There are plenty of big box industrial properties surrounding O’Hare. But the Chicago metro’s most active industrial submarket is defined by smaller, older infill product. It’s a diverse ecosystem that has worked for years.
This is mostly out of necessity of course, as the acres surround one of the world’s busiest airports have been occupied by industrial buildings for decades. But it’s also about demand; users drawn to the area are not the same ones occupying 350,000 square feet in a Will County greenfield development.
“The types of tenants, generally speaking, that would go into a new, larger, state-of-the-art big box distribution center are different than those that would go into the smaller, existing, multi-tenant buildings,” said Cliff Booth, president and CEO, Westmount Realty Capital.
The shorter ceiling heights and bay depths common to older, infill properties aren’t a turn-off to all tenants. The typical urban infill logistics user is less concerned with turning product around at high velocity, like fulfillment users who demand larger warehouses.
“Their business model is more based on doing something with the goods or to the goods. That’s where the profitability comes from, not just the turning around of the goods,” Booth said. “Since their business model is not just based on the rapidity of turning goods, then they don’t need the ceiling heights, sophisticated racking systems or robotics that are associated with larger buildings.”
A Dallas-based commercial real estate investment company, Westmount recently formed a regional office in Chicago, though they’ve had area properties in their portfolio for several years, as well as other Midwest locations like Milwaukee, Minneapolis and Columbus. As investors, their appetite is specific to older property, positioned in a particular manner.
When it comes to mature buildings, there are two options. Either tear down and build a new facility or refurbish the existing one, possibly as a reposition. According to Booth, Westmount’s preferred tactic is the latter as it embodies fewer potential hazards.
“For us, that’s a more attractive investment thesis because we don’t have to take development risk, we don’t have to take construction risk and we’re buying an existing property,” Booth said.
When acquiring a property in a mature area like O’Hare, at an attractive price point, the budget for improvements has to be factored in, of course. But if the total comes in below what a risk-adjusted, conservatively assumed replacement cost would be, that investment should fetch a higher yield.
Knowing when to stop buying is the tricky part. The record run that industrial has seen in recent years, especially near O’Hare, has many wondering if and when the train will come to a halt.
“My crystal ball is probably not any better than anybody else’s and we try not to make business decisions based on what we think is going to happen in the very short term,” Booth said. “But we’re bullish on O’Hare. We have 5 million square feet in Chicagoland. Nationally, we’ll probably start to experience a correction, but we don’t feel like that’s going to be significant or a downturn compared to what we saw ten years ago. That’s our read on the situation.”
The main driver that has influenced the industrial space—consumer predilection for e-commerce over brick-and-mortar—should continue, even if the economy stops growing. Therefore, large fulfillment spaces will continue to have relevance. But so too will infill product in mature locations, because of the depth and diversity of tenants seeking out these spaces.
The urban agriculture company, FarmedHere, was a tenant in a Westmount property near O’Hare, just off of Sayre Avenue in Bedford Park. “It was a really interesting business. We liked it and we thought it was a new economy, so we were excited to have them,” Booth said. “But they didn’t make it.”
It wasn’t a bad business model, the problem was actually due to too much growth too quickly. With products flying off the shelves of Whole Foods, Pete’s Fresh Market, Mariano’s and other grocers, they announced a $23 million, 60,000-square-foot indoor farm development in Louisville, Kentucky.
But with larger-than-expected operational costs, as well as new competition in the market, FarmedHere pulled back. But it was too late and in January of 2017, they closed shop…and Westmount suddenly had a new vacancy in their portfolio. In no time, however, manufacturer Midway Windows & Doors moved in.
“It wasn’t vacant very long and we soon replaced the tenant with a long-term lease,” said Booth. “It showed me the vibrancy of the market.”