Industrial developers set new construction records

Industrial builders in Chicagoland broke new construction records this summer, outpacing the already rapid pace of development in 2021. Sleek, modern warehouses used to store and distribute goods, feeding online shoppers’ appetites for always-on deliveries faster, represent most of the buildings in progress.

“When people hear the word industrial, they always think of chimneys, but it is, almost without exception, warehouse and distribution space,” said Craig Hurvitz, vice president of market research. at Colliers International.

Rising interest rates and an uncertain economy haven’t slowed groundbreaking work in the metro area. Third-quarter developers began construction on 48 buildings that, when complete, will total 17.2 million square feet, 32% more than the previous record, according to Colliers. These projects brought the total under construction to 32.5 million square feet, the most at any time in market history.

“This is a monumental construction report, and many records have been broken,” Hurvitz said.

Demand surged soon after the pandemic began and millions of home shoppers started ordering products online, he added. Many companies have been forced to manage the influx of orders with undersized or outdated warehouses.

Developers have responded by launching the construction of massive facilities, often in outlying suburbs near transportation arteries such as I-55 and I-80, including Romeoville, where Molto Properties opened the Weber55 this summer. Logistics Park, a two-building, 1.1 million-square-foot complex on 60 acres, and Joliet, where NorthPoint Development has just begun construction on former farmland of a 1.2 million-foot building squares, part of its new third coast intermodal hub.

Most buildings under construction were started on spec, meaning the developer got started before they landed a tenant. This shows confidence in the Chicagoland market, and so far it hasn’t been misplaced, according to Hurvitz.

“We continue to see large leases signed every quarter,” he said.

Six or seven years ago, only a few companies a year signed leases in the Chicago-area market for more than 500,000 square feet of warehouse space, but there have been 16 such deals in 2020 , 19 in 2021 and 13 in the first three quarters of 2022, Hurvitz said.

Companies continued to sign leases for specific buildings in the third quarter, sometimes even before developers had finished work. Commercial supply giant Uline has leased the entire million-square-foot building under construction at 10322 140th Ave. in Bristol, Wisconsin, just across the border from Illinois. And Ryder Logistics has leased a 543,638 square foot property at 310 Overland Drive in North Aurora developed by Opus Group.

Economic headwinds will soon help slow the pace of construction, according to Colliers executive vice president Mike Senner. The Fed raised interest rates throughout 2022 to cool the economy and control inflation. The moves will affect everyone in industrial real estate, and with more increases likely, project funding is already drying up.

“The projects being built today were all integrated before anything changed,” he said. “We’re in a completely different environment than we were just six months ago, so the next two quarters are probably going to be very different.”

Additionally, many building materials and building components remain in short supply, according to Ed Lowenbaum, general manager of Cresa Chicago. Steel loading dock levelers, for example, can take eight or nine months to fall into place, and such shortages will help stifle new construction in 2023.

“There will be less of a gold rush mentality, the kind where people need space at all costs,” Lowenbaum said. “Instead, any new construction going forward is more likely to be a planned expansion.”

Even Amazon is silent. At the height of the pandemic, the e-commerce titan grew faster in the metro area than any retail company, taking up more than half of total leased space in the second quarter of 2020, a Hurvitz said, but its rental business has slowed to a trickle this year, and it hasn’t started any new construction projects.

“It shows how strong the current market is,” Hurvitz said. “We are no longer dependent on Amazon.”

Current industrial buildings are unlikely to sit empty for long, even if new construction stops later in 2023, Senner said. Enough companies still want to consolidate their operations into new, larger facilities that buildings completed this year and early next year should find tenants.

“There are still a lot of businesses living in second-generation spaces that want to be in modern warehouses,” Senner said. “We desperately needed to add inventory, so the tap is not going to be completely turned off. We will continue to see a good amount of rental activity, although it will not be a record high.

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