Industrial along I-80 is still booming.
For an in-depth look at what’s driving activity, and the submarket’s current projects, Illinois Real Estate Journal consulted Adam Haefner, Principal and Industrial Broker at Avison Young, and Steve Connolly, Executive Vice President, Industrial Services at NAI Hiffman.
Illinois Real Estate Journal: What makes the I-80 Corridor such an attractive spot for end users?
Haefner: The I-80 Corridor provides access to the Chicago metro area and the I-80 expressway provides east/west access for regional distribution. In addition, the I-80 Corridor provides proximity to the UP and BNSF intermodal yards. While the labor pool is stretched, the corridor also provides access to quality workers. These amenities are attractive to warehousing, distribution, trucking, and manufacturing companies.
Connolly:
- Availability of large land sites for big box requirements—50+ acres is readily available in the I-80 submarket;
- existing infrastructure—access to I-80 and I-55, truck rated roads, highway interchanges;
- entitled business parks—users are often looking for “shovel ready” sites;
- proximity to inland ports—BNSF and UP inland ports drive global container traffic;
- available labor;
- good local amenities—restaurants, hotels, truck stops and truck maintenance facilities have been developed as the market has matured over time.
Illinois Real Estate Journal: Is activity—including new leases and developments—still going strong along I-80? What is fueling this activity?
Haefner: Activity is still strong in the corridor. Vacancy rose slightly in Q3 from a record low of 3.2% to 5%, but this is still a historically low number. With the activity that we are tracking, it is likely that only one existing speculative warehouse over 700,000 square feet will be left by year end.
Connolly: The eastern portion of the market remains strong. Projects in proximity to I-80 and I-55 crossroads and within Centerpoint Intermodal Center continue to develop and lease. Rental rates have increased in conjunction with rising construction costs. The western portion of the I-80 Corridor—Minooka, Morris has several entitled land sites, but no speculative development in the current cycle.
E-commerce continues to drive the need for more warehouse space along with large retailers leasing facilities to build inventories in the U.S. to better control future potential supply chain disruption.
Illinois Real Estate Journal: What amenities are users looking for when leasing new space along I-80?
Haefner: Attractive, functional buildings, and access to labor is usually the priority when choosing a site. Other amenities that users are looking for include 40-foot clear height, abundant car and trailer parking, proximity to expressways and amenities, and access to utilities.
Connolly: Distribution users look to maximize truck docks and trailer parking for their use. Large I-80 sites allow for this with little pushback from the surrounding communities. Larger proposed projects in densely populated areas are seeing increased opposition to truck traffic and trailer parking. Highway access is also important to increase the efficiency of logistics operations; getting to and from the building is often as important as the inside operation.
The new Houbolt Road Bridge at Route 6 and Houbolt Road is a multi-year development nearing completion with a planned Q1 2023 opening. This project will provide a much needed northern access point to the Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) intermodal facilities in Joliet and Elwood and will further drive development activity in the surrounding area.
Illinois Real Estate Journal: Is demand still outpacing supply in the submarket?
Haefner: The vacancy rate did increase in the I-80 Corridor in Q3. However, leasing activity and net absorption more than doubled compared to Q2. Again, if the transactions that we are tracking are consummated in the Q4, we expect vacancy to decrease and net absorption and leasing activity to increase in Q4.
Connolly: Supply/demand in I-80 can be somewhat subjective based on timing and delivery of projects. If you’re a 3PL and need to move into a one-million-square-foot building in the next 60 days, you would currently only have one option. At the same time, if you look at the development pipeline, there is over seven million square feet of speculative projects under construction, with four buildings over one million square feet. The 3PL would consider the market supply constrained, while a prospective developer might feel the market is overbuilt in this cycle. Demand is outpacing supply today, but in six months the opposite might be true.
Illinois Real Estate Journal: How are developers building new space while dealing with the challenge of supply shortages and the rising costs of construction materials?
Haefner: Some developers are struggling raising equity right now because of uncertainty with interest rates, causing multiple projects in the corridor to stall. On the bright side, we think that this may start to reduce lead times and allow buildings to go up quickly. In addition, while building material costs are still up dramatically year-over-year, we are starting to see many of those prices come down month-over-month. Even with the challenges, there are eight speculative warehouses over 600,000 square feet currently under construction further south. These buildings are in the I-80 Corridor, the I-57 Corridor, and Northwest Indiana. If activity continues at current levels, most of those buildings should be leased prior to the end of 2023.
Connolly: In terms of material shortages and lead times, some developers will get aggressive and commit to precast and steel orders early in the process to lock in pricing. Rising construction costs in this post-COVID cycle have been offset but increased rental rates—there is a new price of occupancy and tenants are willing to pay the premium to secure space. Tenants in search of space are finding limited options and experiencing historically low vacancy rates. If they stay in their current building they are very likely seeing a rental increase, and these market fundamentals translate into rising prices for new construction.
Illinois Real Estate Journal: Have the interest rate hikes had any impact on activity?
Haefner: Interest rates have slowed down development, and we expect that it may push some users to look at leasing instead of purchasing. This could help to keep leasing activity stable. Less new product and more tenants in the market may keep upward pressure on lease rates.
Connolly: The current uncertain interest rate environment has put some lenders on the sidelines for the balance of 2022. For developers, higher interest rates increase project costs. Financing projects via a construction loan or capital partner become more expensive and will require higher rents, the same as rising material costs. The interest rate increase has created uncertainty in the capital markets with developers struggling to identify where exit cap rates will land in the next six to 12 months.
Illinois Real Estate Journal: Current/upcoming listings/projects?
Haefner: Our team currently represents the following projects:
- Crow Holdings Industrial, The Silos at Sanders Farm in Merrillville, Indiana, which is a 190-acre industrial park with 263,864-square-foot and 1,001,162-square-foot buildings currently under construction;
- Clarius Partners, Clarius Park Morris, Morris, Illinois, which is a 384-acre industrial park that can accommodate users from 200,000–2,000,000 square feet;
- Transport Properties, The Majestic Star Site, Gary, Indiana, 123-acre project that can support up to a 575,000-square-foot building or a 236-door truck terminal;
- We are also working on two infill projects in the city that will come to market in the next six months.
We specialize in the landlord representation in the I-55 Corridor, the I-80 Corridor, and Northwest Indiana. We also provide tenant representation services in Chicago and around the country.
Connolly: We’re currently working on future development projects in Joliet (160 acres) and Morris (145 acres). The Joliet land is next to the Chicagoland Speedway along Route 53 and will see future big box speculative development. The Morris site is fully entitled and zoned for immediate industrial development. We’re currently marketing in partnership with Seefried Properties to pursue build-to-suit projects and can offer outright land sales.
We have a unique project at Route 6 and Houbolt Road in Joliet—a 22 acre speculative truck maintenance and trailer parking development that will deliver next year. Our client, Ketone Partners, is developing a 57,600-square-foot maintenance facility with the ability to park over 600 trailers. The site is fully zoned and approved for trucking/transportation uses and available for a single tenant with flexible design to accommodate two to three tenants. Investor and user demand has increased in recent years for low-coverage industrial facilities that support the growing industrial base.
