Column by Scott Duerkop, Vice President, Industrial Services, JLL
The 1.3 billion-square-foot Chicago industrial market is generally characterized by significant leasing velocity with steady increases in rental rates over the last two years and high volumes of speculative development activity. The segment surrounding I-80 into Northwest Indiana generally mirrors the macro market but also features notable differences.
At the end of the first quarter, the vacancy rate in Northwest Indiana was 5.92 percent, a number that has been steadily declining over the last few years like the broader Chicago market. The first quarter rate is down from 6.08 percent one year ago in Q1 2015 and from 6.16 percent two years ago in Q1 2014, according to JLL research.
The market remains very active in terms of prospective tenants evaluating Northwest Indiana. They are driven to cross the border because of some marked differences between Illinois and Indiana—from a lower tax structure to aggressive economic development initiatives to what most regard as a more favorable business climate and economy.
Over the last two years, Northwest Indiana has recorded more than 1.0 million square feet of leasing activity, a strong showing for this segment of the market. 2014 was a particularly busy year with approximately 692,000 square feet of activity. The decline in 2015 to approximately 323,400 square feet can be attributed to a lack of suitable product and development sites more than anything else.
The real estate issue that most consistently plagues Northwest Indiana is the lack of modern inventory and suitable development sites in close proximity to the Illinois border. Older facilities in the area don’t quite meet the clear height and loading standards of modern industrial users.
Typically, new projects that incorporate those features will lease quickly. One example is NorthWind Crossings Business Park in Hobart, Indiana. The development of the park’s newest building, a 159,813 square-foot facility located at 6451 NorthWind Parkway, was recently completed by Becknell Industrial.
Within 30 days of the start of construction, Calpipe Industries signed a lease for more than half the space—just over 85,000 square feet—underscoring the legitimacy of the project and the overall expansion potential in Northwest Indiana. Calpipe moved into the new space upon completion of the building on April 1, 2016. Interest in the balance of the building, approximately 75,000 square feet, continues to grow, and the developer anticipates the building could be fully leased by year-end.
While this story reflects the metro Chicago areas where speculative buildings are attracting considerable attention, Indiana’s new speculative project announcements are less frequent than those in Illinois.
The chart below depicts construction activity since 2015. Of the nearly one million square feet of projects in varying stages of construction and development, almost 690,000 square feet represent build-to-suit projects and just under 250,000 square feet represent speculative projects.
In the absence of a large inventory of newly constructed facilities, Northwest Indiana is seeing efforts to retrofit older buildings, including those that may have been used by the steel industry, to make them more compatible with the requirements of today’s user. In 2015, Hoist Liftruck relocated from Illinois to an older manufacturing building in nearby East Chicago, Indiana. A major reason for Hoist’s relocation was the favorable business climate in Northwest Indiana, and Hoist’s investment in the 550,000 square-foot building included substantial renovations.
Even with its challenges—most notably the lack of speculative construction projects so prevalent in many Illinois markets—the prospects in Northwest Indiana remain positive. Investors are buying buildings, tenants continue to carefully consider build-to-suit construction opportunities and leasing is steady.