HEARTLAND SNAPSHOT, AUGUST 2008

Chicago Industrial Market

Recently, there has been a major trend in the industrial real estate community in suburban Chicago — the hesitancy of developers to start new speculative developments without a darn good reason. Their reservations are reflecting both current market conditions and the recently tightened credit situation.

However, the above statement does require some qualification. Developers are engaging in new speculative projects where they feel they have a superior product compared to competing offerings. Also, developers are willing to undertake speculative construction in areas where there are significant barriers to new development, especially if the barriers are physical, such as a lack of available land sites.

In the big box submarkets along Interstate 55 and Interstate 80, a significant amount of speculative product exists, with more coming online later this year. A recent downturn in demand has pushed up the amount of available square footage. This stagnant environment has resulted in many development projects being put on hold, especially those in more rural locations such as Morris, LaSalle-Peru and Wilmington, Illinois.

Many developers and their corresponding financial partners are watching the market variables with a rather keen eye, hoping for some significant absorption to bring things back into line. If demand improves, and there is absorption of 2 million to 3 million square feet in the next few months, this may give several groups the impetus to get their projects rolling again. This could lead to another round of speculative construction activity in late 2008 through 2009.

While the absorption of speculative product has been slow, build-to-suit activity has been fairly brisk throughout the metropolitan marketplace.

Along the I-80 corridor, Bissell recently signed a lease for a 500,000-square-foot build-to-suit at the CenterPoint Intermodal Center in Elwood, Illinois, and Centrella Foods is rumored to be close to a 900,000-square-foot deal in the Cherry Hill Business Park in New Lenox, Illinois. Additionally, there are a few prospective build-to-suit deals that are floating around, which all add up to significant square footage starting construction by the end of this year. In Rochelle, Illinois, along the growing I-39 Corridor, Bay Valley Foods has agreed to occupy 600,000 square feet within Prologis Park Rochelle.

Southeastern Wisconsin has seen its share of build-to-suit activity as well. Uline is relocating its corporate headquarters to a new custom facility that will be developed by CenterPoint Properties in Pleasant Prairie. In nearby Kenosha, Gordon Foods is constructing a 500,000-square-foot facility, and First Industrial Realty Trust’s First Park Kensoha has landed two build-to-suit developments: Affiliated Foods (700,000 square feet) and Rustoleum (600,000 square feet).

In the majority of these transactions, no alternate property could adequately accommodate the requirements of the end user, so build-to-suite development was the most efficient option. Expect the trend to level off over time; the areas with significant build-to-suit activity will tend to attract developers, and in turn the developers may potentially bring more speculative development. The areas with existing spec product will eventually attract users and, due to that success, the industry will be inspired to start more speculative buildings, and begin the real estate cycle anew.

— Charles Ganale is senior vice president of the industrial services group for Colliers Bennett & Kahnweiler in Chicago.

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