FEATURE ARTICLE, APRIL 2008

INDUSTRIAL FILLS IN
In Chicago, a shortage of large tracts of land has caused developers to court small and mid-size industrial users.
Coleman Wood

At approximately 1.2 billion square feet, the Chicago industrial market is in a league of its own in the Midwest. The market is home to many different submarkets, each with its own unique characteristics. Unfortunately, this maturity has put available land at a premium in all but the most far-flung suburbs. In order to meet the demand and work with the available land, developers are tailoring their product to fit the market — which, in this case, is multi-tenant flex buildings.

“There are a lot of submarkets here that are mature, so when we’re looking at high-growth submarkets like Bolingbrook and the I-55 corridor, there just isn’t much land left,” says Craig Phillips, executive vice president of development for HSA. “So the land that is left tends to be for smaller, multi-tenant buildings that appeal to these smaller users that follow the big people that have been [there] for a while.”

The idea is not new. In many sectors of commercial real estate, a large tenant will anchor a development or an area, with smaller tenants filling in the gaps around the larger user. But Chicago’s industrial market has had years to expand and mature, which means that space close to the city proper is hard to come by for both small and large users.

“The problem with development in the city of Chicago is that you really need a TIF district in place to lure developers to come back and build product,” Phillips says. “There’s a huge labor base but, because of congestion in the city, you’re not going to get a major distributor to choose to locate so close to the city — you just can’t get trucks in and out.”

The recently completed Park 355 is located along Interstate 355 in Woodridge, Ill. Brian Fritz Photography

So HSA, along with other area developers, has turned its focus to Chicago’s sprawling suburbs. The company recently completed Park 355, a 637,000-square-foot industrial facility located along a new extension of Interstate 355 in Woodridge. While the size seems to imply that the building was designed for a big-box user, the facility is only 200 feet deep, making it easier to subdivide. HSA can divide the building from 20,000 square feet to best accommodate small and mid-size users. The company has currently completed three leases for the building, with more on the way.

“This is the type of product we think offers ultimate flexibility in the submarket, especially with the new I-355 extension, which goes right past our project,” Phillips says.

HSA is not the only company developing along this corridor. The extension has opened up new parcels of land for development but, according to Phillips, everything is still in the planning stages.

Just south of that, HSA is involved in another project in a high-growth area. The company’s Crossings Business Center is located in Bolingbrook along the Interstate 55 corridor. The 252,700-square-foot facility is also designed to appeal to smaller users.

“You have rental rates around the O’Hare area now in the low $8 per square foot range, and that’s just too expensive for some people who really don’t need to be near O’Hare Airport,” Phillips says. “So they’re looking at new areas to relocate, and Bolingbrook has done a good job of providing amenities for businesses, and being a pro-business environment.”

But Bolingbrook has an interesting dichotomy. The Bolingbrook/I-55 area has one of the highest absorption rates in Chicagoland, but it also has one of the highest vacancies. The high absorption has made it a haven for speculative development, which keeps vacancy rates high. This has put a lid on rent growth, making the area a tenant’s market until the pace of construction slows and more space can be absorbed. 

But even the closer suburbs cannot compare to the development going on in Chicago’s outer fringe.

“I don’t see it (I-55) as a major submarket as long as there is still green space to develop out in the suburbs,” Phillips says.

He adds that the relationship between big-box industrial users and the smaller companies that pop up around these developments follows a cycle in Chicago.

“The big-box guys are always out where the land is inexpensive. So they’re always out there pioneering, and it takes a little while for some of these ancillary businesses to relocate,” he says.

One of the frontiers that is now being populated by smaller industrial users is the “Wisinois” area, a term that loosely defines the area along Interstate 94 between Chicago and Milwaukee.

“Because of the constraints in the Lake County submarket…once you get off the Interstate 294 tollway, you quickly fall off in the number of industrial buildings that make sense for people,” Phillips says. “People want easy access to I-94. So you’re seeing a filling in of the area between Chicago and Milwaukee.”

Recently, the area has experienced significant build-to-suit activity, especially on the Wisconsin side of the market. ULine is building 1 million square feet in the area; Rust-Oleum recently completed a 600,000-square-foot building in Kenosha, Wisconsin; Johnson-Diversey is developing 650,000 square feet; and Coleman Cable is building a 500,000-square-foot facility.

In response to this new build-to-suit development, companies are coming from both states to fill in the now-prime real estate.

“Most of these companies have been coming out of the Chicago and Lake County markets,” Phillips says. “They tend to serve the Milwaukee and Chicago markets for distribution, and they might have executives that live in Lake County or the northern part of Chicago.

“You’re also seeing it in response to people who don’t want to go all the way down to the I-55 market because it’s too far away,” he adds.

HSA is currently working on a project aimed at smaller users seeking to relocate next to the big-box giants moving into the Wisinois market. Mount Pleasant International Commerce Center is located near the intersection of State Highway 20 and I-94 in Mount Pleasant Wisconsin, in an area Phillips describes as a “natural path of progress.” Plans call for a 324,000-square-foot, cross-docked facility with expansion capability, as well as a 125,000-square-foot building, which HSA sees as a way to appeal to both large and small users. Groundbreaking on this phase of development is schedule for spring, with completion by the end of the year. Phase II will see the construction of another 113,000-square-foot, multi-tenant building.

Phillips is not worried about the effects of the economic slowdown on Chicago’s industrial market. He believes that the market will continue to cycle through its legacy developments that are already in the pipeline, and developers will pause to assess the market before jumping into the next speculative development.

“It’s going to be a back-to-basics kind of market for a while, which is good for the long-term health of the development market,” Phillips says.

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