HEARTLAND SNAPSHOT, JUNE 2005

Chicago Industrial Market

As one of the largest regional distribution hubs in the nation, Chicago’s industrial buildings keep getting larger and larger, according to Tim Thompson, executive vice president and managing director of industrial brokerage at Chicago-based HSA Commercial Real Estate. “The warehouse/ distribution end of Chicago’s industrial real estate market has been healthier than expected during the past few years, and in some cases has been remarkably active, including speculative development, to accommodate the growing needs of distribution companies,” he says. “Consolidation among these types of firms isn’t a trend, it’s a way of life.”

Several large industrial developments are underway or planned for the Chicago metropolitan area. CenterPoint Properties recently announced two new build-to-suit facilities totaling approximately 400,000 square feet planned for the McCook Business Center, a 242-acre business park at the intersection of 1st Avenue and Interstate 55 in McCook. “The park will eventually contain up to 2 million square feet of light manufacturing and distribution facilities and change the industrial face of the Village of McCook,” Thompson says.

 A 720,000-square-foot speculative building in Windham Lakes VII in Romeoville was recently leased to The Home Depot, which increased its distribution presence in Chicago to 2.5 million square feet. In the Aurora market, several new speculative buildings have recently been announced, including the 607,752-square-foot West Ridge Building #7 being developed by Liberty Property Trust as part of the western expansion of Bilter Road, and two new buildings being developed by HSA Commercial Real Estate at the intersection of Church and Bilter Roads totaling more than 420,000 square feet.

Other notable build-to-suits are PetsMart’s 1 million-square-foot distribution center in Ottawa and Target’s 1.5 million-square-foot distribution center in DeKalb’s Park 88, now under construction with completion set for August. 

“At the other end of the spectrum, there is also a growing need for projects that will accommodate small to medium tenants, allowing these tenants the option to expand as their business expands,” Thompson says. One project, the three-building, 147,000-square-foot Woodridge Commerce Centre, is being jointly developed by Morgan Realty Partners and HSA. Units start at 2,500 square feet, accommodating small industrial and office users, and there is always the option to move into larger space as the tenant’s needs grow. 

There is not one particularly active industrial market in the Chicago area at this time; development and redevelopment are taking place all across the board, with concentrations in markets that provide good rail and transportation such as the I-80, I-88 and I-55 corridors. “Lake County, positioned midway between Chicago and Milwaukee, is providing industrial and distribution companies with close proximity to both population centers, and businesses in both cities,” Thompson says. “Lake County has caught the attention of those with business interests that touch both Wisconsin and Illinois. The result of this shift in perspective could mean a significant increase in the need for technologically sophisticated distribution centers and industrial facilities in the county.”

Perhaps the most significant amount of construction activity is the redevelopment of functionally obsolete industrial properties built 30 to 40 years ago, according to Thompson. “These facilities have been surpassed by large monolithic suburban distribution and warehousing centers built in recent years with a myriad of loading docks and high ceiling heights to accommodate today’s users,” he says. The most active market for this type of redevelopment is the O’Hare market, where the main industrial focus keeps coming back due to its close proximity to transportation, an abundant workforce and its connection to world markets. In line with this, developers like ML Realty Partners, Opus, HSA Commercial, CenterPoint Properties and AMB Properties Trust have done or are in the process of doing redevelopments in the O’Hare market.

Most property owners in the Chicago area are trying to attract tenants on a local, regional and national basis that are in need of state-of-the-art warehouse and distribution centers. Because of our excellent transportation systems and abundant workforce, Chicago is attracting logistics and distribution firms who seek to streamline their overhead by being located in a market that is easily accessible both by truck, rail and air. Speed to the market is important to both corporations who lease their space directly and to third-party logistics companies that lease space based on the needs of their contracted corporate clients. “Chicago’s industrial market serves as one of the most critical links in the national logistics network and we continue to attract quality tenants,” Thompson says.

Although there isn’t one specific tenant absorbing space in the Chicago market, several major tenants do stand out. For example, R.R. Donnelley took more than 628,000 square feet in Romeoville, and John B. Sanfilippo & Son Inc. recently purchased 1 million square feet of warehouse and office space in Elgin. They plan to consolidate six facilities in the Chicago area at this new location.

Average asking rental rates for available industrial space ending first quarter 2005 was $4.31 per square foot. Rates in the market ranged from a low of $3.46 to a high of $5.17. Of the entire Chicago industrial market sector, which includes thirteen submarkets, submarkets such as the Chicago South, Far West, South, Southwest and West Cook report lower average asking rental rates.

The Chicago metropolitan area comprises slightly more than 1 billion square feet of industrial inventory. With more than 105 million square feet of available space, the overall vacancy rate ending first quarter 2005 was reported at 10.41 percent. “The market is showing significant improvement from the reported 10.92 percent of overall vacancy reported during the same period in 2004,” Thompson says. “The Southeast Wisconsin and West Cook submarkets report the lowest vacancy in the market at 5.67 percent and 7.01 percent, whereas the Southwest and Chicago North submarkets report the highest vacancy levels at 17.11 percent and 12.35 percent.”

One should look to the O’Hare market for the future of Chicago industrial real estate. “With the upcoming O’Hare Airport expansion, this market will continue to eclipse all others in terms of transportation, location and a good work force,” Thompson says. “O’Hare area markets such as Franklin Park, Elk Grove Village, Bensonville and Schiller Park could experience tremendous growth as infill sites are finally developed to their highest potential and existing industrial properties are rehabbed or redeveloped, bringing them in line with the dozens of suburban industrial parks that have been built during the past 5 years.”

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