COVER STORY, AUGUST 2009

CHICAGO INDUSTRIAL UPDATE
A mid-year update on the Windy City’s winding interstate corridors.
Coleman Wood

The metro Chicago area is a major piece of the country’s industrial puzzle thanks to its centralized location and large network of interstates, which connect to many markets surrounding the Windy City. Chicagoland’s submarkets are supported by extensive interstate corridors, offering  unique advantages to users of manufacturing and warehouse/distribution space. Heartland Real Estate Business has spoken with local brokers and collected recently released second-quarter market data in order to provide an outlook on Chicago’s industrial sector, broken down by the region’s primary interstate corridors.

South Cook County

“South Cook is very stagnant; new construction has halted,” says Ben Cremer, a vice president with NAI Hiffman. “There is some leasing activity, but most of it is lateral moves — companies looking for cost savings or consolidation. [The market] is experiencing the same thing it has for the last 15 years, which is that companies are looking to exit South Cook and move to the nearby Will [County] or northwest Indiana markets.

“I think the market is going to remain pretty much as it is, which is stagnant, through the end of the year,” Cremer adds. “In general, the South Cook area is one of the last to increase in activity and development when the times are good, and it is one of the first to decrease in activity when things start going bad.”

Lake County/Interstate 94

The Interstate 94 corridor has not been insulated from the general challenges that face the industry, many of which are driven by macro-economic issues that are impacting the industrial real estate market (softening demand, lack of access to capital, tenant default issues, etc.). There are, however, deals still getting done, and market activity has increased since the marketplace stillness of late 2008 and early this year.

Typically, most users are looking at lease deals rather than sales, as there are fewer distressed property opportunities in this submarket and access to capital can be difficult for user-buyers. Although a significant amount of the leasing activity is short-term in nature or is existing space renewals, there are still some long-term deals getting done when the right tenant and right building match is found.

There has been a significant amount of new development in the I-94 corridor during the past 24 months, totaling approximately 4 million square feet. Many developers, especially larger, institutional firms, seem to be taking a breather from new speculative development projects and primarily focusing on filling existing space vacancy holes in their portfolios. The I-94 corridor does have a few large big box vacancies, and I suspect it may take all of 2009 and 2010 to get those vacancies filled, so it may be 2011 or 2012 until developers are confident again in looking at large, new speculative building projects.

In general, the rest of the year will see more leasing and tenant renewals. Some new development activity may occur, but there will be significantly less big box development. You may see some long-term term land development plays by developers that are positioning themselves for a market rebound in 2011 or 2012.

Generally speaking, this corridor is healthier than most and users will continue to be attracted to the quality of the area business park development projects, the lower real estate and lower operating costs associated with this submarket, and the availability of new space and development sites.

— Chad Navis is director of industrial development for Towne Investments.

SARA LEE EXPANSION BEGINS

Construction began recently for another expansion to the Sara Lee Mixing Center, located in New Rochelle.

Rochelle, Ill. — Construction began recently for another expansion to the Sara Lee Mixing Center, located in New Rochelle. This latest project comes on the heels of a 135,000-square-foot expansion that was completed in August 2007. Construction will total 131,610 square feet of new space, including 82,060 square feet of freezer storage space, 31,050 square feet of blast chill/convertible freezer space, and 18,500 square feet of temperature-controlled dock space. Ultimately, the expanded mixing facility will contain 409,000 square feet of space.

The project is slated for completion by the end of the year. Fort Wayne, Indiana-based Tippmann Group is providing design/build services for the project. The mixing center expansion is the fifth project that Tippmann has completed for Sara Lee since 2006.

CLARIUS PARTNERS TO DEVELOP $28 MILLION INDUSTRIAL PROJECT

The first building at Clarius Park McCook, a $28 million industrial project located in McCook, Ill., has broken ground.

McCook, Ill. — Clarius Partners has broken ground for Clarius Park McCook, a new industrial business park located at 9200 West 55th St. in McCook. The $28 million project comprises two Class A industrial facilities totaling 368,841 square feet. Building 1 will contain 201,431 square feet on a 9.4-acre site. The building includes 30-foot clear ceilings, 50-foot by 50-foot bay sizing and 60-foot speed bays. The building will be divisible to approximately 40,000 square feet. There will also be a 146-foot truck court, 20 trailer parking spaces, 24 dock positions, 2 drive-in-doors and 254 automobile parking spaces. Building 2 will be up to 167,500 square feet and will be on an 8.6-acre property. The company is marketing Building 2 on a build-to-suit basis and construction will commence upon securing a tenant. Construction for Building 1 is scheduled for completion by the end of the year.

Moss Inc. has signed a lease for a 105,000-square-foot industrial building located in Elk Grove Village, Ill.

LEE & ASSOCIATES ARRANGES 105,000-SQUARE-FOOT INDUSTRIAL LEASE

Elk Grove Village, Ill. — Lee & Associates has arranged a lease for a 105,000-square-foot industrial building located at 2600 Elmhurst Rd. in Elk Grove Village. The lease carries a 10-year term and a total cost of $6.3 million. The tenant, Moss Inc., plans to consolidate several of its locations in the O’Hare submarket into the new facility. Chris Nelson of Lee’s Chicago office represented the landlord, Mirvac Industrial Trust, in lease negotiations. The tenant was represented by Taurus Realty Partners.

I-39 Logistics Corridor

The market data demonstrates the maturation of the I-39 Logistics Corridor. For the first time, we are in a position to respond to virtually any opportunity that presents itself, because we now have space available for lease or sale in Class A industrial facilities and parks, built not only by our local and regional developers, but by America’s largest national industrial development firms, which have recently established a presence in the corridor.”

— Janyce Fadden, Executive Director of the I-39 Logistics Corridor Association.

O’Hare/Interstate 90

O’Hare landlords are making deals; since fourth-quarter 2008, there has been 1.2 million square feet of industrial space leased, mainly due to rate discounts of 30 percent to 60 percent, as well as generous tenant improvement allowances and abatement. The leasing market has reacted better to the downturn than the sales market. Asking prices have not been discounted as much as leasing rates. This fact, plus simply the lack of prospects — I have received few inquiries on my sales listings since the beginning of year — means very slow sales. Though no significant sales have closed, a number of institutional groups are trying to unload pieces of their portfolios, which means some major trades around O’Hare may happen at the end of the year. Expect the sales that occur to close at low prices.

There has been no spec industrial development around O’Hare. Build-to-suits have accounted for 70,000 square feet in two deals this year — a dismal number in one of the largest submarkets (105 million square feet) in the Chicagoland market of 1.25 billion square feet. From 2006 through 2008, construction start activity measured an estimated 19 million square feet in the metro Chicago market, with approximately 70 percent of that spec. Right now, across the vast Chicago market, I measure about 260,000 square feet of spec and approximately 500,000 square feet of build-to-suits under construction, including building expansions, which is far below prior year activity.

O’Hare submarket vacancy measures 12.5 percent. This time next year, we may see that drop below 12 percent, mainly due to the aggressive leasing market. If credit loosens up and sales prices start to reflect the deal-making stance in the leasing market, we could see some good absorption around O’Hare in 2010.

— Brian Carroll, senior vice president with the Industrial Services Group of Grubb & Ellis Company.

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