Industrial build-to-suit development impressive, but spec construction even stronger
Four-and-a-half years ago, as the general business climate was functioning in full recovery mode, we began what has been one of the most prolific development cycles in the area's industrial market.
According to Colliers International industrial market statistics, since the current development cycle began in 2013, and through midyear 2017, industrial construction activity has totaled 74 million square feet of space on the strength of 288 speculative, build-to-suit and building addition projects.
During the current cycle, build-to-suit and building additions have accounted for 50 percent of the construction activity. A total of 150 build-to-suit and building additions totaling 37.3 million square feet have been completed in that time, compared to 138 speculative completions totaling 36.7 million square feet. This is in stark contrast to the previous cycle which ended in 2008, when speculative development accounted for about 70 percent of deliveries.
Despite significant build-to-suit activity since 2013, speculative construction continues to accelerate. Currently there are a total of 45 construction projects totaling 14.8 million square feet under construction. Of that activity, 9.9 million square feet (67 percent) is being built on a speculative basis.
Since industrial development activity picked up in 2013, nine of the ten largest construction projects completed have been build-to-suit projects, and all ten were 900,000 square feet or larger. While speculative development has and continues to be impressive, big-box users requiring specialized distribution facilities have repeatedly opted to build facilities to their specifications. In part due to e-commerce giant Amazon.com leasing more than five million square feet in the Chicago market over the past 18 months, developers are more confident that the demand now exists for large speculative facilities, and are building bigger facilities to attract those users.
Currently, seven of the ten largest projects under construction are being built on a speculative basis. Three of these speculative projects are greater than one million square feet, and a fourth speculative facility greater than one million square feet is currently breaking ground.
Each of these colossal structures are being built in the I-80 Joliet Corridor, which is home to 27 percent of all construction activity since 2013. This submarket stretches from Tinley Park on the east to Ottawa on the west and encompasses all of Joliet, the sprawling intermodal facilities in Elwood and Joliet, and several new industrial parks. Just to the north, the I-55 Corridor, encompassing the industrial sections of Bolingbrook, Romeoville, Woodridge and Lockport, has witnessed 19 percent of activity since 2013. During the previous cycle, the I-55 Corridor saw the lion's share of development — more than 30 percent was built in the submarket.
Following are some additional facts and figures about this very strong run that has occurred in industrial real estate since 2013.
• Construction completions have increased every year since 2013, from 8.8 million square feet in 2013 to 22.3 million square feet in 2016. Through the first half of 2017, 12.7 million square feet has been delivered, and the year is on pace to eclipse the record set last year.
• The average size of development projects since 2013 has increased every year, from 235,000 square feet to 335,000 square feet.
• The four speculative projects greater than one million square feet under construction represent the first speculative projects of that size built since 2013.
• The 36.7 million square feet of speculative projects completed since 2013 is 59 percent leased. More than 15 million square feet is currently available in recently-constructed modern speculative facilities.
• Users of the largest construction completions since 2013 is an impressive roster of international companies with a strong Chicago-area presence. The largest delivery was a multi-building complex for tire manufacturer Michelin totaling 1.7 million square feet. Other users include Home Depot, Mars Corp., Saddle Creek Logistics, Uline, Amazon.com, Georgia Pacific and 3M.
The current industrial development cycle has set several records in the Chicago market and nationwide. Elevated demand from distribution and manufacturing users as well as the unprecedented rise of e-commerce combined with record low vacancy rates and excellent market fundamentals in several key submarkets dictates that the ongoing development cycle will continue unabated. Land constraints and the cost of redevelopment will limit construction activity in certain areas, while the demand for modern, efficient industrial product will continue to push the boundaries of Chicago's industrial market.
• Craig Hurvitz is vice president, research for Colliers International. Based in Rosemont, he is responsible for numerous quarterly research initiatives and report that track and highlight activity and trends in Chicago's industrial marketplace.