The industrial balance: Follow historical trends or look to the future

Mason Hezner

By Mason Hezner, senior associate, Brown Commercial Group

Industrial businesses have been expanding steadily in recent years, fueled by growth in e-commerce, light manufacturing and related industries. As industrial property owners/tenants evaluate their space needs and debate whether to expand, decisions should be based on a balance between looking at historical trends and being forward thinking. This requires a look at trends in the industry and the company, focusing on both micro and macro-related issues.

This strategic planning process should involve a close review of the business’ growth patterns during the past three to seven years. What patterns emerged and how might they continue into the future? Are there challenges to growth and how would they be addressed?

As Industrial lease rates remain competitive in the Chicago market, companies that can accurately project growth will seek long-term leases where landlords are often more aggressive in pricing. This will allow them to take advantage of the current rates for years to come. Additionally, companies seeking to expand or consolidate multiple locations will also need to compare those possible savings with other factors, including the high costs of moving.

Companies should also look ahead five to seven years and think about realistic growth projections:

  • Where would additional sales come from and is the volume sustainable over the long-term?
  • Is the industry the company serves growing?
  • What are the overall challenges facing the industry?

By looking at more macro-level growth patterns, both historic and forward-thinking, business owners and executives can more closely define growth goals and expectations.

Availability of labor 

The availability of labor is another important consideration. Businesses should have a clear understanding of their labor needs and how they would be filled. How much labor is required for an expansion? Most importantly, is the industrial space close to that labor supply and accessible via major transportation routes, including public transportation? Further, are there opportunities to leverage state and local tax credits and incentive programs that can help train labor required for the business?

Logistics and distribution considerations 

Among the growing industrial business sectors today are those involved in logistics– from coordinating deliveries of e-commerce businesses to managing trucking to general distribution. Distribution related businesses typically require taller ceilings, several loading docks and proximity to a strong labor pool. If those fundamentals are in place and the business outlook is strong, this is an ideal time to consider taking on more space.

Among the important considerations for firms involved in trucking and logistics include the overall structure, and what is acceptable for today as well as for the future. Increasingly, it isn’t just about ceiling height, but cubic square feet and the ability for logistics companies to add in racking systems and operations that will allow more product to be stored effectively.

Location, location, location 

Chicago’s industrial market is heavily concentrated in the O’Hare market, with Elk Grove Village continuing as a prime focus for many companies looking to lease or buy. Elk Grove Village is seeing a vacancy around 4 percent, an historically low rate that demonstrates the strength of the overall industrial sector and the value of being centrally located near O’Hare International Airport. That submarket continues to draw businesses because of the synergy of being in proximity to thousands of other, complementary industrial users.

Tenants who want to relocate or expand in this submarket should move quickly, as the leverage is turning toward landlords. Tenant incentives and improvement dollars are going away, as landlords look to capitalize on the low vacancy rate. Tenants are advised to sign longer term leases now to take advantage of lower rates. For investors and business owners, this is also a time to lock in interest rates and current sales pricing, as they are expected to continue climbing.

Elk Grove Village also has helped spark redevelopment in its business park, through a tax increment financing (TIF) district passed in 2014. This TIF district covers more than 900 acres on the village’s east side and has helped modernize outdated buildings, assist the village with public works and improvements, and more.

Conversely, the outlook for older manufacturing businesses has dimmed, as the economy continues to move toward automation and more modern, light manufacturing processes. While some manufacturing businesses may still remain viable, owners should look carefully at their potential market share over a 5 to 10 year period before committing to a significant expansion.

Many manufacturing buildings lack the ceiling heights, dock access, and other features that would make them adaptable to other uses. Also, some manufacturing businesses are susceptible to slowdowns based on changes in their particular industry and the ongoing movement toward automation.

Those types of businesses should take a more conservative approach to space planning, looking at how to best utilize existing space and plan for stable growth in the future.

The outlook for Chicago’s industrial market remains strong for the foreseeable future. Sales and leasing activity should continue on a steady basis, due to the strong demand and market fundamentals. As businesses evaluate their space needs, it is important to realize that having too much space is an easier issue to work around than not having enough. In either scenario, proper planning and growth projections are essential.

Mason Hezner is a senior associate with Chicago’s Brown Commercial Group.

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Gummi bears coming to Wisconsin: German candymaker Haribo to build 500,000-square-foot plant in Pleasant Prairie

by Dan Rafter

It’s a winning combination for Wisconsin — candy and jobs.

Candymaker Haribo, based in Germany, plans to build a manufacturing plant in Pleasant Prairie, Wisconsin. In making this announcement, Wisconsin Gov. Scott Walker said that the new facility will generate as many as 400 jobs.

The $242 million plant will be 500,000 square feet. But don’t expect Pleasant Prairie to be churning out Haribo’s iconic GoldBear gummi candies just yet. Haribo estimates that construction on the new plant won’t be complete until 2020.

“Haribo has already been in the process of selecting a location for a first manufacturing facility in the USA for several years. In an elaborate process, we have examined many different sites. We are very excited to announce this important decision today,” said Rick LaBerge, chief operating officer of Haribo of America Inc., in a written statement.

The new facility will be located in the Prairie Highlands Corporate Park, located west of Interstate-94 and between highways 165 and 50. Construction on the new facility is scheduled to start in 2018.

The reason for the long start-up period for construction? Pleasant Prairie is still finalizing a deal to buy 458 acres of land for the facility from Illinois’ Abbott Labs. This purchase is expected to cost Pleasant Prairie $37.5 million.

“The state’s business-friendly climate and strong fiscal management, along with our dedicated workforce and reliable infrastructure, are among the many reasons Haribo decided Wisconsin was the right choice for this facility,” Gov. Walker said.

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Five national retailers that are barely hanging on

by Dan Rafter

This isn’t a great time for large, traditional retailers. Commercial brokerage Marcus & Millichap recently released its 2017 national retail report. That report said that non-traditional, service-based and value retailers — everything from dollar stores to nail salons to restaurants and adult-focused arcades — are continuing to grow.

Traditional clothing, department and electronics stores? They keep struggling, and many of them are closing hundreds of stores in 2017.

There’s an obvious reason for this: Consumers are increasingly buying clothings, books, electronics, outdoor apparel, hardware and music online. Many consumers prefer ordering these items from retailers such as Amazon and Zappos instead of traveling to brick-and-mortar stores.

Stu Wangard, chairman and chief executive officer of Milwaukee’s Wangard Partners, has seen this trend clearly.

Wangard said that Milwaukee’s retail market is seeing a bit of a rebirth. But it is a changing market.

The Milwaukee retail market is moving from large traditional department stores to smaller specialty stores, he said. Service businesses are on the rise, too, everything from fitness clubs to nail salons.

The retailers that are thriving? Those that are offering products and services that customers can’t simply order from a Web page.

“It’s obvious who the winners are and those who are going through downsizing,” Wangard said. “In each category, there is a winner. Those dominant winners are adding square footage at the right spot and the right size.”

The National Retail Federation reported that February retail sales across the country grew 0.8 percent when compared to the same month one year earlier. Online sales, though, saw a bigger jump, with the federation reporing that online and other non-store sales jumped a much healthier 8.2 percent this February when compared with 12 months earlier.

Meanwhile, sales at clothing and accessories stores fell 1.1 percent this February when compared to the same month in 2016. Sales at general merchandise stores fell 1.4 percent during the same time period, and electronics and appliance retailers saw the biggest fall, their sales dropping 9.8 percent this February when compared to the same month one year earlier.

Jack Kleinhenz, chief economist with the National Retail Federation, described consumer spending in the first half of this year as “erratic and most often weak.”

Again, service businesses, including restaurants, are bucking this trend. Daniel Ortega, a vice president with Colliers International, highlights this when he estimates that food-related spaces take up 25 percent to 30 percent more square footage in retail centers today than they did 10 years ago.

And don’t expect this trend to lessen. The National Restaurant Association said that 2016 ranked as the seventh consecutive year of growth in restaurant-business sales. The association said restaurant industry sales hit $783 billion last year.

So, what retailers are struggling? There are many, and, as is to be expected, most of them fit into the traditional large-scale retail mode.

Here is a list of the five retail giants that are struggling the most in 2017:

J.C. Penney: This veteran big-name retailer is hemorrhaging stores. The company recently announced that it was closing 138 under-performing stores across the country.

In a written statement, the company’s chief executive officer, Marvin Ellison, said that the closures are a step in helping to rejuvenate the department store chain.

“We believe closing stores will allow us to adjust our business to effectively compete against the growing threat of online retailers,” Ellison said.

Sears Holdings: It seems as if Sears has been struggling forever. This year looks to be especially bleak for the once-dominant retailer. Sears — along with Kmart — will close 150 stores this year. This comes after the chains shuttered 130 locations in 2016.

Radio Shack: The electronics retailer filed for bankruptcy protection in 2015. It did the same earlier this year. Radio Schack also announced that it is closing 552 more stores across the country. That comes out to 36 percent of its locations.

Many of the retailer’s closings are in the Midwest states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, Ohio, Tennessee and Wisconsin.

Macy’s: It’s difficult to picture Thanksgiving without the annual Macy’s parade. But the department store chain has long been struggling, and this trend doesn’t appear ready to slow in 2017. Analysts say that Amazon, of course, has hurt this chain. But so have value chains such as T.J. Maxx.

The chain also posted weak holiday sales in 2016, its sales in November and December of last year falling 2.1 percent. It’s little surprise, then, that Macy’s plans to close 100 stores this year.

hhgregg: Online sales haven’t been kind to electronics retailers. hhgregg — which sells electronics and appliances — is a good example. The chain will close 88 stores this year and filed for Chapter 11 bankruptcy protection earlier in 2017.

“We’ve given it a valiant effort over the past 12 months,” chief executive officer Robert Riesbeck said in a written statement. “We have conducted an extensive review of alternatives and believe pursuing a restructuring through Chapter 11 is the best path forward.”

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Marcus & Millichap report: All is not gloomy for retailers

Some retailers are struggling, but others — mostly in the value and service end of the business — are thriving.

by Dan Rafter

You might think that all brick-and-mortar retailers are struggling today, what with Amazon and online sales a constant threat.

But the truth is more complicated, as the latest national retail forecast from Marcus & Millichap highlights.

Yes, several big-name retailers are struggling. J.C. Penney recently announced that it would close 138 stores. Gander Mountain says that it is closing 32 stores. Other top retailers such as Macy’s and Target are working through challenges of their own.

However, in its retail report, Marcus & Millichap says that the retail sector is actually flourishing despite the continued expansion of online retailing. This is largely because of the strength of service retail — such as entertainment and dining retailers — and value retailers, mostly dollar stores. Marcus & Millichap said that fueled by these segment types, the retail sector will generate 81 million square feet of net absorption this year, while the national retail vacancy rate should fall to 5.1 percent by the end of 2017.

This doesn’t mean that the retail sector doesn’t face challenges. Marcus & Millichap predicts that in 2017 new retail developments will total just 49 million square feet. That’s a drop from 2016.

And Midwest cities aren’t exactly retail hotspots right now. Marcus & Millichap ranks major cities according to such factors as retail vacancy rates, rents and development. Marcus ranks the Seattle-Tacoma market as the top retail market for 2017. Nashville is the first Midwest city on the list, ranking a strong fifth in the country.

After that, it’s a long way down to 25th, where the Minneapolis-St. Paul market ranks. Chicago is the next highest-ranked Midwest city at 27, while Columbus comes in at 30 and Louisville at 35.

Posted in Chicago Commercial Real Estate, Columbus real estate, Illinois, Illinois real estate, Kentucky commercial real estate, Louisville commercial real estate, Minneapolis commercial real estate, Minnesota real estate, Nashville, Ohio commercial real estate, retail, St. Paul commercial real estate, Tennessee, Wisconsin commercial real estate | Tagged , , , , , , , , , , , , , , , , , | Leave a comment

Student housing sees ‘historic’ changes, community-focused amenities offer luxury living

by Sara Freund, Staff Writer

Campus North Residential Commons at University of Chicago

The days where university students live in glorified shoe boxes are gone. Today they can choose from student housing that boasts amenities usually associated with high-end luxury apartments.

“Twenty five years ago, amenities—if a community even had them—were relegated to basements without windows where students could watch a movie,” said JJ Smith, president of CA Student Living, a company that invests, develops and manages student housing assets.

Dorms on campuses are becoming increasingly modern and now focus on providing inviting, communal spaces. An example of this is the University of Chicago’s new Campus North Residential Commons, which opened in September.

The Studio Gang-designed facility at 55th Street and University Avenue supports 800 undergraduates in eight different houses. These residence halls aren’t restricted to freshman; students of every year live there. The modern housing has dining and retail options plus gardens, courtyards and open three-level communal hubs for studying, cooking or relaxing. There are also private rooms and kitchen facilities for students who want a more independent experience.

Campus North Residential Commons at University of Chicago

Before Campus North opened, Michael Higgins, an HFF associate director, helped the university sell off decades-old properties and three outdated residence halls. He said working with a university in this way was a unique situation. Many schools can’t afford to build new housing because of budget constraints, so they look to the private companies.

One of those companies is CA Student Living, and looking ahead Smith thinks newly constructed properties will have strong occupancy and growth.

“We will likely see 40,000 to 45,000 beds delivered nationwide over the next two to three years and we plan to deliver 3,500 and 4,500 beds each year through 2020. While that figure is down from a high of 60,000 in 2014 and 2015, there is a healthy supply in the pipeline that will likely be absorbed quickly,” Smith said.

In 2015, CA Student Living opened Chicago Infinite and Arc at Old Colony to more than 58,000 students in the Loop. The former office buildings at 28 E. Jackson Blvd. and 37 W. Van Buren St. are near at least 22 universities in downtown Chicago. They offer students amenities like free wifi and cable, a landscaped rooftop with fire pits and grills, a 24-hour gym, an on-site coffee shop and a club and lounge room. The fully-furnished, modern apartments range from studios to four-bedrooms, and most come with an in-unit washer and dryer, a 50-inch flat screen TV, hardwood-style floors, stainless steel appliances and quartz countertops.

Living area in a Chicago Infinite student apartment

Outdoor space at Arc at Old Colony

“While creating a community is paramount, there’s also a renewed focus on well-being with indoor fitness centers and open, airy spaces such as balconies and outdoor decks,” Smith said.

However, Midwest university markets are playing catch-up to the south and west, Smith added. In those regions, available land plus a boost in college enrollment led to growth and lots of competition in the sector.

“Now, those same developers are seeking opportunities in the Midwest, but land tends to be ‘generationally’ owned and more difficult to attain. Developers need to get creative in land acquisitions and development plans,” Smith said.

Many developers aren’t limiting themselves to undergraduate students. They are targeting a wider range of tenants including graduate students, law students, medical students and recent graduates.

Scion Student Communities, which owns and operates more than 48,000 beds in campus markets, recently made a $1.6 billion purchase of three student housing portfolios across the country. In Chicago they operate 1237 West, which sits right next to DePaul’s campus at 1237 W. Fullerton. Previously, the property was exclusively for DePaul students, but now owned by Scion, it is open to all students and Lincoln Park residents.

Two more projects aimed at young professionals have popped up near the Illinois Medical District and University of Illinois at Chicago. PMG’s U apartments at 1350 S. Union and Related Midwest’s Landmark West Loop at 1035 W. Van Buren both focus on high-end amenities and creating a sense of community.

At Landmark, that means going above and beyond “a bunch of couches and TVs,” said vice president of Related Midwest Mike Ellch. A feature amenity, called the Living Library, is designed to have the atmosphere of a coffee shop. The 9-foot ceilings, fireplace with copper finishes and lots of natural light gives residents a place to work and socialize.

The Living Library at Landmark West Loop

“We love having a group of diverse residents. We don’t market strictly to one type of person because this is a space where everyone can learn from each other. We want to foster a community in this building,” Ellch said.

Overall, student housing has experienced incredible changes in amenities and options beyond university-owned housing. Investment sales in the sector have also been “historic and unprecedented,” according to Peter Katz, an executive director of Institutional Property Advisors, a division of Marcus & Millichap.

Smith also noted that luxury, lifestyle-oriented residences can be the tipping point for incoming freshman and transfer students.

“Studies show that housing accommodations are one of the top three factors that influence a student’s enrollment decision, so a university must make sure its housing stock is in lock-step with the needs of today’s students,” Smith said.

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A stinky situation in the city: Chicago’s problem with dog poop

Click on the map, provided by RentHop, to see just how big of a problem dog waste is in your neighborhood.

by Dan Rafter

Tired of waking up to find dog poop on your front lawn? If you live in Chicago, you’re far from alone. Turns out, 2016 was a particularly busy year in the city for dog poop complaints.

RentHop recently published a study on dog poop complaints throughout Chicago. Turns out, 2016 was a record-setting year in the city for people complaining about dog owners leaving behind smelly gifts on their front lawns. And RentHop has discovered, using data from the city of Chicago’s list of Sanitation Code Violations, that 2017 is on track for an even higher number of complaints about rude dog owners.

Turns out, there’s a bit of science to dog poo problems. RentHop found that March tends to be the busiest month for complaints. That might be because of all that thawing snow revealing hidden poop piles. People tend to complain about dog poop most often on Mondays, followed by Tuesdays and Wednesdays.

RentHop found, too, that residents in neighborhoods in which there is a greater number of owner-occupied housing units, and less rentals, tend to complain the most. The West Englewood neighborhood tends to generate the highest number of dog poop complaints in the city, with a yearly average of 26.5 complaints. West Pullman came in second with an average of 22.2 complaints a year, while Hermosa averaged 21.9 complaints and Washington Heights 20.5.

Chicago’s Near North Side neighborhood tended to generate the lowest number of complaints, 0.63 a year on average. The Loop was next lowest with 1.05 average yearly complaints.

Overall, RentHop found 1,090 complaints about dog poop in Chicago in 2016. That was up 32.1 percent from 2015 when the city saw 831 complaints.

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Plenty of construction projects keeping developers busy in Minneapolis/St. Paul market

The Opus Group recently completed the third phase of the Valley Park Business Center in Shakopee.

by Dan Rafter

Construction activity is rising across the country. The Midwest is no exception, with cranes soaring into the skies of cities from St. Louis and Kansas City to Omaha and Chicago.

And one of the busiest of all Midwest markets? The Minneapolis and St. Paul region, which is seeing a seemingly nonstop stream of new-construction projects in both its urban and suburban communities.

What’s most interesting about the construction scene in the Twin Cities, though, is the wide variety of projects that developers are tackling.

One of the most interesting projects in the middle of construction here today is the transformation of a former Macy’s department store.

RJM Construction is moving along on schedule on its work converting the former Macy’s store in downtown St. Paul into a new development that will be called Treasure Island Center. The resulting 540,000-square-foot building will include a mix of new office and retail tenants.

It will also include a rather interesting feature: an 1,100-seat hockey practice facility at its very top.

The new building, located at 363 Wabasha St., will boast an NHL-sized ice rink, the TRIA Rink. Earlier this year, crews from RJM reached a milestone when they placed a 100,000-pound crane atop the new building’s roof. The crane will hoist structural steel, mechanical equipment and other supplies.

“This isn’t your typical construction project, but we’re up for the challenge,” said Joe Maddy, chief operating officer, when describing the task of building a new ice rink.

There will be space inside the project for the Minnesota Wild hockey team and Minnesota Housing Finance Agency. RJM will also build a 6,000-square-foot orthopedic clinic for TRIA Orthopaedic Center on the building’s street level.

RJM Construction is also involved in a suburban office project, building a 25,000-square-foot addition to Bremer Bank’s service center in Lake Elmo, Minnesota.

The bank building is located at 8555 Eagle Point Blvd. in Lake Elmo. Construction is scheduled to begin in April, with the addition set for completion at the end of 2017.

As in most Midwest cities, the industrial market is a strong one, too, in the Minneapolis and St. Paul markets. A good example is the work that the Opus Group is turning in on an industrial park in the region.

The Opus Group has completed the third phase of development at Valley Park Business Center in Shakopee, Minnesota. Minnesota-based Fountain Industries will be the first tenant at the park, leasing about 48,000 square feet of the 122,400-square-foot development.

The project represents the final phase of Opus’ development at the 50-acre site, following the completion of a 200,000-square-foot speculative development and a 216,000-square-foot build-to-suit industrial warehouse and office space for Amerisource Bergen.

“We are very pleased to bring Fountain Industries, Amerisource Bergen and other businesses to Valley Park Business Center,” said Joe Mahoney, senior manager of real estate development with Opus Development Company.. “The leasing of this development underscores the ongoing interest for industrial space in the southwest market of the Twin Cities.”

Located southwest of Minneapolis near major state highways, the warehouse has approximately 74,000 remaining square feet available for lease. The development suits tenants who desire to be in the Shakopee submarket and are seeking functional, first generation space. The property features 28-foot clear height, along with 193 parking stalls, 24 dock doors and six drive-in doors.

Building construction of the final phase of the speculative industrial development began in July 2016. Previous phases of the Valley Park Business Center were completed in 2014 and 2015. Opus’ recent portfolio of work includes more than 6.9 million square feet of industrial developments currently under construction or completed in the past 24 months across the United States.

Kraus-Anderson Construction Company has been busy throughout the region, too. The construction firm recently completed a major warehouse addition for Dahlheimer Beverage at 3360 Chelsea Road West in Monticello, Minnesota.

The 97,250-square-foot expansion nearly doubles the size of Dahlheimer’s warehouse.

The expansion of the beer distributor’s existing warehouse and office space was designed by HDA Architects. Chesterfield, Missouri-based Gabriel Project Management is the owner’s representative.

The new addition was performed while the distributor was in full operation. Construction was completed in a tight schedule of only 22 weeks and included the installation of approximately 32,000 square feet of in-floor heating systems in the truck wash bays and truck drive-thru bay.

Of course, the Minneapolis and St. Paul regions are seeing plenty of multifamily development, too, as are all Midwest markets. A good example is a new development new the Mayo Clinic, about 80 miles from the center of Minneapolis.

Multifamily development the Lofts at Mayo Park in Rochester, Minnesota, held a ribbon-cutting ceremony on Feb. 21. The ribbon-cutting marks the opening of the new market-rate apartment complex.

The site is located within the Destination Medical Center Development District located between 107 and 121 Sixth Ave. SE. The four-story project is being developed by Helen and Chris Roland, trustees of the George F. Pougiales Trust. Welsh Construction worked with the Rolands to execute their vision for the short-term and extended-stay residential development near Mayo Clinic.

The ribbon-cutting, hosted by the Rochester Area Chamber of Commerce, included remarks from Laurie Ackerman, Director of Sales and Marketing for Opportunity Services and Chamber Ambassador; Helen and Chris Roland, trustees of the George F. Pougiales Trust; and Judy Braatz, Membership Development Director at the Rochester Area Chamber of Commerce.

“We’re always happy to have additional housing choices in Rochester. The Destination Medical Center Initiative will generate tens of thousands of new jobs. The workforce needed to fill those jobs will require a myriad of housing options,” said Rob Miller, president of the Rochester Area Chamber of Commerce.

The development features 29 units, and was designed by Minneapolis-based Snow Kreilich Architects. Amenities of the Lofts at Mayo Park include modern exterior finishes, underground parking, roof deck patios, a glass-front lobby and conference room and private patios and balconies. Additionally, 14 of the 29 units are fully-furnished for future tenants.

The development is located on Mayo Memorial Park, one of Rochester’s oldest and most well-connected parks. The building’s common spaces provide expansive views of the park, the Zumbro River and downtown Rochester.

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