A paradox of the local industrial market is that taxes and politics have made investors leery about acquiring assets in Cook County. At the same time, however, users absolutely need to be there because there’s no greater concentration in the Midwest of both consumers and good labor.
That’s a point that the panelists kicked around repeatedly during the industrial breakout session at the 18th Annual Chicago Commercial Real Estate Conference. Diane Thalmann, economic development manager at NIPSCO, moderated the discussion between Tom Boyle, SIOR, senior vice president, Lee & Associates (and the 2020 president of SIOR Chicago); Joshua Hearne, SIOR, principal, Cawley Chicago; John Joyce, CCIM, managing director, SVN Chicago Commercial, Steven Kohn, principal, Avison Young and Michael Larsen, managing director, development, InSite Real Estate.
While Cook County taxes in particular may scare off investors to some degree, the panel all agreed that users—whether they like it or not—simply have to locate here. Access to labor is important, as is last mile logistics into the third-largest population center in the country. Cook County also has excellent infrastructure and intermodals such as those in Bedford Park and Hodgkins.
“I have a client in south Cook County that wants to relocate, but they have to stay within a small circumference to maintain their employment,” Hearne said. “They could go to Will County where they might get a space that’s more functional, but they would lose their labor and that’s way more important than saving pennies on the balance sheet.”
The demand is strong in the Chicago area, but especially within Cook County, for small, second-generation space, as illustrated by Boyle.
“Two years ago, I sold a building near Addison and Elston; 40,000 square feet, bow truss, 80 years old. It was a depreciated building with four million dollars’ worth of environmental difficulty,” Boyle said. “I had five offers and the buyers bought this thing without going through environmental due diligence. I think it’s flipped two or three times since then.”
The demand for second-generation industrial properties is particularly strong as there are thousands of small businesses that operate in the area who don’t need a 36-foot clear, 300,000-square-foot space with ESFR sprinklers and LED lighting. But the supply fundamentals also act to increase these property’s profiles since the economics don’t make sense to construct new structures to these specs.
“Nobody’s going to build these smaller, incubator, multi-tenant industrial and flex properties anymore because of the price of construction to replace these buildings. It’s $110-plus per square foot,” Joyce said. “What that’s going to do is limit the supply and since there is a ton of user demand, it’s just going to push rents up.”
The massive logistics centers going up along I-80 and I-55 tap into the e-commerce phenomenon, but they are also cheaper to build on a per-square-foot bases than smaller structures, so developers have an easier time penciling out a deal later with an institutional buyer. So why is the same not true of smaller properties? Despite these market conditions—strong demand, low supply, rising rents—Cook County’s tax status is burdensome enough to drive away potential investors.
“If there were 10 100,000-square-foot buildings with 20-foot clear and decent docks available on the market, they’d sell by the end of the day. There’s so much pent up demand across so many different industries that are looking to buy space that just doesn’t exist,” Kohn said. “At the same time, buildings that would sell to investors quickly, it’s hard to get any of our traditional buyers to even look at them. They all want to get out of Cook County and Illinois.”
Kohn pointed out that while there is a dearth of these smaller, Class B properties available for purchase in Cook County, they are virtually nonexistent in the collar counties and even in Indiana and Wisconsin. Thus, the strategy of moving just outside of Cook County’s tax jurisdiction but within reach of most of the its benefits falls apart if there’s nowhere for a user to move to.
On the development side, there is one major impediment in Cook County: lot size. In a submarket defined by its infill nature, there’s just no room to develop the additional parking that so many users are looking for.
“There are more requirements for trailer storage and for more car parking,” Larsen said. “We’re seeing sites get larger for the same size building than you did 10 years ago. You used to be able to push FARs to 0.4 or 0.45. Now you’re seeing closer to 0.2 or 0.3″
Despite the enigma that is Cook County—extremely strong fundamentals in an environment of high taxes and political uncertainty—the panel all agreed that 2020 will be a robust year for the industrial sector in particular and commercial real estate as a whole.