O’Hare market on the brink of change

October 15, 2013  |  Staff Writer  |  Print Article  |  Email this Article

By Ronald J. Behm

and Jonathan D. Kohn

Colliers International Industrial Advisory Group

Chicago’s O’Hare industrial submarket, a 140 million-square-foot giant long favored by a range of industrial users and air cargo distributors, has certainly weathered its fair share of this country’s economic crisis. Concentrated throughout the towns surrounding O’Hare Airport – Elk Grove Village, Des Plaines, Bensenville, Mt. Prospect, Wood Dale and Itasca – vacancy has hovered around its all-time high of 12.75 percent for most of 2009 and 2010, well above the glory days of 2006 and 2007 when vacancy slipped below 6 percent. There has been no speculative construction since 2008.

In fact, net construction (when factoring in demolitions) has been negative or zero for four consecutive years.  Land values for speculative development have plummeted from $25 per square foot in 2007 to $10 to $12 per square foot today.  It certainly paints a dire picture. Those with a vested interest in commercial real estate – particularly institutional owners and developers – have been forced to temper their expectations and wait this cycle out, hoping that the ”$.99 net” lease transactions witnessed quickly become a thing of the past.  However, several encouraging indicators are suggesting that we may see developers turn to speculative development in 2013.

The O’Hare submarket has an abundance of outdated and functionally obsolete industrial properties with the availability of modern buildings few and far between.  Just what is “modern” and how rare is this product in the O’Hare market?  With ceiling height (28 feet and above) and exterior loading as qualifiers, there are only two modern buildings above 100,000 square feet currently available in the O’Hare market. In addition, within the available inventory of 24-foot clear buildings, only two can accommodate a large user of 200,000 square feet or greater – and both are currently experiencing serious prospective tenant activity.

Until recently, leasing activity in this large size range has been relatively quiet going back to 2007.  In the five years between 2007 and 2011 combined, the O’Hare market has witnessed only five lease transactions (excluding renewals), greater than 200,000 square feet.  In 2012 alone, five sizeable transactions have been completed including a 306,590-square-foot lease, which was signed by Amalgamated Sugar for the entire building at 1010 Foster Ave. in Bensenville.  O’Hare user sale activity also had a shot in the arm in the four quarter as three large transactions closed.

The largest user sale transaction occurred when Topline Furniture purchased a 252,109-square-foot property at 1455-1495 W. Thorndale Ave. in Itasca. O’Hare available inventory has dropped nearly three million square feet since it reached 17.8 million square feet in 2010. The vacancy rate has declined more than two full percentage points to 10.6 percent, and while there is still considerable pre-recession ground to make up, this improvement is beginning to gain traction and capture the attention of the development community.

While absorption in O’Hare has been negative in O’Hare most of the year, we are expecting very positive results for the fourth quarter based on the volume of leasing and sale activity experienced to date.  Further, an additional 600,000 square feet of new lease transactions are expected to close by year end or soon thereafter. So what is it going to take to inspire speculative development in O’Hare? Despite the fact that conditions are improving within this market and available modern product continues to get leased, rental rates have not increased yet as would be expected with shrinking inventory and increased demand.

The high cost of construction may not be justifiable until there are clear indications that rental rates are on the rise for modern buildings. However, several forward-thinking developers have staked their land positions in O’Hare over the past 12 months and are literally banking on the forward momentum that the O’Hare market is experiencing.  Bridge Development acquired two sites in Elk Grove Village at 2727 E. Higgins Road and 2201 Lunt and is contemplating speculative or build-to-suit development of 123,000 and 150,000 square feet respectively.

Panattoni Development purchased the 10.25-acre former Wirtz Beverage site at 1925 Busse Road and has plans for a 208,000-square-foot speculative facility.  Finally, Johnson & Johnson sold its 26-acre site at 1350 Estes Ave. earlier this year to Duke Realty, which will be the new 229,800-square-foot home for Yusen Logistics.  The remaining portion of the site is available and can accommodate up 285,000 square feet.  Other sites acquired at a premium in O’Hare several years ago are still awaiting new industrial development.

While the Central DuPage market remains a strong competitor to O’Hare, based on the considerable upswing in activity it is clear that there is a user type that demands a modern facility with an O’Hare address.  As landlords begin to push rents and limit concessions, more construction may begin to occur.  Until then, the large user will have very few state-of-the-art alternatives in O’Hare.

© 2014 Real Estate Communications Group. Duplication or reproduction of this article not permitted without authorization from the Real Estate Publishing Group. For information on reprint or electronic pdf of this article contact Mark Menzies at 312-644-4610 or menzies@rejournals.com

One Response to “O’Hare market on the brink of change”

  1. Dave Berzon says:

    Ron:

    The O’hare market is no Eagle River, Wisconsin, but it will do.

    It’s been a while.

    Dave


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