by Dan Rafter
It’s little secret to commercial real estate pros who do business near the Illinois/Wisconsin border: There’s a war going on between the states to attract new industrial projects.
It’s no secret, either, which side is winning most of these battles.
“If there’s a project that can go in Illinois or go north of the border to Wisconsin, there is always a competition,” said Bob Smietana, chief executive officer and vice chairman of HSA Commercial Real Estate. “And Illinois is certainly not winning more than the other guys.”
What makes Southeast Wisconsin so attractive to industrial users? Taxes are lower in Wisconsin. The state has a reputation as being pro-business. Public-private partnerships are strong here. And Southeast Wisconsin boasts a strong workforce and easy access to much of the rest of the country.
There’s one other thing, too: “It is not Illinois,” Smietana said. “That is helpful these days.”
Challenges in Illinois
It’s easy to list the positives of doing business in Southeast Wisconsin. Unfortunately, it’s just as easy to list the negatives of trying do so in Illinois.
Illinois’ government has a terrible reputation today, with most believing that it is either hopelessly corrupt or simply mismanaged. Taxes are higher in the state. Industrial users worry, too, that the only way Illinois will solve its pension crisis is to raise taxes even higher.
Further north across the border, though, those concerns are not an issue for industrial users.
“You drive up I-94 and there is so much activity going on,” Smietana said. “There is a lot of spec activity, too. This is just a nice area for people to do business in.”
Uline offers a good example. The company, which distributes janitorial supplies and packaging materials to businesses across the country, moved its corporate headquarters to the Southeast Wisconsin community of Pleasant Prairie back in 2009.
It recently built a new distribution center and second corporate building to add to the campus. The company seems settled in to Southeast Wisconsin, providing the area with plenty of jobs in the process.
A bit further north, in the community of Somers, First Industrial Realty Trust recently completed construction of the first industrial building at First Park 94, a 310-acre business park. First Industrial has already leased the entire 601,439-square-foot industrial facility to a single tenant.
And Land & Lake development recently built a 150,000-square-foot distribution center in Racine County.
The impact of Amazon
Not surprisingly, retail giant Amazon has had a major impact on the Southeast Wisconsin market. The company opened a 1-million-square-foot fulfillment center in Kenosha in 2015. The location made sense: Amazon can quickly ship products from it to customers throughout the Midwest.
Smietana said that the fulfillment center provided an immediate boost to the reputation of Southeast Wisconsin.
“When you see Amazon commit to this area like that, it changes the landscape of the distribution channels,” he said. “It sends a message that this is a good location for distribution centers. At the same time, you have Uline opening its own big distribution center in the area. That puts the rubber stamp of approval on this being a good location for distribution facilities.”
Smietana said that he expects even more companies to open distribution centers in Southeast Wisconsin.
“Distribution centers have become so much more important,” Smietana said. “Companies need to be closer to their customers. We are impatient people. If we can’t order something at 5 in the evening one day and receive it by 3 in the afternoon the next, then we have a problem.”
It’s not surprising, then, that the Southeast Wisconsin market is seeing so much spec industrial development today. There simply aren’t enough existing industrial facilities for users that want to locate in this slice of Wisconsin today, Smietana said.
“We are seeing more spec development than we’ve seen in a long time,” he said. “Demand is keeping up with the spec that is being put up, too. Southeast Wisconsin has never been viewed as a major market, but it is becoming just that with the amount of industrial space being built. The good economic and social dynamics that make this a good market just can’t be ignored.”
Smietana said that he is not yet worried that developers are adding too many spec industrial buildings to the area. That’s because many of the older industrial facilities that once dotted the area have been taken out of service. They just became obsolete for today’s users.
Industrial users today demand modern clear-height facilities. They are also looking for plenty of parking, energy-efficient HVAC systems and LED lighting.
“There is a certain amount of supply that is required in this sector every year,” Smietana said. “Buildings have been removed from service because they are no longer usable. What we are seeing, even with the amount of spec being built, is that we are not even close yet to the amount of industrial space that was available on average in 2005 and 2007. We haven’t even approached that. So the supply is still not enough for demand in this market.”
Investors embracing industrial
Smietana said that investors have embraced industrial, too, both in Southeast Wisconsin and across the country.
He said that many are even turning away from multifamily, the darling commercial asset class still, and putting their dollars into industrial.
“There is a sense that multifamily in a lot of markets is a little bit at the end of the cycle,” Smietana said. “So you are seeing a little bit of a concern from investors there. They are now looking back to steady Eddie industrial. They are saying, ‘We need to put more money in industrial.’ A lot of investors feel that they haven’t invested enough in industrial. To be fully diversified, industrial has always been a help.”