Midwest Industrial Business Parks Evolve in Pursuit of E-Commerce
There’s a reason why warehouse facilities and fulfillment centers ranked No. 1 and 2 for 2016 investment and development prospects. In addition to the annual commercial real estate survey findings by PwC and the Urban Land Institute, the National Council of Real Estate Investment Fiduciaries (NCREIF) is reporting that the Midwest posted the strongest industrial income return among all U.S. regions in second quarter 2016.
“E-commerce is affecting more than just the industrial real estate business park. It is the most significant driver of demand in industrial products across the county right now,” says Ryan O’Leary, regional senior vice president at Duke Realty. “Business parks are obviously a big beneficiary of that.”
O’Leary, who oversees the Chicago, Minneapolis and St. Louis markets for the Indianapolis-based REIT, estimates that e-commerce drove 35 to 40 percent of the approximately 8 million square feet of industrial absorption in the Windy City during the second quarter. Business parks with very good infrastructure, access to major thoroughfares and easy flow for heavy truck and auto traffic have a huge advantage in securing that tenant demand, which usually requires a quick turnaround on building delivery. Unlike development costs for a garden-variety warehouse space 15 years ago, e-commerce facilities can exceed $100 per square foot.
The industry remains in the early stages of e-commerce building design, according to Brian Quigley, executive vice president at Rosemont, Ill.-based Conor Commercial Real Estate. Racking, floor-loading and column spacing will vary with the type of product being stored or the conveyor systems used. That means there’s not a one-size-fits-all design solution in the e-commerce industrial segment.
Key questions at Conor Commercial are:
• Which users require 36-foot clear heights versus 32?
• What column spacing dimensions allow for the most efficient product storage?
• Should the steel structure be strengthened to allow for the hanging of conveyor systems?
• Does the site plan allow for additional security with fencing and guard shack?
Taylor Talt, vice president and development partner at Majestic Realty, says industrial park site selection has changed dramatically. The empowered e-commerce consumer has fed the focus on the “last mile” of product delivery, or shortening of the supply chain.
“Over the last several years, we have seen large 1 million-square-foot [tenant] requirements that used to be on the outskirts of certain markets now looking to be located in dense locations for fulfilling that ‘last mile’ demand,” he says.
While consumers probably don’t concern themselves much with industrial site selection or development specifications, the web-based buyer has never been closer to the industrial real estate sector.
“Pretty soon, [deliveries] will arrive in a couple of hours,” O’Leary says of his wife’s Saturday morning Amazon orders. “It’s amazing what they’re able to achieve.”
Patience pays off
Many industrial business parks finding success in the current cycle are ones on large tracts of land purchased in 2006 and 2007, right before the economic downturn. Patient developers not only reaped the rewards from the comeback of industrial real estate, they also benefitted from the flexibility the excess land afforded them, such as being able to cater to e-commerce drivers.
“On the build-to-suit side and for spec development, you want to leave yourself a lot more flexibility because all of us are seeing a lot more demand from e-commerce users in the market,” says O’Leary. “With that comes the desire to have expansion capabilities.” That includes heavy car parking and trailer parking.
The business parks developed prior to the current cycle don’t have the same infrastructure or flexibility, which means greater difficulty in landing the latest types of industrial users. In a development sector where turning land into cash flow as soon as possible is the name of the game, the unintended wait-and-see for pre-recession developers paid off.
Between spring 2014 and summer 2016, Duke Realty completed more than 1.25 million square feet of new construction at Gateway North, located in Otsego, Minn., the desirable northwest submarket of metropolitan Minneapolis.
In July, Duke Realty broke ground on Blue Dot’s 120,000-square-foot headquarters expansion, just over a year after the designer and distributor of modern furnishings moved into its more than 150,000-square-foot headquarters at the park.
“Gateway North has been a very big success,” O’Leary says of the 150-acre, master-planned development, 40 percent of which is e-commerce-based. “This park accounted for a major portion of the absorption in the [Minneapolis] market throughout last year. The park just had the right mix of land flexibility and the ability to deliver new bulk product for these tenants.”
Tenants were attracted to brand-new, bulk product and 32-foot clear heights, which a lot of the bigger distribution tenants struggle to find in the Minneapolis market, according to O’Leary. The flexibility of excess land came in handy for tenants such as Ruan, which had heavy trucking and trailer storage requirements.
Other tenants include Room & Board, which moved into a 486,000-square-foot, build-to-suit facility at Gateway North in early 2015 under a long-term lease agreement. Wagner SprayTech Corp. will occupy a 220,000-square-foot warehouse/distribution facility in the fourth quarter of this year. The build-to-suit property will offer 36-foot clear heights and the ability to expand by 50,000 square feet.
O’Leary says that a lot of business parks have similar stories: the property was bought, and construction of the infrastructure started around 2006.
“We did one 150,000-square-foot spec building to kick off the park in 2007, and by 2008 the market had slipped away and we went into an extended down period when there really was no activity,” he adds. “But these parks were well-positioned for the rebound and recovery.”
Logistics, labor lead the way
Business parks today are more about logistics and less about scale, according to Quigley. “Regardless of whether the target customer is e-commerce related, a bulk distributor or a manufacturer, today’s top priority is to reduce the cost of transporting goods,” he says.
Conor Commercial will deliver 2 million square feet of Class A industrial product in metro Chicago in 2016, part of 6 million total square feet across the nation, with an even split between build-to-suit and speculative development. Speaking from experience, Quigley gives his top 10 hallmarks of Class A industrial product:
• 32-foot minimum clear heights
• one dock per 5,000 rentable square feet
• one trailer park for every 10,000 square feet
• a 135-foot truck-court depth
• a seven-inch concrete floor slab to allow for 4,000 psi
• an ESFR sprinkler system
• clerestory windows and skylights for natural illumination
• an eight-inch unreinforced concrete truck court
• LEED insulation levels, including at R-30 for the roof
• warehouse ventilation of two air changes per hour
“Years ago developers would buy up hundreds of acres of land in far-flung greenfield locations with the goal of creating branded business parks. They ended up with a 10-year supply of land,” says Quigley. “The old saying that ‘land eats while you sleep’ is still very true today. The new model is to limit your inventory to land that can be put into production immediately.”
In August, Conor Commercial Real Estate, a member of The McShane Companies, completed Fountain Square Commerce Center, a 70-acre industrial business park located approximately 30 miles southwest of Chicago in Bolingbrook, Ill. A project that started in fourth quarter 2015, the Class A development consists of four speculative buildings that range from 109,088 square feet to 320,532 square feet and a 12-acre, build-to-suit site. The speculative buildings are divisible by 30,000 square feet and will feature ample car and truck parking, substantial dock door positions, 32-foot clear heights, ESFR sprinkler systems and office space.
The phrase “location, location, location” should, but doesn’t always, evoke another L word: labor. Proximity to efficient transportation infrastructure and the availability of labor are now the two most important factors in site selection, according to Quigley.
After all, transportation expenses account for roughly half of the total supply-chain costs, whereas real estate accounts for only 5 percent.
“We first identified the Interstate-55 submarket as its primary target due to the strong, sustainable user demand combined with very limited large-scale vacant land options, then identified the land site with the best access to I-55,” says Quigley, regarding the Fountain Square property. “The result is that the park checks the two most important site selection criteria: immediate access to I-55 for transportation savings and a high-quality, diverse and available workforce.”
O’Leary of Duke Realty, which focuses exclusively on industrial business parks, says, “It’s not as much about amenities as it is transportation routes, being close to rooftops and the labor pool, as well as your access and roadway infrastructure for trucking. So it’s more of a supply-chain analysis than it is an amenity base.”
Brian McKiernan, senior vice president of development at metro Chicago-based CenterPoint Properties, emphasizes the “extremely critical” human resource component of industrial business parks.
“Warehouse work is becoming more complex, and the efficiency of its employees is critical to the success of the operation,” he adds.
O’Leary maintains that access to a skilled workforce is every bit as critical for industrial operations as it is in the office sector.
“Even for local distributors and manufacturers, labor is a massive component of their bottom line, so high turnover or the inability to get labor is very costly,” he says. “A lot of tenants do significant labor analysis, both on availability and costs, from location to location. So having these business parks wherever there’s a good draw of labor is critically important for big distribution centers.”
According to Quigley, the No. 1 rule that developers should follow — but often fail to heed — is to not compromise functionality and truck flow by squeezing too much product onto a site. Yes, the goal is to effectively monetize the land, but tenants will easily see when quantity has been put before quality.
“What our customers view as deal breakers when touring industrial product are 1) not having a truck court depth of 135 feet from the back of the building to the curb, 2) not having enough dock doors or trailer parks, and 3) not providing adequate car parking,” adds Quigley.
Up next for business parks?
A lot more supply-chain planning and analysis will be required to successfully develop the industrial business park of tomorrow. It’s becoming increasingly hard to find large tracts of land for such development and even more difficult to entitle business parks near Midwestern population centers.
“The key will be finding sites that allow for zoning that can provide solid access to a major population base and can accommodate the flexibility,” says O’Leary. “Industrial real estate is in an evolution right now due to a lot of the demand coming from the e-commerce sector, which is changing how these buildings function, how they accept inventory, how the inventory goes out and how it’s handled within the facility.”
Majestic Realty will deliver a more than 424,000-square-foot speculative industrial building in December at Majestic Badger Logistics Center between Milwaukee and Chicago. The Southern California-based firm is designing and constructing buildings with larger truck courts (185 feet deep), full circulation around buildings for trucks and 36-foot clear [heights], which have all become the spec standard.
“With the continued evolution of e-commerce fulfillment centers, we are seeing larger office square-footage requirements and, in most cases, we are bringing more power to our parks,” says Majestic’s Talt. “There is also less demand for rail-served buildings than in the past.”
Large industrial users will need to “sprawl” to third- and fourth-tier markets, while smaller users will take an infill and redevelopment approach as tenants want proximity to home and more amenities, according to Casey Hankinson, Ryan Cos.’ vice president of industrial development for the North Region.
“No longer do industrial users like to be by themselves,” he says. “They like amenities, close proximity to transportation and, of course, labor, which is a big reason why they want to be around amenities — it helps with employee attraction and retention.”
The healthy industrial sector, especially in the Midwest, has served to realign the investment and development goals for creators of business parks.
Beholden to shareholders, REITs like Duke Realty aim to convert land from a non-income-producing investment to one generating cash flow within 36 months or less. With that in mind and continued e-commerce momentum, O’Leary forecasts that acquisition and development activity will center on “one-off sites” that can be put into production quickly so as to take advantage of the region’s strong industrial market fundamentals.
— Brian A. Lee