CRE Midwest

Build-to-suits continue to be the trend in Chicago market

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Build-to-suits remain the trend in the greater Chicago-area industrial market, despite the reemergence of speculative construction.

Build-to-suits remain the trend in the greater Chicago-area industrial market, despite the reemergence of speculative construction.

Quality class A industrial space had been dwindling in the Chicago market, and companies were more willing to pursue build-to-suit opportunities, rather than to retrofit existing space to meet their needs, according to an industrial market report by Cushman & Wakefield of Illinois Inc. Existing facility concerns like higher ceiling height requirements and increased loading docks helped propel the 3.4 million square feet of build-to-suit projects completed in 2012, with more expected in 2013.

“Due to the lack of supply of class A, institutional-grade speculative buildings, new requirements are being resolved via build-to-suit transactions,” said Thomas Boyle, principal with Newmark Grubb Knight Frank.

The overall Chicago industrial market, which includes Southern Wisconsin and Northwest Indiana, contains nearly 1.2 billion square feet of inventory and currently reflects an availability rate of 9.1 percent, a 20 basis point decline from third quarter 2012, according to CBRE. The metro area subtotal also registers in at 9.1 percent, a 40 basis point decrease. Both numbers reflect a significant drop of 90 and 110 basis points, respectively, when compared to one year ago.

Jack Rosenberg, principal at Colliers International, said he sees a tightening of the market, particularly for larger users.

“At the worst part of the economic downturn there were 17 buildings that could deliver a half million square feet or more in I-55 and I-80 and last year there were only four,” he said. “What’s happened is that without new spec construction, the market has really tightened up, especially for the bigger users.”

During the second quarter 2013, two buildings totaling 407,198 square feet were completed in the Chicago market area, according to an industrial market report by CoStar. This compares to four buildings totaling 1,857,142 square feet that were completed in the first quarter 2013, three buildings totaling 322,138 square feet completed in the fourth quarter 2012, and 1,413,345 square feet in five buildings completed in the third quarter 2012.

There were 628,655 square feet of industrial space under construction at the end of the second quarter 2013, according to CoStar. Some of the notable 2013 deliveries include: 3851 Youngs Road, a 1,001,184-square-foot facility that delivered in first quarter 2013 and 1160 W. Crossroads Parkway, a 604,158-square-foot building that delivered in first quarter 2013.

The largest projects underway at the end of second quarter 2013 were 41 Prairie Parkway, a 203,217-square-foot building with 66 percent of its space pre-leased, and Park 355 II, a 180,480-square-foot facility.

Despite this activity, John Dunneback, director of development at Ryan Companies, said developers are being more cautious before embarking on new construction projects.

“Things seem to be moving slowly in the sense of decision-making on the part of the clients,” he said. “Getting things in the ground hasn’t been happening as quickly as we thought it was going to. Everyone is really cautious and conservative. There is money out there and people want to do things but they’re moving a lot slower and being more intuitive.”

Mark Augustyn, chief operating officer at Principle Construction, said there has been a great deal of bidding activity, indicating that developers may be more comfortable getting projects off the ground.

“Much like the auto industry, everybody’s been extending the life of their used cars and finally they feel comfortable in their financial position that they can go ahead and buy a new car,” he said. “The same thing happened with the businesses we work for. Everyone has been trying to get by with what they had without extending themselves into a new product. Now I think they’re more comfortable with the direction of the economy and they feel comfortable extending themselves to expand their space.”

Now developers are starting to get off the sidelines, according to Augustyn.

“A lot of the developers that make their living developing real estate haven’t been making a living developing real estate,” he said. “They’ve all been waiting for what they think is the right opportunity. I think what they realize now is that nobody is buying a building based on a marketing brochure.  They have to have product.”

And much of that product is manifesting itself in build-to-suits.

Although the largest completed new facility in 2012 was a speculative project, built-to-suit completions measured 3.2 million square feet, vastly superior to the 977,100 square feet in speculative developments completed in 2012, according to Colliers International.

In the fourth quarter of 2012, ground broke on Trader Joe’s 800,000-square-foot build-to-suit distribution center in Minooka, as part of the 2.4 million-square-foot park known as Internationale Center South, according to Paine/Wetzel TCN Worldwide. Also in the quarter, Duke Realty announced plans to build a 163,214-square-foot warehouse adjacent to its existing building to accommodate the expansion of its tenant Peacock Engineering.

Paine/Wetzel TCN Worldwide also notes that the largest project under construction at the close of the year is the 1.6 million-square-foot build-to-suit distribution facility for Home Depot, which will be located adjacent to its current facility. The second largest project under construction is a 1 million-square-foot facility being built on spec by Clarius Partners LLC in the Will County submarket. This is the first phase of a four-building project planned. Upon completion, Clarius Park Joliet will total 2.5 million square feet.

Big box speculative development also made a return in 2012, as DCT Industrial Trust completed a 604,100-square-foot speculative project at 1160 Crossroads Parkway in Romeoville, according to an industrial market report by Colliers International. This also happened to be the largest facility built in 2012.

Paine/Wetzel TCN Worldwide notes that while speculative construction remains tentative, an upswing in demand has given developers confidence in the midst of a more robust market. The focus remains, however, on build-to-suits, or speculative buildings at least partially pre-leased prior to construction.

Dunneback said developers wait to see if their competitor’s building gets leased up before moving ahead with their own projects.

“You could have company x start a speculative warehouse in the Elgin market,” he said. “Well, company y and z are going to wait until company x’s building is up and there is leasing activity because they don’t want to have competition. No one wants to have a building sitting empty.”

Construction has made an aggressive return to the Chicago industrial market, according to CBRE. 2012 posted 5.7 million square feet in construction starts. Of that total, 1.9 million square feet are speculative projects, which is the highest total since 2008 and is more than five times the speculative construction activity seen in 2011.

Rosenberg said he notices construction activity picking up.

“Last year you had two big spec buildings built for the first time since 2008,” he said. “Every major developer is looking to get construction going and so I would expect that before the end of the year, there will be a significant amount of new spec industrial buildings under construction. However, I think spec construction will be more disciplined than it has been.”

Boyle said he also is seeing signs that construction activity and the economy are improving.

“When we talk to general contractors, they are busier than they’ve been in four years and virtually every tenant I’ve talked to in the marketplace with over 100 employees is expanding in one way, shape or form, which is unique,” he said.

Boyle added that as the economy improves, he is seeing more large transactions in the market.

“What’s interesting is there is more demand above 200,000 square feet than there is below 200,000 square feet,” he said. “I think it’s a top-down recovery because typically there are 10 times as many 20,000-square-foot requirements as there are 200,000-square-foot requirements.”

The strength of the Chicago industrial market also is helping to spur demand for more construction, according to Rosenberg.

“Last year, the Chicago industrial market had a really strong performance,” he said. “There was 13 million square feet of positive absorption, and the vacancy rate dropped under 10 percent. Those are figures that the market hasn’t seen since 2007. So if the economy continues to grow at 2 to 3 percent, then barring another recession, demand is going to be there.”

Boyle said another optimistic sign for construction is the number of investors looking to purchase land.

“I think the precursor to construction is the reemergence of the land market and there are a lot of investors in the market looking for bulk land sites again, which has been a forbidden topic for the last four years,” he said. “Class A vacancy rates are now between 5 and 10 percent depending upon which submarket you are referring to and when vacancy rates hit 7 percent, investors start looking at land.”

However, Boyle noted that there are some submarkets in Chicago that have a much higher barrier to entry when it comes to available land.

“O’Hare, Lake County and Southeast Wisconsin are markets where there is not an abundant amount of land for a developer or user to just drive up, purchase and build a facility,” he said. “The majority of land sites in these areas will require a lot of work for entitlements, wetland remediation and that sort of thing. That also affects the supply. These areas that are tight now are going to be tight for a while.”

Retail construction remains hot

Construction demand from retailers is on the rise, according to Augustyn.

“For us, one of the surprises has been the resurgence of retail,” he said. “In this particular year, we’ve seen a big pickup on retail work.”

Chuck Taylor, director of operations at Englewood Construction, said many retailers are remodeling or renovating their spaces.

“I think the retailers and restaurateurs that kind of sat on the sidelines are trying to take advantage of what’s left of the good real estate deals,” he said. “We’re hearing anecdotally that rents are starting to increase, specifically in the high market areas like Michigan Avenue and downtown. But even in the malls, we’re seeing a high amount of occupancies.”

Taylor said retail construction activity is taking place throughout the Chicago metro area.

“There’s a lot more construction activity downtown and the suburban shopping centers are also doing very well attracting new tenants or relocating tenants,” he said.