Record-breaking new spec construction, rising rents and continued pressure on building material pricing and availability headlined the Design, Construction & Leasing panel discussion at the 19th Annual Supply Chain, Distribution & Logistics Summit sponsored last month by REjournals/Chicago Industrial Properties in Oak Brook, Illinois.
Panel experts reveled at reports of sustained tenant demand for space, predicted (without concern) that vacancy rates may rise a point or two next year, and expressed frustration over difficulty in procuring concrete, steel and power switchgear. The panel shared insight on new decarbonization mandates, the rise in “tenant amenities” within industrial parks (jogging paths and EV charging stations) and greater demand for office space, dock positions and trailer parking.
The good news for tenants is that they will have more options next year for new space in many submarkets than they had this year,” said MK Asset Managing Director John Coleman, who moderated the panel. “Because our market is the nexus for product movement coast to coast, we are well-positioned here even if the economy is wobbly.”
According to statistics provided by JLL Research, more than 30 million square feet of new construction warehouse and distribution space will be delivered this year. JLL reports that in 2023, nearly 40 million square feet of spec space is expected to come on line—a record for the Chicago market.
“Market velocity right now is high, and we expect it to continue well into next year,” said JLL Managing Director Keith Stauber. “That means we’ll need a significant volume of leasing to keep up with supply. The market absorbed more than thirty-five million square feet in 2021, and we think it can do it again.”
Even if leasing next year falls a bit short, the market can carry more vacancy and still be considered healthy, said Josh Hearne, Principal with Cawley Chicago. “We’ve been on a very good run the past several years with vacancy rates in the four to six percent range, which at the time was considered historically low,” Hearne said. “Vacancy now is right around three percent, so even if it increased a percent or two next year, we will still be in an enviable place.”
One threat to the market is rapidly rising material costs and availability, explained Peak Construction Vice President David Michael. “Cement is a tough commodity to come by right now,” he said. “We weathered a labor strike in the spring, but with the high volume of new construction going on right now, plus the amount of road work underway, fabricators are on short allocations. If you’re not already in the queue, it could be more than a year before you see concrete delivered to your site.”
Similarly, there is a backlog of orders for power transformers and switchgear, said Bill Hasse, President of Hasse Construction. “Certain parts made overseas for some of our most basic power components are just not available, and that’s holding everything up,” he said. “On the positive side, pricing on roofing material and some steel items have stabilized or dropped a bit recently.” One exclusion is dock packages. “Put them in now, because the lead time is only getting longer.”
With energy prices high, a push for renewable sources has reached the industrial building sector. As part of its push for “decarbonization,” Chicago now requires all new construction warehouses to be built with reinforced steel and roofs that can hold the weight of solar panels, said Paul Heitman, Director of Heitman Architects, Inc. “Though not yet a requirement, the trend will continue into the suburbs because that’s the direction our industry is heading.”
Heitman also said that employee amenities once reserved for office tenants are finding their way into industrial developments. Walking paths, outdoor public spaces and EV charging stations are a material part of master-planned developments. Panelists referenced a new business park in Glenview being developed by Dermody Properties that includes such design elements.
“Industrial tenants want these amenities because they are competing for employees just like office tenants,” Cawley’s Josh Hearne added. Collaborative work spaces with higher-end furniture inside the building are also part of the new amenities package for industrial. “We’re seeing tenants build a little more office space to accommodate these new amenities,” Stauber added.
Hearne and Stauber both predicted that tenants will require more dock positions and more trailer parking next year. “The standard now is one dock for every ten thousand square feet of warehouse,” Hearne said. “That could grow to seven and a half or eight in the next few years.”
“Manufacturing operations that previously took place oversees are moving back or closer to the U.S.,” he said, “where users can take advantage of efficiencies afforded by newly built Class-A facilities that allow goods to be produced closer to end users, reducing transit costs while lowering the risk of furutre supply chain disruption.”
Accordingly, CRG’s focus is on infill sites and one-million-square-foot “big-box” logistics centers, like its branded facilities collectively known as The Cubes, located about 20 miles SW of Chicago. The project is especially attractive to users who are looking for modern logistics facilities to keep pace with the boom of e-commerce and today’s supply chain needs, and McKee said developments of this kind will remain viable and in high demand for the forseeable future.
CRG currently has 17 active projects of this kind, which are anticipated to deliver over 12 million square feet of Class-A space.