite striking.
Getting that project pushed through the governmental agencies was an effort. We showed them how good-looking that building could be. Sometimes you do a rendering and the ultimate result doesn’t match up. In this case, the finished project far exceeded the image of the rendering. It is a striking building. It is nice to see. There was just a great effort from everyone involved. We finished that project about a month ago. We delivered the building on time. It was quite well-received.
IREJ: Are you seeing more industrial activity this year when compared to years past?Geoffrey Kasselman: That’s a reasonable question, but it’s a hard one to answer. The activity here has been stellar for several years in a row now. It’s been really good and it continues to be really good. How much better can you be when you are already stellar?
IREJ: When you say ‘stellar,’ what do you mean?Kasselman: We have had 23 quarters in a row of positive absorption in the industrial market here. I can’t remember in my years in the business a period where we had 23 quarters in a row of positive absorption. We figure it will soon be 24 quarters in a row. So that is six straight years of improvement upon improvement upon improvement.
Last year there was more demand than there was supply, resulting in a great deal of positive absorption. That also resulted in rental rates increasing 5.7 percent versus the previous year. That is a big jump in any year. It also resulted in more than 10 million square feet of new construction activity emerging from the ground. There is another 10 million to 14 million square feet of announced starts that haven’t actually commenced yet. That is an extraordinary amount of new construction.
IREJ: Are there any industrial submarkets in the Chicago area that are especially strong today?Kasselman: The I-80 and I-55 areas are strong right now, especially I-80. Those are the two markets with the most speculative new construction taking place. We are seeing new construction with all of the submarkets, though, just about. We are seeing infill developments really starting to emerge as people are refocusing their supply chains, their distribution networks. They are focusing now on where the critical mass of consumers reside. That is typically in the city center, in the Cook County area close to the city. Land is harder to come by there and the obstacles to erecting new buildings are greater. But we are still seeing new spec construction in Cook County, particularly near the city. The Goose Island area, the South Loop, Pilsen, these are all areas in which people are saying, ‘If I build it, people will come.'”
IREJ: It sounds, then, that you have plenty to celebrate these days when it comes to the Chicago-area industrial market.Kasselman: We are pleased. We are a little astounded, honestly. We represent both buildings and tenants, so we understand both perspectives. Those tenants who wander into the market needing almost immediate occupancy, who have no time to build and no time to wait for new construction to be finished, have to pick from existing building stock. They are finding intense competition. If you are looking for more than 500,000 square feet of one continuous block of modern distribution, the choices are few. Competition is fierce. The landlords know it.
IREJ: Why is this such a strong industrial market?Kasselman: In other cycles, people built huge business parks. This time they are developing much smaller land sites. They might build a business park, but it will have two or three buildings instead of 10 or 15. New construction is limited to a series of one-off buildings on small sites. They built them speculatively, leased them up, sold them off and started the cycle again in that focused and conservative approach.
At the end of the day, though, it comes down to consumer confidence. It doesn’t matter what we consume, whether it’s watches, houses, boats, vacations or nice meals versus cheap meals. The important thing is that we are spending the money. Consumer confidence really is an early indicator of where the economy is heading. We will watch consumer confidence closely in 2016 and 2017. If that starts to wane, and people get conservative with their disposal income, than we will note that. We will then see this market start to slow.