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SUBURBAN CHICAGO CITY HIGHLIGHTS: Industrial Market

Michael Gazzola and Dan Benassi with Entre Commercial Realty LLC/TCN Worldwide
Heartland Real Estate Business, Feb. 2010

The Chicago Industrial real estate market is dead…or is it? In 2009, we saw a dramatic decline in activity and for many developers, a 90 percent-plus reduction in development due to the lack of capital and virtually no traditional sources of financing, declining values and overall economic uncertainty.

Vacancy increased to nearly 12 percent, up a percentage point from the third quarter of 2009 and up almost two points from 2008. Forecasts for 2010 suggest another 1 percent jump but also the probability of stabilization. However, any meaningful recovery will take at least 12 to 24 months depending on how quickly market fundamentals improve. Overall net absorption was just less than a negative 16 million square feet compared to a positive 6 million square feet in 2008. Sublease space contributed close to 6.5 million square feet on top of 6 million square feet in 2008. This points to the weakening business climate, which is causing companies to dispose of excess space or close down altogether. On the construction front, Chicago has seen a 60 percent reduction since 2008 with only slightly more than 8 million square feet delivered, versus almost 19 million square feet in 2008. To complete the picture, rental rates declined 10 percent during the past 2 years and are expected to decline further in 2010 before stabilizing.

Statistics are great and for the most part are more of a history lesson confirming what we already know; the market is bad. More important though is to look forward; what are developers doing to weather the storm? The answer is they are looking for different opportunities that present themselves, staying flexible and being more diverse. Activity taking place today falls into four categories: specialty building; location-sensitive buildings; government, civic and healthcare projects; and large logistics projects.

A great example of specialty and location-sensitive deals in 2009 are the Mori Seiki USA Inc. and the Big Kaiser Precision Tooling Inc. build-to-suits at the Huntington Woods Corporate Center in Hoffman Estates, Illinois. Mori Seiki, a large machine tool manufacturing company, relocated from Arlington Heights and now occupies a 103,000-square-foot office, showroom, training and warehouse facility specifically designed to accommodate its needs for the next 20 years. Additionally, this facility was recently sold to a New York investment firm for $314 per square foot. Big Kaiser supplies tooling for the machine tool industry. Relocating from Elk Grove Village, Illinois, the company constructed a 32,000-square-foot office, showroom, training and warehouse facility to expand its market presence in the United States and to better serve clientele, which includes Mori Seiki.

Many local developers are focusing on the government and health care business. Stimulus dollars and the federal government’s desire to jumpstart the economy has created activity on the national and local levels for projects, and developers are retooling to handle this new business and thrive. The larger logistics projects are fewer in numbers but no less important to the overall market as efficiencies are being created and costs are being controlled.

Finally, here is a new term that the industry might be hearing more in the coming months as developers and owners scramble to fill product that has not moved, shove-to-suit. With decreasing prices, many users in the market are being more flexible and trying to adapt operations to fit into existing buildings rather than constructing new facilities. Users are more willing to forgo the build-to-suit route and instead are forcing projects into an existing building that, while not being perfect, also comes with a 20 to 30 percent lower cost and significantly shorter ramp-up time. Developers who can perfect the shove-to-suit business might have a leg-up moving forward!

— Michael Gazzola and Dan Benassi are with Entre Commercial Realty LLC/TCN Worldwide, a Chicago-based industrial real estate firm.