Spec gains momentum: e-commerce and logistics driving demand

Paragon Park | Brendon Stegel

by Sara Freund, Staff Writer

Speculative development is revving up to keep up with the demand from logistics and e-commerce companies. New product on the market has even changed to accommodate these tenants.

So far there are 52 industrial projects under construction in the Chicago market—a total of 18.3 million square feet, according to a report from Colliers International. Speculative industrial projects account for 46 percent of that, or about 8.4 million square feet.

“We’re in the best market we’ve seen in 15 years. Chicago’s demand for industrial properties has been through the roof, especially in 2016,” said Craig Hurvitz, vice president of market research at Colliers.

None of the spec space under construction has been pre-leased, but that isn’t cause for concern, Hurvitz said. That’s because since 2013, 49.4 percent of completed spec projects have been leased. Since the cycle began, that percentage has increased every quarter. In this year’s first quarter, six spec projects totaling 1.7 million square feet were completed, and about 30 percent of that has been leased.

The net absorption for 2016 was 26.6 million square feet, and “we’ve never seen that in a single year in the Chicago industrial market,” Hurvitz said.

Some of the top spec developers within the past few years are Panattoni Development Company with 3.8 million square feet and Bridge Development Partners with 3.09 million square feet. Another active developer is Opus Group with about 2 million square feet. The company doesn’t intend to slow down and sees the industrial growth as healthy, said Opus vice president Mike Yungerman.

“We are bullish on industrial in the Chicago market. It’s been a long recovery, but a good recovery, and with cautious optimism we will continue to see growth for the next 18 months,” he said.

In this cycle, the majority of Opus’ projects are spec and that’s the way Yungerman prefers it. Even though spec has the potential to be slightly riskier, those projects receive more market attention and often get better returns, he said.

In Romeoville, one of the most active submarkets, Opus developed two speculative industrial buildings in 2015 and is constructing a third on a 22-acre site in the Paragon Business Park scheduled to be completed this summer. The buildings are between 100,000 to 200,000 square feet.

After a lot of big-box projects, developers are noticing a need for small and mid-size spaces. It’s important to note which types of buildings are lacking in some submarkets, said Sean Henrick, senior director at Cushman & Wakefield.

“It’s all about knowing where to build and what to build. You have to know what tenants are out in the market. It’s hard to predict, and that’s why you see some developers stub their toes,” he said.

One of the biggest drivers in the industry is Amazon. Last year the company leased 4.5 million square feet and currently has four more distribution facilities under construction in Monee, Aurora and Waukegan. But even if you take Amazon out of the equation, 2016 was still an impressive year, Hurvitz said. He expects the company to slow down and focus more on last-mile warehouses closer to the city.

Besides Amazon, many of the largest leases signed within the last year have been from third-party logistics companies. Across the Midwest, logistics is the largest driver of demand and accounts for 42 percent of the total space leased in 2016, according to a report from CBRE.

This trend has led developers to build in anticipation of e-commerce and logistics companies. The abundance of car parking and 32- to 36-foot clear ceiling heights now seen in new projects indicate the influence of those types of tenants. Larger parking lots help offset the overlap of shift workers, Yungerman said.

The largest speculative project this quarter was a 1-million-square-foot logistics center developed by Core5 Partners in Joliet. The facility is in line with industry trends, having a 36-foot clear ceiling and 396 possible parking spaces. The warehouse lighting will be powered by LED bulbs—another trend experts are noticing. This type of lighting is quieter, brighter, cost effective and energy efficient.

So far, the numbers and trends show that supply is meeting demand even with spec development increasing during the past few years. Now is not the time to hesitate. When the leasing percentage starts to dip, or when spec buildings sit vacant for two years, that’s when it’s time to be cautious, Hurvitz said.

Advertisements
This entry was posted in Uncategorized and tagged , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s