Tenants want what they want.
Industrial in Chicagoland is rapidly evolving, signaling a crucial need for market modernization among assets — especially for players with an increasingly outdated warehouse supply.
More than 70% of existing U.S. industrial space was constructed before the 21st century, and one-third of the inventory is over 80 years old. How does that bode for modern needs? Not well, but from a timing and cost perspective, there’s no better time to embark on a new development project.
The national construction pipeline has risen to an all-time high of 500 million square feet, and net absorption nearly totaled the same amount in 2021 alone. Yet across the U.S., market modernization faces a host of obstacles — from land constraints to a challenging regulatory and entitlements environment, labor shortages, pricing concerns, and supply chain congestion.
We spoke with Newmark Research Manager Amy Binstein and Senior Managing Director Adam Marshall regarding Newmark’s recent report including modernization trends and challenges specific to Chicagoland.
Last-mile delivery has had the largest adoption with occupiers in the last few years, Marshall reported, as well as developers trying to find infill locations that they can renovate or redevelop for modern distribution facilities.
“There’s been a big push to find sites to redevelop for modern distribution,” he said. “These facilities tend to be smaller in scale due to restrictions and site sizes in neighborhoods that were originally developed many decades ago. For larger distribution facilities, sites that push the boundaries of traditional submarkets and will allow zoning for immediate development of industrial distribution facilities are key. These tend to be submarkets that have access to labor. We’re seeing those types of facilities being built now on a larger scale — 300,000-500,000-square-foot facilities at a minimum.”
This in mind, Newmark also shined a light on energy conservation and the type of energy being consumed.
Industrial energy demand is only expected to increase over the coming decades but investing in sustainable solutions is not only environmentally wise but has the potential to maximize returns and revenue for developers and investors. Sustainability is quickly becoming a make or break for occupiers in site selection and is therefore another modernization trend worth considering.
Data centers are huge users of electricity, for example, and in high demand in Chicago, largely due to a recent change in state legislation that provides sales tax exemption and income tax credits for users that are investing at least $250 million dollars for data centers in Illinois. This has pushed Illinois to be one of the lowest-cost markets in the U.S. for data center development.
“In the last 24 months, we’ve seen several high-profile, $250 million-plus new data centers being developed in Chicago, and those facilities require very heavy power substations on site, or in close proximity,” Marshall said.
Lower development cost allows for higher-cost upgrades like solar panels on a warehouse roof or on-site EV charging infrastructure. Plus, these facilities are reliably being developed, despite the limited availability of space.
Microsoft recently purchased land in Elk Grove Village and Hoffman Estates; T5 purchased a spec building in Elk Grove to be converted into a data center; and a site to accommodate three data center buildings is under contract on a location just outside of Elk Grove Village, currently owned by WGN Radio. Binstein said Meta will also expand one of its facilities near DeKalb.
“The five-building complex will be roughly 2.4 million square feet, and it’s scheduled to be completed in 2023,” Binstein said. “There are a couple of new developments near Naperville and Aurora, too, but the cluster is near O’Hare.”
