CRE Midwest

Construction firms still rely on build-outs and renovations to get by

The industrial leasing market has improved, but development firms are still waiting for occupancy rates and rental rates to increase before any significant construction will begin.

The industrial leasing market has improved, but development firms are still waiting for occupancy rates and rental rates to increase before any significant construction will begin.

Despite the lack of major projects, opportunities are available. As firms begin to strengthen their balance sheets and consider expansion, many are finding that it is more cost effective to build-out space rather than pay for moving costs. Also, as investment picks up on bargain buys, owners are repositioning assets with upgrades and interiors work. Some developers have also landed mid-sized build-to-suits in the past year. The activity may not equate to a plethora of new, ground-up buildings, but construction and development firms are finding ways to keep busy.

“Industrial activity is picking up,” says Joseph Pomerenke of ARCO/Murray National Construction Co. “We are seeing more mid-sized build-to-suits, anything from 30,000-100,000 square feet. There is also a lot of building expansion. People are asking about expansion when reconsidering their lease.”

ARCO/Murray recently broke ground as general contractor on an 82,950-square-foot facility in Cross Point Wisconsin for Crothall Services Group. The Developer is CenterPoint Properties.

Two large built-to-suit projects were announced last year. Clorox and USAA have an agreement for an approximate 1,350,000-square-foot build-to-suit in USAA’s Commerce Business Center in University Park. The second largest build-to-suit announced in the last year is VentureOne Real Estate’s deal with Minneapolis-based 3M in the I-39 corridor. In August of last year, the firm partnered with Clayco Inc. to break ground on a 650,000-square-foot distribution center at Park 88 Industrial Park in DeKalb. The development is on a site that will allow an expansion to 1 million square feet in the future.

Those projects broke the mold of what has been a relatively modest built-to-suit market. The strategy for many firms has been to accumulate multiple mid-sized projects to make up for the lack of larger deals.

Northern Builders recently scored a 48,000-square-foot built-to-suit in Elgin for Bystronic Inc., a machine tool firm. According to the release announcing the deal, the lack of Class A industrial product in the I-90 corridor triggered the activity.

Still, with vacancy rates hovering around 11.5 percent for the entire market, new construction is still difficult to find.

If ground-up work is unavailable, firms are keeping busy with interiors and build-outs. These transactions have been the most common, and, with little new construction occurring, are often the only viable way to bridge the gap between robust development periods.

Morgan / Harbour Construction recently contracted numerous built-outs and expansion projects.  The firm was recently selected to complete a 48,000-square -foot interior build-out for TricorBraun in Woodridge, a 32,065-square-foot warehouse expansion for Dik Drug Co. in Burr Ridge, and it recently completed a renovation of two, 12,000 square foot, single-story buildings for MV Transportation and a 16,000-square -foot parking lot expansion, in Carol Stream.

Ben Warriner, Vice President at Morgan / Harbour, says that the last two years were “trying” but that he is optimistic that 2011 and 2012 will be much better for the industry.

“There seems like a lot of activity right now,” says Warriner. “Last year everyone was still very cautious.”

Warriner says the majority of work now comes from new ownership groups that are looking to upgrade recently purchased facilities by making them more efficient or adding office components. As market conditions continue to improve, competition for healthy tenants has become intense.

“We just finished a speculative office space in a distribution facility,” says Warriner. “It is interesting to see what some firms will do to try and set themselves apart from competition and give themselves a leg up.”

While interior and build-out project work has increased, Warriner says it will still be a while before new construction, especially speculative, takes place.

“Rents are going up and net absorption is improving,” says Warriner. “As long as the economy continues to recover, it will help the industry. I don’t think development will come back for a year or a year and half. It is possible we could see some speculative construction in late 2012. It just doesn’t make economic sense yet.”