Just as much as other property types, the industrial market reacts to the overall economy. This trend, however, has not fared well for the industrial sector during the past 2 years. According to a recent Marcus & Millichap Industrial Research Report, the glut in the industrial market is due to economic pressure on the drivers of industrial warehouse demand: manufacturers, distributors and retailers. In addition, the dot-com bubble and subsequent recession, the events of September 11, 2001, and a global economic downturn have also hurt the industrial market by reducing demand for industrial product.

According to the report, projects with a high degree of flexibility, low office build-outs and the ability to accommodate a wide range of tenants are still being built. Furthermore, the manufacturing, distribution and retail industries are all showing signs of improvement, which should lead to a significant increase in demand for industrial space in the remainder of 2003 and in 2004. Marcus & Millichap predicts that major distribution hubs will be the first to recover because they are driven by national trade flows rather than by local economic conditions.

Heartland Real Estate Business recently spoke with industrial developers and leasing agents about projects that are currently under development in the Midwest. With a recovery on the horizon, many industrial projects are poised to take advantage of the increase in demand.

Maple Point Business Park, Woodridge, Illinois

Maple Point Business Park

The 15-acre Maple Point Business Park is located at 103rd Street and Lemont Road, just minutes from the eastern boundary of Interstate 55. Bridge Development Partners has completed the development of the first phase of the project, and the second phase is scheduled for completion in June 2005. The approximately $20 million industrial park will total about 250,000 square feet when complete.

HSA Commercial Real Estate, which represents park owner Argonne Bridge LLC in leasing activity, is targeting mid-sized companies that require between 20 percent and 30 percent of office buildout. Current tenants include Nestle Waters (69,424 square feet), Components Express (23,848 square feet), INO Therapeutics (15,536 square feet) and Fortec Medical (11,433 square feet).

According to Thomas Boyle, senior vice president of HSA Commercial Real Estate, Maple Point Business Park is one of the few developable sites in one of the most desirable industrial submarkets in the country. “It’s been a very successful project in a tough [economic] market,” he says. HSA Commercial’s industrial portfolio is composed of more than 11.8 million square feet.

Valley Green Business Park, Shakopee, Minnesota

With construction that began in 1961, Valley Green Business Park is now in its final stage (the bulk land sale of approximately 300 acres). The 2,250-acre park currently has 7.5 million square feet of office, industrial, retail, hospitality and residential space occupying the site, and land is available for mixed-use development.

The land owner and developer, Valley Green Business Park Ltd. — in a partnership with Allianz Life Insurance Company of North America — is creating opportunities for land sales, design/build projects, space for lease, build-to-suit projects and residential, commercial and office/ showroom/light industrial developments. The partnership is targeting office, distribution and manufacturing companies located in the southern, southwestern and western suburbs of the Twin Cities metropolitan area, says William Ritter, senior vice president of Minneapolis-based Welsh Companies. (Welsh Companies is representing the property owner in the marketing and sale of the land at the park).

The business park, which is scheduled for completion in 2008, is located at Highway 169 and County Road 83. “It is situated in a prime section of one of the most rapidly growing communities in the southwestern suburban metropolitan area,” Ritter says. “Scott County is the fastest growing county in Minnesota and the eighth fastest growing county in the nation.” In addition to being high-growth areas, Shakopee and Scott County are both known for being responsive to the needs of businesses. “They consider development incentives, such as tax abatements, on a case-by-case basis,” Ritter notes.

Interstate Distribution Center, Urbandale, Iowa

Super DSM LLC is redeveloping the Interstate Distribution Center, an approximately 600,000-square-foot regional distribution facility located at the intersection of Interstate 80/35 and Douglas Avenue. According to Darin Ferguson, executive vice president of Ferguson Commercial Real Estate Services, the facility’s location is ideal because it is situated adjacent to a bulk mail facility and a 2 million-square-foot industrial park.

The approximately $10 million facility is situated on a 42-acre site, and it is scheduled for completion this winter. Currently, Ferguson is overseeing the redevelopment and marketing of the project. “We are targeting regional or national companies that can use a 100,000-square-foot to 500,000-square-foot distribution center with or without cooler/freezer space,” Ferguson says.

Plainfield Business Park/Airtech Park, Plainfield, Indiana

Plainfield Business Park/Airtech Park

As part of its appeal, the Plainfield Business Park/Airtech Park is located adjacent to the Indianapolis International Airport. In addition, a new third runway for FedEx and the expansion of a new midfield terminal at the airport provide extra incentives for companies considering a move into the park.

Besides being close to the airport, the park also provides access to Interstate 70. “This location is attractive to national companies and logistics companies that are looking for a new Midwest distribution center,” says John Huguenard, principal and senior vice president of Colliers Turley Martin Tucker, the company responsible for more than 11 million square feet of the deals completed in the 15 million-square-foot park. “More than 65 percent of the U.S. population can be reached within a 24-hour drive.”

Construction on the project started in 1995. It is currently in its third phase of development, and the park is scheduled for completion in 2010. Companies that are developing projects in the park include Browning Investments, Duke Realty Corporation, Keystone Property Trust, Opus North Corporation, Pizzuti Companies and ProLogis Trust.

More than 35 companies are currently tenants at the park. For example, TNT/Deere occupies 925,800 square feet, Whirlpool/Ryder Logistics occupies 804,586 square feet, and Belkin Components occupies 798,096 square feet. “We are targeting national companies seeking a Midwest hub for bulk distribution or light manufacturing,” Huguenard says. “This project has been an excellent opportunity to assemble large parcels of land and create a first class industrial park with development standards designed to attract institutional capital investment.”

Livonia Business Campus, Livonia, Michigan

Located off of Interstate 275 at the intersection of Interstate 96 and M-14, the Livonia Business Campus features 122 acres for design/build, for-sale or for-lease corporate industrial facilities from 50,000 square feet to 750,000 square feet. A joint venture partnership between Etkin Equities and General Motors Corporation (GM) is handling improvements at the project. These improvements, which include infrastructure installation and building construction, are scheduled for completion in spring 2004.

According to Gary Sallen, partner with Signature Associates-ONCOR International, the company responsible for marketing, leasing and sales at the park, the development team has a record of success at the nearby CenterPoint industrial park in Pontiac, Michigan. In addition, Livonia has long been associated with forward thinking, and it has a well-trained labor market readily available, Sallen says.

Signature Associates-ONCOR International is currently targeting automotive first- and second-tier suppliers and logistics companies looking for a centralized location at a competitive rate structure. “We are currently in final negotiations with a 25-acre buyer as well as a number of build-to-suit transactions ranging in size from 65,000 square feet to 225,000 square feet,” Sallen says.

The Return of Spec Space: Chicago’s Industrial Market The current Chicago industrial market is a story of contradictions: on one hand, vacancy rates have spiked to 9.3 percent, and average asking rents have declined. On the other hand, developers are building speculative space again. In Will County alone, approximately six major speculative warehouses are underway. Corum Real Estate Group is building a 700,000-square-foot warehouse at Crossroads Lake Business Park, and Orix is poised to start a 658,000-square-foot speculative warehouse at Windham Lakes. In total, more than 3 million square feet is currently under development in the Interstate 55 corridor, and the trend looks like it will continue. For example, Duke Realty Corporation is adding 86 acres to its portfolio in Romeoville for 1.9 million square feet of speculative space. In addition, big boxes continue to be built in the Interstate 80 corridor, and tenants with mega requirements are scouring the Interstate 39 corridor for the right combination of infrastructure and incentives. So what is driving developers to wager on increased demand in a market that is still showing historically high vacancies? The answer is cap rates in the short term and logistics in the long term. Both private and institutional investors are currently paying top dollar for warehouse/distribution facilities leased to credit tenants. Even though demand has remained flat on a national level during the last 36 months, Chicago continues to see large tenants in the market. The most recent market report from CB Richard Ellis shows year-to-date gross absorption at 20.8 million square feet, which is a 27 percent increase from last year. For the market, it puts in place a sound recipe: outstanding cap rates + increased demand + available land in core markets = speculative construction. And what about logistics? Why is it causing such a dichotomy in the metropolitan Chicago industrial landscape? Logistics is defined as the management of product movement, information and capital through assembly, manufacturing and distribution to the retail exit point. With the Pacific Rim responsible for the majority of goods imported into the United States, and the majority of the purchasing power of the United States on the East Coast, the Midwest and, specifically, Chicago, are key linchpins in the country’s overall supply chain. Metropolitan Chicago is the world’s third largest handler of international freight, ranking behind Hong Kong and Singapore. This distinction makes Illinois the country’s single largest rail transfer center and increases the demand for distribution facilities. With container traffic growing by 7 percent per year, the prospects for big box development are excellent. Corporations perform 80 percent of logistics activities internally, and the 3PLs, third-party logistics companies, provide 20 percent of all warehousing in the country. However, 3PLs are poised to capture 40 percent in the next 3 years. This sector is currently growing at a clip of 15 percent per year. These statistics relate back to developers building spec space in areas like Bolingbrook, Joliet and Rochelle in terms of “cycle time.” Quite literally, this is the time it takes from processing the order to delivering the goods. With increased competition and the methodologies that have cropped up to optimize the supply chain, users are asking for buildings to be delivered in an increasingly short time frame. Fulfillment companies today are often asked by their corporate customers to provide services in less than 1 year. As a result, a 600,000-square-foot speculative building with proper column spacing, 6-inch to 8-inch flat floors and a clear height of up to 32 feet is highly desirable for a user that cannot wait. In addition, drayage costs are driving warehouse operators to situate their big boxes next to intermodal transportation. Consider a manufacturer that might spend $175 per container to transport his products from a freight train on the south side of Chicago to a warehouse in Bolingbrook. Now, imagine that he ships 4,000 containers per year for a total drayage cost of $700,000. Now compare that cost with locating a warehouse across the street from the Union Pacific Global III intermodal yard in Rochelle, Illinois. The drayage cost now drops to $25 per container. That savings adds up to about $600,000 per year for the manufacturer. When you factor in that the tax savings might total another $50,000, it is easy to see why the market for well-located, high-cube distribution facilities is still strong. — Patrick Gallagher is senior vice president of Skokie, Illinois-based The Alter Group, which also has regional offices in Atlanta and Phoenix

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