Northwest Indiana’s industrial boom only expected to continue, despite low supply

northwest-indianaby Declan Harty

Northwest Indiana was one of 2016’s fastest growing markets for industrial properties in the Chicagoland area, according to research compiled from JLL.

The area ranked at No. 8 in total net absorption of industrial space in the fourth quarter of 2016 with 264,638 square feet, only following traditional juggernauts like the I-80 corridor, I-88 corridor, Lake County, O’Hare, North Kane County and the I-57 corridor.

The region falls in the middle of the 20 regions when it comes to available properties, with 8.81 percent listed as available. JLL reported that the vacancy rate fell to 7.96 percent in the same fourth quarter of last year. Both available property rates and vacancy rates in Northwest Indiana have been falling in recent quarters – down from 9.2 percent and 8.6 percent, respectively, in the prior quarter.

But as Northwest Indiana continues to see increased interest, many developers and companies are forced to retrofit other facilities to house their operations.

“We’re seeing a lot of repurposed, aged industrial facilities for new leaner, cleaner manufacturing operations,” said Karen Lauerman, chief executive officer of the Lake County Indiana Economic Alliance. Lauerman said she’s seen a spike in vacant buildings being repurposed for distribution facilities.

For some Chicago businesses, a significant percentage of their workforces may already be living in Northwest Indiana, with as much as 40 percent for one company that recently made the move to the area, Lauerman said. With about 60 projects in the pipeline in Lake County, Lauerman said she expects to see at least 1,500 new jobs enter the market during the next few years.

Northwestern Indiana communities are rebranding themselves as areas where the growing workforces can move to and find affordable housing and living opportunities.

Beach-like communities, like Michigan City, are transforming their downtowns and major commercial areas to repurpose for year-round residents, according to Diane Thalmann, manager of economic development at NIPSCO, a natural gas and electric provider based in Merrillville, Indiana.

The industrial warehouse interest isn’t exclusive to the Chicagoland area. Markets across the country can expect to see a continued increase in industrial interests, JLL reports, saying that another 194 million square feet of industrial property are still in development across the United States.

But companies might be seeking out Indiana simply because of the amenities there, like lower living costs, resulting in labor-saving costs, Rurode said. State and local governments in Indiana have maintained a business-centric climate, allowing for companies to find refuge and benefit from a better tax structure, a stronger infrastructure and a top bond rating of AAA, compared to Illinois.

Groups like the Center for Workforce Innovation are working to improve and strengthen the state’s workforce, as teaching new skills to workers is more necessary than ever with the slowdown in production at steel mills and other similar operations.

There have already been indicators of increased interests in Northwest Indiana early in 2017, Thalmann said. But to ensure Northwest Indiana remains an industrial powerhouse for Chicagoland companies, she said it takes a collaborative effort.

“We like to think of ourselves as the eastern suburb of Chicagoland,” Lauerman said. “We know we can’t win them all, but we’re doing our best to make our case as the ideal place to do business.”

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CRE can transform neighborhoods, say Commercial Real Estate Forecast Conference panelists

M&R Development's Addison & Clark mixed-use development has the potential to transform Chicago's Wrigleyville neighborhood.

M&R Development’s Addison & Clark mixed-use development has the potential to transform Chicago’s Wrigleyville neighborhood.

by Dan Rafter

Commercial real estate has the ability to transform entire neighborhoods. A panel of CRE experts addressed this during the Transforming Real Estate session of REJournals’ 15th annual Commercial Real Estate Forecast Conference held today in Chicago.

Panelists for this session were Brian Bernardoni, senior director of governmental affairs, Chicago Association of Realtors; Marc Blum, president of Next Realty; Rand Diamond, managing principal and co-founder with GlenStar; Michael Drew, founding principal of Structured Development; and Tony Rossi Sr., managing partner with M&R Development.

Rossi Sr. said his firm’s mixed-use Addison & Clark development across from the marquee at Wrigley Field is an example of how commercial real estate can positively impact a community. This development — construction has recently started on it — will bring about 150,000 square feet of commercial space, 148 apartment units on top of the commercial space and 410 parking spaces to Chicago’s Wrigleyville neighborhood.

Rossi said that the development can help turn this neighborhood into more of a year-round destination.

“Right now you have a baseball neighborhood centered around an activity that is largely restricted to the summer months,” Rossi said. “To make financial investment here worthwhile, you need to convert it to a 12-month use. Our focus is to bring in commercial tenants that will be as viable in February as they are in July.”

Bernardoni agreed with this focus, saying that Wrigleyville needs everything from restaurants to hotels and grocers.

“What does Wrigleyville need?” Bernardoni said. “What doesn’t Wrigleyville need besides bars?”

The hope is that developments such as this will bring more year-round life into this popular neighborhood. It’s an example, too, of how commercial real estate can provide a boost to city neighborhoods.

Unfortunately, not every neighborhood in Chicago is thriving when it comes to development. Bernardoni said that it’s easy to focus on one or two major success stories, while ignoring that so many other neighborhoods are screaming for development that has yet to come.

“Some of these neighborhoods are dying on the vine,” Bernardoni said. “Chicago can’t be truly successful until all of these neighborhoods are getting their own success stories.”

 

 

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Commercial Real Estate Forecast Conference panelists: Expect a big 2017 for Chicago CRE

chicago-office

The Chicago office market is set for a strong 2017.

by Dan Rafter

What does 2017 hold for commercial real estate? That was a key question during the 15th annual Commercial Real Estate Forecast conference held today by REJournals.

Some of the biggest names in the Chicago commercial real estate industry shared their predictions on how strong the development, leasing and sales ends of the business will be this year.

The good news? The panelists agreed that this year should be another busy one for Chicago real estate.

This panel featured Danny Nikitas, manging director of Avison Young; David Burden, principal with Colliers International; Bill Rolander, executive managing director with Newmark Grubb Knight Frank; Stephen Rachman, regional manager with Marcus & Millichap; John Morris, executive leader of industrial with Cushman & Wakefield; and Drew Nieman, executive vice president with CBRE.

Nieman said that the city’s A-plus office market is at a stunningly low 3.5 percent vacancy rate. This shows that the demand for these high-end office towers in downtown Chicago is nowhere near slowing, he said.

“People say why build another one?” Nieman said. “I say, ‘why not?’ People obviously want this.”

Burden said that there are key reasons why companies are moving to downtown Chicago today, often relocating from suburban locations.

“Location is driving these decisions,” Burden said. “They want to be close to the labor pool and transportation. Those factors are driving the downtown resurgence.”

The West Loop office market is especially tight today, Burden said. Users searching for big blocks of office space here will struggle to find these locations. The demand for new office space in the West Loop remains strong, Burden said.

Rolander said that the supply of office buildings has been reduced a bit, too, because of the trend of converting office space into non-traditional uses. This includes turning outmoded office space into high-end apartment buildings.

“That has reduced the supply of office,” Rolander said. “When office has been turned to non-traditional uses, it has certainly reduced the supply available to users.”

The industrial market in Chicago has also been strong for years. Morris said that the industrial industry at the end of 2016 here, though, has finally started to flatten. Rent growth has slowed, Morris said, and vacancy rates in the Chicago industrial market also rose a tick during the last quarter.

This isn’t necessarily a bad thing, though, Morris said. The Chicago industrial industry remains strong, even with the leveling off that it is now seeing.

“Flattening out is not a bad thing,” Morris said. “We have all been predicting this for four years, that supply would finally catch demand. At the end of 2016, we finally got to that point.”

Rachman had plenty of positives to share, too. He predicted that 2017 will be a busy year for investment sales.

“The first quarter of the year might be a little rocky with the new administration coming in,” Rachman said. “But there is a lot of capital out there. There is $400 billion in commercial real estate paper coming due. It all points to a very robust year for investment sales.”

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Commercial Real Estate Forecast Conference icons: Country’s uncertainty bleeding into CRE industry

John Bucksbaum

John Bucksbaum

by Dan Rafter

The Icons in Real Estate panel brought some of the biggest names in commercial real estate to REJournals’ 15th annual Commercial Real Estate Forecast Conference today in Chicago.

These commercial leaders shared their thoughts on how the commercial real estate industry has changed and is changing, and how the country’s uncertain immediate future might impact the way commercial deals are closed and new developments are built.

This year’s panel featured industry stars John Bucksbaum, founder of Bucksbaum Retail Properties; Breck Hanson, executive vice president with Associated Bank; Gail Lissner, vice president with Appraisal Research Counselors; Jim McShane, chief executive officer of The McShane Companies; and Steve Stratton, executive managing director with JLL.

breck-hansonThe panel was especially appropriate considering that in two days Donald Trump will take over as president. What impact will the new president have on the real estate market.

Hanson said that Trump, being a real estate professional himself, should look favorably on the commercial real estate industry.

Hanson said that Trump’s plans to boost spending on the nation’s infrastructure should provide a positive jolt to commercial real estate.

“We are cautiously optimistic that a Trump industry will fuel a lot of activity in the real estate industry,” Hanson said.

Jim McShane

Jim McShane

McShane said that this an increase in infrastructure spending would be a definite positive for the construction industry. But he did express concerns that Trump’s plans might remain just that, plans and not action. McShane expressed doubts that Congress would be willing to release the large amount of funds that Trump will need to push his agenda of infrastructure spending.

There is hope that Trump’s administration will bring jobs back to the country, positions that were lost overseas. Stratton referred to re-shoring, the move of formerly lost jobs back to the United States.

Steve Stratton

Steve Stratton

“Jobs have gone to India, to Mexico, China and the Phillipines,” Stratton said. “I think we’ll see, because those economies are less consistent, companies coming back to the United States. I call that re-shoring. I think that will be a boon to some of our labor sectors.”

McShane, though, warned that the jobs coming back to the United States won’t be the same type of manufacturing positions that the country lost. The number of traditional manufacturing jobs will continue to shrink in the United States, with many of these jobs replaced by technology. This, McShane said, is a trend that isn’t going to slow.

McShane said that today’s young adults need to go to school and embrace tech and science.

“I caution anyone hoping for the old manufacturing jobs to come back,” McShane said. “There aren’t as many opportunities for that kind of work today.”

Panelists also looked at the near future for commercial real estate. The commercial real estate industry has been expanding at a steady pace since the end of the last recession. But no expansion lasts forever. Is there any worries today that, say, new apartment units are being built at too quick a pace?

Lissner said, though, that in Chicago, the fundamentals underneath the multifamily market continue to be strong. Supply is not yet outpacing demand, she said.

“Everyone is looking at multifamily,” Lissner said. “But I don’t think multifamily is going to crack. We are not yet at the peak of new inventory. We are still seeing inventory being added. It will have to slow. The pace is not sustainable. But we are not yet at the peak.”

Bucksbaum said that one of the biggest challenges facing the Chicago multifamily market — and many markets across the country — is the size of the monthly rents that come with new apartment buildings. As Bucksbaum said, many new apartment buildings are simply too expensive for many renters.

“We need $2-a-square-foot or $1.50-a-square-foot rents, too,” Bucksbaum said. “Everthing today is so expensive. I don’t know where the people who were paying $2 a square foot go when these buildings are torn down. Long-term, I think this is a big challenge that faces the city.”

Lissner said that there are options for people looking to rent less expensive apartment units in the city and its suburbs. These renters have to look for older units, ones that, as Lissner says, “don’t have all the bells and whistles.”

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Innovation and technology mitigate impact of rising construction costs

About half of all new construction nationwide is built to Leadership in Energy and Environmental Design (LEED) standards even in cases where owners don’t pursue certification. This large retail project, built by Leopardo, includes a vegetated green roof.

About half of all new construction nationwide is built to Leadership in Energy and Environmental Design (LEED) standards even in cases where owners don’t pursue certification. This large retail project, built by Leopardo, includes a vegetated green roof.

Guest post by Michael Behm, Leopardo Companies, Inc.

The cost of new development is rising in the Chicago area and across the country, driven in part by increasing labor costs and risk-adverse lenders. On the plus side, construction firms are getting better at using technology and lean processes to save time and money while improving the quality of projects.

Construction costs increased by about 12 percent during the past five years, and continue to rise despite low commodity prices. The main reason is construction labor costs, which increased 3.59 percent in the 12 months leading up to July, according to CBRE. The Chicago area has experienced some of the steepest increases in the country, averaging nearly 4 percent annually in recent years. The shortage of labor hits less active construction firms the hardest, as larger firms are better able to keep high-quality workers busy.

Michael Behm

Michael Behm

Total commercial construction volume in the Chicago metro area reached $3.6 billion in the first half of 2016, a 37 percent increase over 2015, according to Dodge Data & Analytics. We can foresee high volume extending into 2017, as demand for modern big-box industrial space outpaces available supply in some suburban corridors, and ground has been broken on several hotel and multifamily projects in the city. By October, Chicago had issued 40,000 building permits, up 2,000 over 2015, and a record 44 tower projects requiring 48 cranes were under way in December. Office build-to-suits are active, too.

One obstacle to speculative construction projects is the national trend of banks pulling away from high-risk real estate lending. New regulations within the Dodd-Frank financial reforms require banks to reserve more cash when making construction loans. As a result, banks are requiring 50 percent or greater equity from developers. Other institutions such as life insurance companies and pension funds are filling the gap with mezzanine financing and equity capital, but these financial structures increase the cost of financing and may limit construction volume in some markets.

Construction industry change

To help manage and mitigate the rising cost of construction, the industry is turning to new high-tech systems as well as looking to the past for some very simple processes that have worked well in other industries.  Building information modeling (BIM) and virtual design and construction (VDC) are helping owners, designers and builders take a virtual look at buildings, spaces and systems while identifying challenges well before product and people show up at the construction site. Today’s technologies are allowing all parties to better understand options and challenges early in design, and verify conditions before the first day of construction. Leopardo has watched virtual technologies improve rapidly during the past five years, and has become an educated adopter of these systems to help its entire network of stakeholders better collaborate, which in turn helps the entire construction project team reduce schedules, eliminate waste and manage costs better.

The integration of lean principles in design and construction has also provided progressive companies and owners the opportunity to better manage costs and schedules using well-tested, low-tech processes used in the past by other industries.  We have seen many project teams search for opportunities to prefabricate buildings, modules, bathrooms and even partial building systems when the repetitive nature of a design can be created and replicated off-site. Prefabrication can greatly reduce on-site labor costs, facilitate material staging on project sites and accelerate project schedules.

During the past few years, Leopardo has immersed its teams in pull planning, a collaborative approach that includes all people who are directly responsible for supervising work on all phases of the project. Owners, designers, contractors and subcontractors all collaborate to work out plans that include the best alternatives for the entire project and team. The goal is to provide predictable and reliable planning that results in a continuous workflow and the elimination of all project wastes, including delays and rework.

All these processes help to keep a lid on project costs. Maximizing efficiency can shave tens of thousands of dollars off project costs—maybe not enough to offset rising labor costs, but a significant reduction nonetheless.

Focus on Sustainability

Another change in our industry is the ever-increasing focus on sustainable building and construction processes. About half of all new construction nationwide is built to Leadership in Energy and Environmental Design (LEED) standards even in cases where owners don’t pursue certification, and many companies are demanding net-zero buildings that have virtually no carbon footprint. In addition, Illinois has adopted new, more stringent energy codes, and machines used in Chicago projects must comply with anti-idling provisions to reduce greenhouse gases and to protect residents from noxious fumes. Some Leopardo projects have gone beyond the city’s mandate by using clean diesel machines that minimize pollution.

Sustainability is even more important when building out interior spaces, as most companies now recognize the importance of green offices to enhance worker health, well-being and productivity. Creating these high-performance buildings and interior spaces requires a collaborative team approach to design, construction and operations; thus, this is one more reason for contractors and architects to be well-versed in BIM and other integrated design/development processes.

Our industry has been slow to adopt technology and change, but as competition intensifies, many more firms are getting up to speed. Some are adopting technology-based solutions for the first time, while those that have had systems in place for years are integrating new applications and tools that allow teams to communicate, plan and execute projects more effectively. The result is a better end product, delivered with speed and precision, and at a lower cost than would be otherwise possible. As we see labor and material costs continue to rise, these strategies are increasingly vital to ensuring that projects meet or beat client expectations.

 Michael Behm is senior vice president at Leopardo Companies, one of the nation’s largest contractors. Behm directs Leopardo’s quality management program, which includes oversight of the firm’s virtual design and construction (VDC) practices, as well as lean construction principles.

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Building the 20-minute neighborhood in Detroit

waters-edge-detroitby Dan Rafter

Developers delivered 543 apartment units to downtown Detroit in 2016, and JLL estimates that they’ll bring 1,607 more this year. This is good news for the city, which is still working through the first phase of its comeback from bankruptcy.

All these new apartments? Brokers with JLL say that the city’s multifamily boom has already spurred additional retail and office development. As more residents move into the center of the city, Detroit will only grow stronger, said Aaron Moore, a multifamily associate with the Detroit office of JLL.

“All of these new apartments have had an impact on Detroit,” Moore said in an interview with Midwest Real Estate News. “It’s important to remember, though, that this is only the beginning of the city’s efforts to come back after the bankruptcy. New apartments are only the beginning. It is nice to see this activity, though. It has a ripple effect. It brings people’s spirits up. We are seeing a lot of new investment in the area, and that’s nice to see.”

JLL reports that most of the new development in Detroit has taken place in just 7.2 square miles of a city that encompasses 139 square miles. This means that much of the city still needs to see investment.

Still, the multifamily activity in downtown Detroit is a welcome sight. JLL says that since 2006, more than $10 billion has been invested in the city of Detroit and that more than 16,000 jobs have moved to the city since 2010.

Multifamily developers have noticed. JLL reports that developers have added 1,551 apartment units to Detroit during the last five years.

The goal is to populate downtown Detroit with dense, walkable neighborhoods. JLL says that Detroit has the chance to become a world-class entertainment city. The NBA’s Detroit Pistons recently announced that they will return to Detroit’s city limits. This means that soon all four of Detroit’s professional sports teams will be playing within less than a 1-mile radius.

Three urban casinos, several bars and plenty of restaurants will surround these sports franchises.

“You knew Detroit was going to be successful when the national and local foundations came together to save the city after the bankruptcy,” Moore said. “The arts and culture communities have had a tangible and intangible impact on the city. There’s been a renewed focus on the riverfront. It is clear that Detroit has become the regional epicenter of arts, culture and education in the area. Who wouldn’t want to live there?”

Moore isn’t worried that developers are adding too many apartment units in downtown Detroit. The bigger concern, he said, is that developers won’t be able to add multifamily units to the market quickly enough to meet demand.

“Young professionals, Baby Boomers, everyone is moving to downtown,” Moore said. “These people want to work in walkable communities, the 20-minute neighborhoods, where you can walk and bike to everything you need in 20 minutes. We are seeing more mixed-use development in downtown Detroit because of this. Detroit’s trajectory is positive and will remain positive.”

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Destination suburbs: The new choice for aging Millennials

Steve Shepherd

Steve Shepherd

Guest post by Steve Shepherd, Vice President, Colliers International MSP

“I just want to cook a ham for the holidays and be surrounded by family and friends,” says one aging millennial, who as of late, is interested in finding balance and establishing roots.

As millennials age (or younger Gen-Xers for that matter), the live-work-play mantra will naturally morph into live-work-educate, as their focus changes to providing educational and enrichment opportunities for their children.

Good schools, a backyard with room for Fido and expanded living space will become more important lifestyle factors than proximity to the nearest micro-brewery.

Suburban “urban-hubs” 

Can the suburbs serve as an enticing option for a generation that wants it all and is used to having it all?  Not surprising to the people who study population migration patterns, the answer is “yes.”

Serving the needs of both millennials and boomers, the suburbs are embracing the integration of the types of amenities that draw people to urban centers.  Attractive mixed-use developments are surfacing in many suburban communities with the profile of centralized walkable hubs that offer ease of accessibility, community gathering space, entertainment, shopping and dining.

In the Twin Cities, suburban locations like West End, France Avenue, Ridgedale, Wayzata and Golden Valley are well positioned to offer this desirable mix of walkable amenities to both millennials and employers seeing to hire millennials.

It’s not only investors, developers and urban planners who are hip to this trend, office owners alike are figuring out how to reposition aging stock with creative, open, collaborative space to fulfill the “work” needs commanded by today’s transitioning workforce.  Savvy office owners know that to keep pace with modern demands and remain viable, they must differentiate themselves to attract businesses focused on recruiting and retaining talent.

Reinventing suburban assets 

Under the ownership of Hillcrest Development, Pentagon Park, located at Hwy. 100 and I-494 in Edina, Minnesota, is an example of a repositioned office property that undertook the task of reinventing itself to avoid abandoned offices, conference rooms and hallways.

“Reinvention of a 1960s-era office park requires attention to detail,” said Scott Tankenoff, managing partner at Hillcrest Development. “Our investments in the buildings were prioritized to promote energy efficiency, enhanced natural light and the development of adjacent tenant amenities.  Further renovations focused on creating open spaces, ceiling heights and exterior common spaces for employees and visitors to enjoy.”

Office options along popular Twin Cities’ commuter routes afford business owners and decision-makers who live in the suburbs, especially the affluent western suburbs, the convenience of a centralized location.  With transit options, accessible amenities, free parking for employees and the added “cool factor” of a repositioned property, the suburbs are starting to look, and think, like the city.

Looking outside the Loop 

Arguably our metro’s hottest office market – and not coincidentally a location very popular among millennials for live-work-play — the North Loop has filled up with creative and tech-driven businesses that don’t need to be in the downtown core with access to skyway connections.

The North Loop’s delivery of cool, non-traditional, often brick-and-timber office space at affordable prices of $12 – $14 PSF net became a popular alternative to a downtown address. With that submarket near full and lacking parking options, we are already seeing a shift to other submarket options, like neighboring Northeast Minneapolis.

With local developers chasing projects in Market West near International Market Square, it’s not a stretch to believe that a subset of office tenants looking for new space would consider the right creative project along Highway 55 or the Interstate-394 corridor if the value was right.

The jury is still out on whether companies are willing to stay in the North Loop as the top end of the market gets pushed closer to $20 PSF net.  Remember, these users have already acknowledged that they don’t need to be located at main-on-main in downtown. We have already seen creative/tech activity at Wirth Corporate Center on Highway 55 in Golden Valley, where creative space design has been implemented to attract those getting priced out of the Loop.

Can the suburban office package of creative finish, access to amenities and value win out over an urban setting if the value isn’t there?  I guess we’ll let the millennials decide.

Steve Shepherd, is vice president of Colliers International MSP in Minneapolis.

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