Chicago’s Biggest Industrial Real Estate Challenges and Opportunities Right Now

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Halfway down the road to 2021, it’s not only safe to say that the year will be successful for the industrial real estate market in Chicago, but essentially unanimous opinion. A flurry of press releases about the start of new specifications continues to hit our inbox steadily, while quarterly reports back up empirical evidence with hard data that pinpoint the exact demand for new Class A industrial facilities in urban areas.

While the industry trend is a much-needed respite from the incessant hard news and reports in office space and retail, industrial developers, contractors and brokers still face many challenges. However, the current moment is more than just a boom or a bull market, it is truly a dramatic change in the way goods are produced, stored and distributed throughout the country. This evolution that we are seeing is expected to continue. at least the next few years.

High construction costs and lead times require careful capital investment.

The story of sky-high prices for steel and lumber has influenced construction and real estate development across the country. And although the cost of some types of raw materials is low. starting to return to earthacquisition timing continues to be a major concern for developers looking to join forces and fund the deal. The solution, at least in the short term, is to be careful about where new projects are being built and to ensure that the number of these new projects reaches their numbers today and in the future.

Sterling Bay from Chicago has become a household name in the region thanks to its exponential growth and outstanding projects such as Mega-development Lincoln Yards along the Chicago River. However, Sterling Bay moved into the industrial sector in time and is fighting for new opportunities like any other major player in the region. And despite fierce competition, high construction costs and long lead times, the overall demand for a new product means there is still plenty of room to go.

“There is no doubt that it is becoming more competitive compared to the share of capital in this space, the market is getting narrower and it is becoming more difficult to find deals, but in fact it is only an indicator of the volume of demand from tenants,” says Mark. Barbato, director of industry for Sterling Bay. “So we are leveraging the deep, long-term relationship we have with the brokerage community to continue to find opportunities.”

And perhaps nowhere in the Chicago area is there greater competition and higher costs than the O’Hare submarket, but demand is strongest here too. And while the shock of new construction is hard to shake off, the reality is that tenant companies that need to work in the submarket will make it work. And as long as demand remains stable, it is safe to assume that rental rates will also follow the same curve.

“Become [costs and lead times] are the biggest limiting factor for us right now, making it extremely difficult to respond as quickly as we would like to all the demand we see in the market, ”says Barbato of critical building materials with limited lead times. backed up for about a year. “We continue to focus on selecting sites and submarkets that we truly understand and believe in, and where you see rents rising at a rate that keeps pace with rising construction costs.”

Beyond O’Hare, Barbato says there is tremendous scope for new Class A industrial facilities within the city of Chicago. And while Chicago itself has a notorious barrier to entry into development, Sterling Bay’s expertise in office building, hotel and residential development will come in handy when it comes time to meet with city councilors and stakeholders to discuss new industrial projects.

Rendering of industrial facility 545 Lamont Road in Elmhurst. Image courtesy of Sterling Bay.

The trickle-down effect due to policy changes affected logistics and real estate.

While steel is the biggest obstacle for developers, fuel and labor costs have the greatest impact on the overall income and expenses of operators and businesses renting premises at these new industrial sites in the Chicago region. And to further complicate matters, the transport and logistics industry is still struggling to catch up with some policy changes that have had a big impact on freight transport since the pandemic.

Ultimately, any major policy change or transportation and transportation issue will have an impact on industrial property, or the 1.5 Rule, as quoted by Adam Roth, executive vice president and director of global logistics at NAI Hiffman. Is the federal government demanding radical changes in the way we measure and track mileage? It is expected that it will take a year and a half to finally make an impact on commercial real estate, because ultimately “it’s all about the truck,” says Roth.

“In January 2020, the federal government passed a new regulation called the Drug and Alcohol Information Service, which says that if a driver fails a drug test, he is fired and then sent to a new shipping company, that violation remains on record,” says Roth, detailing one recent change in the trucking industry that has had a major impact. “So guess how many drivers have been suspended by the DAC since January 2020? 70,000, which is the equivalent of Schneider, JB Hunt, Werner, Swift and US Xpress sitting behind their drivers. “

Eliminating tens of thousands of drivers lowers the overall load capacity of trucks, resulting in increased costs. Another policy change that Roth is highlighting is the Congress-sanctioned use of electronic recording devices (ELDs) to measure mileage and breaks, effectively erasing artificially low (or high) driving times. The introduction of ELD meant that trucking companies could no longer falsify records or require drivers to exceed unsafe limits.

Roth explains that while both of these measures are badly needed and well-intentioned to improve the working conditions and safety of drivers, any radical change will always have financial implications. Setting driving time limits and mandatory use of rest breaks means that drivers need more parking space, so new locations are required to have more trailer parks. And a year and a half after the policy went into effect, facility operators and drivers began looking for additional parking spaces.

So how can industrial users reduce transportation costs while creating new opportunities for developers to build new space?

“There are two ways,” Roth suggests. “You are approaching intermodal transport, and Chicago is the main rail link in North America, and vice versa, you are shortening the length of the track, moving closer to the population, or increasing the number of warehouses. And we see both of these events taking place in Chicago. “

The demand for production space in the O’Hare submarket is high. Photo courtesy of Jun Seita / Creative Commons 2.0.

The need for new developments will continue for the foreseeable future.

The e-commerce boom has undoubtedly been one of the biggest drivers of demand for new industrial space in the Chicago metro area as well as the rest of the country, and this demand trend is likely to continue for the foreseeable future. But additional storage and distribution space is also needed to help prevent the recurrence of supply chain disruptions and product shortages that we saw during the pandemic.

At the moment, the demand for industrial space is so great that it could potentially be a boom that we see once in a generation. And as it signals a broader evolution and change in how consumers buy products and how those products reach their final destination, we are still more or less at the beginning of this important transformative change.

“With the expansion of e-commerce, we have conducted extensive market research across the country and are seeing the billion square feet of new warehouse space needed in North America over the next 60 months,” said Dominique Carbonari, executive vice president of JLL. “But now we’re doing it about 20% or a year, so we can say we still have 800 million square feet,” adds colleague Rob Wheeler, senior vice president of JLL.

Wheeler and Carbonari, each with over 20 years of experience in the industry, say the Chicago area has the lowest industrial vacancy rate in their entire careers. User demand has been steady, but over the past year, a number of big deals have resulted in huge takeover rates. And while e-commerce has experienced an important moment during the pandemic, orders and fulfillment of orders from online stores only just over 20% of all global retail sales

But distributors are realizing the inefficiencies and costs associated with current supply chain shortages and are looking into additional storage and warehousing space. Wheeler notes that for one deal, which he operates in another area of ​​the country, the requirements for the intermediate segment increased by 20%, in particular to store additional inventory. Thus, the total area of ​​Class A premises in new construction is likely to increase to meet these new thresholds.

And fortunately, Chicago’s geography and infrastructure will not only help it catch up to meet the needed industrial space demand, but will further cement the city’s reputation as a critical transportation and distribution hub on a wider scale. This will continue despite the county and state’s ongoing (and notorious) financial troubles.

“With all the mixed messages coming from government and tax issues, Chicago is still where all Class A railways connect, there is still a population here, and there is still a demand for companies to be here and distribute from here, and the need for efficiency based on this, ”says Carbonari of the large population in the area and the need for additional production space.

“You cannot change the railways, there is water, and all the supply chain infrastructure here cannot be replicated,” Wheeler adds. “So, despite some headwinds that may arise from the political climate, Chicago will continue to perform.”

This article also appears in the July 2021 issue of Chicago Industrial Properties magazine.

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