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Speculative Industrial Development Makes a Big Comeback in the City of Chicago

Chicago’s nearly 1.2 billion-square-foot industrial market continues to be a strong performer, garnering national attention. Tightening vacancies, healthy absorption and rising rental rates have spurred increased construction across our region.

In fact, 7.7 million square feet in new industrial product came on line during the first six months of the year, with another 16.6 million square feet currently under development, earning metro Chicago the distinction of having the second largest pipeline of new inventory in the country.

As vacancies dwindle across the metro area, surging demand for quality, close-in manufacturing and distribution space is driving a critical mass of new speculative development in the city proper for the first time in more than a decade. From January 2015 through the second quarter of 2016, developers delivered 317,000 square feet of spec industrial product in metro Chicago, according to Cushman & Wakefield Research.

Larry Goldwasser, Cushman & Wakefield

Larry Goldwasser, Cushman & Wakefield

To put that figure into context, a total of 238,000 square feet of spec product was introduced in the city during the prior 10 years (2005-2014). Another 369,000 square feet of spec development is underway and scheduled to be delivered in 2017, but the new construction will only partly mitigate the pent-up demand for space within city limits.

Why the shift?

As industrial real estate product continues to advance and evolve, small to mid-sized companies with an established local presence recognize that they must embrace modern efficiencies to stay competitive. At the same time, larger national and global companies’ desire to be as close-in to Chicago’s population density as possible remains on the rise for a variety of reasons.

Demand for next-day and same-day delivery is prompting industrial tenants — particularly in the e-commerce and food manufacturing/distribution sectors — to tighten the last-mile gap to consumers.

Additionally, industrial users across the board, especially those with larger front-office components, are working to gain an employee recruiting and retention advantage. They recognize that the city’s 24/7 live-work-play environment attracts young talent.

Developers are pushing hard to get out in front as these trends converge. One spec project recently came on line and three others are in various stages of development. They include:

• Prudential’s 3348 South Pulaski Road, 316,680 square feet, Chicago South (2015 completion);
• DCT Industrial’s 1400 West 44th Street, 166,370 square feet, Chicago South (2017 delivery);
• Clarius Partners’ 2302 South Paulina Ave., 162,000 square feet, Chicago South (2017 delivery);
• Dayton Street Partners’ 4150 North Knox Avenue, 40,700 square feet, Chicago North (2017 delivery).

In total, 385,170 square feet of planned projects are expected to deliver in 2017.

Each project has been designed to be absorbed, with versatility as a central theme. These structures can be divided for users with diverse size and fit-out requirements, from production to manufacturing to traditional warehousing or cold storage to sorting and shipping. An important side note is that developers continue to introduce their projects at a measured pace.

While the availability of infill sites at the right price and in the right location have become somewhat limited, the City of Chicago still offers attractive opportunities to support development in the near term. 8080 Lakeshore, a 430-acre U.S. Steel redevelopment site located 10 miles south of downtown, is currently among the highest-profile offerings.

In fact, 8080 Lakeshore is one of the largest contiguous infill, waterfront parcels available for sale in the United States. Several developers are looking to buy portions or all of the site, which will pave the way for even more spec development in the near term.

City steps up

The re-emergence of speculative construction within the city limits is linked closely to increasingly strong support from the City of Chicago. Local government is working with brokers, investors and users to expedite the approval and permitting processes. By encouraging new development through policy and incentives, the city has opened its doors to a new generation of industrial tenants.

While industrial spec activity in the City of Chicago seems to be making a comeback, the groundwork for its momentum has been solidified over the last several years in the form of successful build-to-suit projects. Method Products’ 21-acre, 150,000-square-foot soap production facility led the pack when Chicago emerged as the top choice in a five-state sight search to house the LEED Platinum facility.

Other recent Chicago build-to-suits include facilities for:

• FedEx, 3000 S. Damen Ave., 220,000 square feet completed this year;
• Preferred Freezer, 2302 S. Paulina Ave., 227,000 square feet under construction;
• Blue Plate Catering, 333 N. Ogden Ave., 70,000 square feet under construction;
• Great Central Brewing Co., 221 North Wood St., 32,000 square feet under construction;
• Whole Foods, Pullman Park, 150,000 square feet planned.

These developments show how efficient the city can be in responding to viable projects. And the message is resonating. At no time in the past 20 years have we seen such a large volume of developers and users looking for sites and buildings in Chicago proper.

— By Larry Goldwasser, senior director, Cushman & Wakefield. This article first appeared in the October 2016 issue of Heartland Real Estate Business magazine.

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