Activity has improved recently in nearly all sectors of the real estate market, however, it has been industrial real estate construction that has been the most active over the past 18 to 24 months. Net absorption through the first six months of 2016 in the Chicagoland area has already eclipsed the total for all of 2015. Several submarkets have recorded record-low vacancy rates in the second quarter, with nearly half of the submarkets tracked by Lee & Associates reporting vacancy of below 6%, and overall vacancy in the Chicagoland region at 6.9%. The amount of square footage under construction is also near an all-time high, with over 14M square feet currently under way. Many prospective users are having a difficult time locating functional space, making build-to-suit a viable, and valuable, option.
The low vacancy rate, limited amount of inventory (in many submarkets), and specific needs of tenants all have led to the surge in build-to-suit activity that has occurred in 2016. Of the total 38 new deliveries that occurred through June of this year, 20 were build-to-suit properties. This trend began in 2015, with companies such as LSG-Sky Chef and DHL unable to find exactly what they were looking for in terms of size and features in an industrial building in the O’Hare market. Both are now in design/build facilities suited to each of their specific needs; LSG-Sky Chef located close to O’Hare Airport with appropriate food processing and distribution attributes and DHL with the appropriate clear-height in a cross-docking facility.
Operational efficiencies also have to be considered when leasing a facility, as a tenant who considers design/build can get exactly what they want, in an appropriately sized building with the necessary features, at a cost that still fits within budget. In many cases, the cost to retrofit an existing facility to a tenant’s needs is greater than, or near enough to, the cost to design and build. Given the age and original design of many industrial structures in the Chicagoland area, it is not surprising that companies in today’s world of e-commerce are considering designing and building their own structures.
According to Lee & Associates most recent survey of the industrial market, there is currently 5,385,959 square feet of space under construction that has been identified as build-to-suit, representing nearly 40% of the total amount of space currently under way. Four of these projects are above ½ a million square feet in size with two of over a million square feet. IKEA will be leasing 1,250,000 square feet of build-to-suit space in Hillwood’s Laraway Distribution Center in Joliet while developer CenterPoint Properties is leasing 1,368,000 square feet of space to Mars/Wrigley in the nearby Elwood Intermodal Center. Hillwood’s property is expected to be completed by mid-2018, while CenterPoint’s space should be completed sometime in the first quarter of 2017.
The southwest suburbs aren’t the only location where build-to-suit activity is flourishing. Though maybe not on the same scale, other submarkets are seeing strong levels of activity. In northern Kane County, for example, three separate build-to-suit projects are currently under construction: Opus’ 133,000 square foot facility for Renishaw Tool in West Dundee, and two other projects of 35,000 and 117,446 for Atlantic Transport and HIWIN Global respectively are under way in Elgin and Huntley respectively. Build-to-suit projects are also underway in submarkets from northwest Indiana out to Rockford and the I-39 Corridor and all points in between.
Of the just over 10.5 million square feet of new industrial space completed during the first six months of 2016, nearly 5.4 million square feet was build-to-suit (representing 51% of all new space delivered). Notable build-to-suit deliveries that took place through the first six months include Saddle Creek Logistics leasing of 1,114,575 square feet of build-to-suit space in CenterPoint’s intermodal facility in Joliet and ULINE’s addition of 1,100,000 square feet of build-to-suit space in Pleasant Prairie, Wisconsin. In all there have been a total of 20 build-to-suit buildings delivered during the first six months of 2016.
With completion and delivery of two projects of over a million square feet and another two projects in that size range under way, it is safe to say that the build-to-suit market in the Chicagoland area is alive and well. Although these big buildings get a lot of the attention, there is build-to-suit activity occurring in all size ranges, with three projects under construction under 100k square feet, six in the 100k to 500k size range, and two in the 500k to 1M size range. With strong demand and little in the way of inventory across many submarkets, speculative construction and build-to-suit activity will likely continue to expand, at least through the first half of 2017.