CRE Midwest

Southwest I-55 Corridor – the leading indicator of Chicago’s industrial real estate market

If you’re looking for pessimism, you won’t find it here – not within Greater Chicago’s industrial real estate market.

By Daniel E. Fogarty Jr. 

Vice President of Industrial Development - McShane Development Company

If you’re looking for pessimism, you won’t find it here – not within Greater Chicago’s industrial real estate market.  We sit smack in the middle of the United States, connected by ever-improving infrastructure (both rail and highway) coming directly from the shipping ports of the East and West Coasts, with nearly one-half of country’s population within one day by truck.  So it stands to reason that right behind the U.S. coastal markets, Chicago should be the next to feel the upswing, which we indeed are.

The recent recession has been well-documented and brutal, particularly for the real estate market.  Only the fittest of companies, regardless of size or industry, have survived.  Most of the firms that have endured the economic crisis have emerged from the downturn with a much healthier balance sheet that is short on debt and long on cash.  These “survivors” spent the recession cutting (costs, overhead, anything and everything) while postponing most new investment of any kind.

We have witnessed these now healthier businesses, consume a mass of available industrial real estate over the past 24 months as they strive to improve operational efficiency through the use of more modern, better located facilities.  This massive reduction of available supply in parallel with virtually no new construction during the same period has allowed the greater Chicago market to reach equilibrium.  This balance, or this depletion of class A distribution options, has created an increasing number of companies entering the market in search of build-to-suit solutions.  The lack of existing space options has closed the cost delta between available product and a custom built-to-suit facility to allow companies to reach for the better fit.

Note the supporting statistics*:   

Chicago Industrial Vacancy Rate (end of year statistics)

                        2009                12.1%

                        2010                11.7%

                        2011                10.9%

Industrial Gross Absorption (square feet)

2008                +5,063,779

2009                -7,535,952

2010                +3,672,896

2011                +8,598,416 

New Industrial Construction in Chicago (square feet)

2008                7,199,187

2009                   803,423

2010                2,857,410

2011                1,963,222 

Industrial Investment Sales in Chicago

2008                $1.3 billion

2009                $667 million

2010                $712 million

2011                $2.6 billion

            *all statistics provided by the Chicago office of Grubb & Ellis Company

There are several micro variables that lend to Chicago’s consistent velocity, but our macro strength is clearly what I began this article with – location.  Chicago is the largest population base located in the center of the single largest consuming country in the world.  Chicago’s location practically dictates that companies wishing to conduct business on a national platform within the U.S. must take a position here. 

Due to the constant demand for space in this market, corporate and institutional investment capital consistently flows intoChicago.  With a steady demand from institutional investors such as pension funds, insurance companies, and REITs to place capital in Chicago assets, our market is consistently “liquid”.  Real Capital Analytics reported that investment in all commercial real estate assets throughout the United States was up 58% in 2011 over 2010 with $220 billion in total investment in 2011.  Chicago ranked third behind only New York and Los Angeles with $10.8 billion of the nation’s total investment dollars placed within this market. 

Several submarkets throughout the Chicago industrial market have reported strong results over the past 18 to 24 months, but none seem better positioned for growth than the southwest I-55 corridor.  The growth of the SW I-55 corridor has been nothing short of amazing during the past 20 years.  After the conclusion of the early 1990’s recession, the roughly 10-mile span of I-55 that runs from I-294 south to Plainfield has transformed from vast empty cornfields to roughly 60 million square feet of industrial facilities. 

During the hottest periods of real estate activity recorded from 1997 - 2000 and again from 2004 - 2007, nearly 45 million square feet of new space was added to this submarket, all of this in spite of an average area vacancy rate that hovered at +/-14%.  With the economy currently rebounding and overall fundamentals continuing to gain strength, this submarket currently possesses a historically low vacancy rate of 8.5%, with only two available buildings that offer tenant spaces of 500,000 square feet or greater. 

The dwindling supply of large blocks of space has resulted in the recent launch of three new build-to-suit deals within the corridor.  Currently under construction are: Lawson Product’s 307,000 square foot corporate headquarters by CenterPoint Properties in McCook; Edward Don & Company’s 362,500 square foot corporate headquarters and Midwest distribution facility by McShane Development Company at the Union Pointe business park in Woodridge; and Allegheny Technologies 120,000 square foot facility by (who is building?) in Woodridge. 

Very few well-located land sites remain available for new development in this vibrant corridor.   Both the Ryan Companies and Pizutti are preparing to launch 600,000 square foot speculative facilities on the largest remaining parcels within their respective business parks in Romeoville, which will further reduce the supply of quality land in the SW I55 corridor.

In the northernmost portion of the SW I-55 corridor, positioned nearest to the Chicago CBD of all parks in the corridor, is a premier land parcel at the confluence of I-55 and I-355 that can accommodate a range of new industrial development.  McShane Development Company’s Union Pointe business park offers frontage on both I55 and I355 with convenient access to each.  This fully-improved business park, approximately 100 acres in size, was launched in late 2011 when ground was broken for Edward Don & Company’s new corporate headquarters and Midwest regional distribution center.  This new 362,500 square foot facility is positioned on the southernmost 20 acres of the park.  While construction of this build-to-suit has been underway, a significant portion of the park infrastructure has been put in place, preparing for the next phase of development at Union Pointe.  Additional information on the Union Pointe business park can be found at www.union-pointe.com

With the economy continuing to chug forward and industrial activity on the rise, we should expect to see continued improvement throughout the Chicago industrial marketplace.  I believe the most robust activity in 2012 and into 2013 will reside in the SW I55 corridor as it is the link between Chicago proper and the regional / national marketplace via its direct and efficient connection to the further out I80 corridor. 

Daniel E. Fogarty Jr. serves as McShane Development Company’s vice president of industrial development overseeing the firm’s industrial development activities within the Chicago area and throughout the Midwest region. He can be reached at 847-692-8856 or via email at dfogarty@mcshane.com.