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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