A string of large deals has made floor spaces of more than 500,000 square feet a scarce resource in the I-80 submarket, prompting many area experts to start speculating about new construction.
Net absorption has continued at a steady clip in the I-80 corridor, with NAI Hiffman reporting 1.2 million square feet of positive gains through the second quarter. Vacancy is still north of 14 percent, but new tenants are moving into the market and taking larger spaces, making the remaining few large floor plates highly covetous. The prevailing belief is that some developer may attempt to enter the market with a new speculative development to engage this type of user.
“The fundamentals tell me that rents are not yet high enough to justify speculative development, but my gut tells me that someone will do it,” says Trevor Ragsdale, managing director, markets corporate solutions at Jones Lang LaSalle.
Tim Hennelly, president of the Great Lakes Region for Ryan Companies, is among the developers who are siding with the fundamentals for now.
“The vacancy rate has tumbled, but not to the point where we will see a new spec deal,” says Hennelly. “The good news is deals are getting done, but the bad news is rental rates are still too low to kick off speculative development.”
Speculative development would be seen as a large gamble in a still unstable economy, but recent activity shows that there is still a market for large distribution space.
Opus Development Corporation recently landed Electrolux, a Swedish-based global appliance manufacturer, for a 495,454-square-foot lease at 801 Midpoint Road (Minooka Ridge Building 2), Minooka, Ill.
CenterPoint Properties also signed a big lease with third-party logistics provider Saddle Creek Corporation for 415,800-square-feet of distribution space at the CenterPoint Intermodal Center in Elwood, Ill.
Both deals brought new tenants to the market and cleared a substantial amount of space.
“The market has been solid and we have seen a good flow of tenants,” says Charles Canale, senior vice president at Colliers International. “The availability of large buildings has drastically reduced since this time last year. There are really only a handful of buildings above 500,000 square feet.”
The number is three to be exact. Rock Run Business Park at 4100 Rock Creek Blvd in Joliet has a 509,216-square-foot space; Joliet Crossings at 3451 S. Chicago Street in Joliet has a 575,024-square-foot space; and the Tinley Park Corporate Center at 18801 Oak Park Avenue in Tinley Park has a 915,643-square-foot space.
With large space becoming a premium, Canale says that rents have ticked up, with Class A sites commanding around $2.70 per square foot, 15-20 percent higher than rents than last year.
“If tenant demand stays steady firms are going to have to consider build-to-suits or forward-thinking developers will start to do speculative buildings,” says Canale. “I think we will see a combination of the two.”
There are still several tenants looking. JLL’s Ragsdale says that he is currently representing a potential new user to the market that is in search of 300,000-400,000-square feet.
Yet for active tenants, I-80 is not the only option.
I-80 may be a tighter market, but when a broader picture is provided that includes space in the nearby I-55 corridor, the area is not as thin as it may appear. I-55 and I-80 are often lumped together in market reports and many distributors looking for space in the southwest region will tour sites in both corridors.
They are not interchangeable, but, as JLL’s Trevor Ragsdale says, when large blocks of space are being considered, they may as well be.
“I-80 tenants tend to have more of a regional focus and I-55 tenants probably focus more on distribution to the Chicago area,” he says. “But when you are dealing with large floor space it usually carries the characteristics of a regional distributor.”
In other words, big users could be accommodated in either corridor.
When the floor space is dropped to 400,000 square feet and the I-55 and I-80 markets are combined, there are more than 12 options for tenants right now, says Ragsdale.
While that may not be the most encouraging market for developers to roll the dice and build, Ragsdale says that some entities, especially REITs, may decide to initiate construction anyway.
“REITs have land in their portfolio just sitting there dormant,” says Ragsdale. “From my perspective they would be the ones who have to put land into production first.”
Ryan’s Hennelly envisions construction taking place in the short term, but of the build-to-suit variety.
“We will see an uptick in build-to-suits,” says Hennelly. “If a firm wants to be on I-80 it will have to be a build-to-suit. That made no sense before because of the vacancy rate. The I-80 corridor is still one of the main arteries of the country. There is really nowhere else to go in the area for one-million-square-footers.”
Hennelly expects a major build-to-suit to be announced sometime in the next 12 months. His firm has a 320 acre industrial park at Laraway Road and Rte. 53 in Joliet known as Laraway Crossings. The recent opening of the nearby CenterPoint Intermodal Center at Joliet has been a boost to the area and made it desirable for distributors looking to take advantage of the rail connections.