The Chicago industrial market is wading through a down market that started in late 2000. However, parts of the market have remained vibrant because of low interest rates available to investors and users. “The difference between this real estate recession and the one we suffered through in 1989 to 1992 is that there is money available in this recession,” says George Cibula, president of Elmhurst, Illinois-based Darwin Realty & Development Corporation.

One source of money is from REITs, which are active in both developing and acquiring properties. Some major purchases include Scarlato and Sons’ acquisition of older warehouse facilities in the suburbs of Bellwood, Melrose Park, Northlake and Broadview; Duke Realty Corporation’s purchase of the Inland Container property on Grand Avenue and Interstate 294 in Northlake; and Opus North Corporation and Cohen Financial’s joint venture purchase of the Zenith television manufacturing plant at 25th and North avenues in Melrose Park.

Currently, REITs and other private investment groups are anxiously pursuing 20- to 25-year-old industrial buildings. For example, in December, CenterPoint Properties Trust purchased an 875,000-square-foot package of six multi-tenant industrial buildings located in Bensenville, Hodgkins, Waukegan and Libertyville. The buildings were purchased from Benack, LLC and Hop2, LLC.

Another source of available money is from diverted stock market funds. “Currently, investors are finding the 5 percent or 7 percent annual returns for real estate positively glowing compared to the double-digit negative returns of the stock market in the past 36 months,” Cibula says.

Recently, the most significant market trend is the softening of rental rates in all product sizes, while the sale prices on a per-square-foot basis continue to rise. The rental rates are falling because low interest rates are available to refinance older buildings. This trend enables landlords to either hold down or eliminate annual increases or lower rents from the tenant’s last lease while the landlord maintains his cash flow due to lower mortgage debt service.

Prices of new product are rising since construction costs have escalated due to increased government bureaucracy and land costs, but buyers can afford these higher per-square-foot costs due to 5 percent and 6 percent long-term interest rates. “As an investment, industrial real estate in the Chicago metro market has never had more buyers,” Cibula says. “New buildings with long-term tenants have always been an easy sell at top rates.”

The two most important developments in the Chicago metropolitan industrial market are CenterPoint Properties Trust’s development of 2,000 acres in Elwood and Union Pacific Railroad’s development of 1,500 acres in Rochelle.

The Elwood development has at its core a 600-acre railroad intermodal yard operated by the Burlington Northern/Santa Fe Railroad, which is on schedule to be fully operational by the end of 2003. This yard will double Burlington Northern Railroad’s capacity to move overseas containers from the West Coast to Chicago, which is a third of the cost of moving a 53-foot container the same distance by truck. This should increase the truck traffic from Chicago to those markets not served by the West Coast and Midwest railroads, like Detroit, Indianapolis and Columbus, Ohio.

The Union Pacific Railroad’s development is slated for completion in late 2004 or early 2005. The Rochelle facility is also an intermodal yard with an emphasis on overseas container traffic from West Coast ports. This development ensures truck terminals and high velocity warehouses will be built in this area, since a similar pattern has emerged around the BNSF Railroad yard in Elwood. “These two new railroad/container yards will influence where the new truck terminals and the new large distribution warehouses will be located for the next 25 years,” Cibula says.

Some of the developers that have recently entered the Chicago market are Clayco Construction Company of St. Louis, which is currently building a 900,000-square-foot warehouse for Solo Cup/Sweetheart Cup in University Park. USAA Realty will own the facility. Clayco has also purchased substantial acreage near the Union Pacific Railroad yard.

Dermody Properties of Reno, Nevada, has purchased enough land near the Union Pacific Railroad intermodal yard to construct four, 300,000-square-foot warehouse buildings. When the yard gets closer to completion, Dermody will start work on a speculative building.

Panattoni Development had a strong entrance into the market by arranging the purchase of AMLI’s industrial assets. In the transaction, Prudential Insurance Company acquired the leased buildings and Panattoni received hundreds of acres of developable land.

In the past 12 months, Central American Warehouse Company has absorbed the most industrial space in the market. It leased the 700,000-square-foot, former Montgomery Ward warehouse on 115th Street in Romeoville and leased 650,000 square feet from Northern Builders at Carlow Development, off Weber Road, in Bolingbook.

The overall industrial vacancy is between 9 percent and 10 percent. That rate is evenly spread among all types of product — flex space, distribution facilities and manufacturing space. The types of tenants Chicago area landlords are attempting to attract are more varied than anywhere else in the United States. One segment of the industrial market that is healthy is the food manufacturing and distribution sector, with 11 food vendors recently signing leases of 120,000 square feet or greater.

Rental rates for new buildings larger than 150,000 square feet are as low $3 per square foot. Rates for the new buildings between 100,000 square feet and 150,000 square feet range from $3.50 and $3.90 per square foot. New buildings less than 100,000 square feet range from $4 and $6 per square foot depending on location. Rates for buildings older than 15 years range from $2.50 and $2.75 per square foot depending on the pain threshold of the particular landlord. “Many of the landlords who own older buildings have refinanced at rates that have reduced their mortgage debt, and they have been willing to pass some of those savings on to tenants to retain tenants in a competitive market,” Cibula says.


©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.