Chicago’s Hidden Industrial/Distribution Market: Challenges & Opportunities
This is a summary of the May 28, 2015 meeting of the ULI Chicago District Council,
which gathered at the Union League Club in Chicago to hear an expert panel of
professionals discuss the industrial/distribution market in Chicago, particularly
neighborhoods close to the downtown.
They tackled a spectrum of questions, including why industrial users continue to locate
in the city rather than going to modern suburban facilities, where displaced industrial
tenants are going in the wake of an influx of office/retail development in areas like the
West Loop, and the future of Planned Manufacturing Districts in light of pressure to
redevelop highly coveted sites like the former A. Finkl steel plant.
Moderator: Ronan Remandaban, Lee & Associates of Illinois, LLC
Panelists: Harvey Camins, President & CEO, CTK Chicago Partners; Kevin Matzke,
Managing Principal, Clarius Partners, LLC; and, Aaron Paris, President & Partner, Merit
Partners, LLC
From a warehouse to the wayside to a new lease on redevelopment life—the journey
over the past half-century of the 21-acre, 1.5 million-square-foot campus at 4000 W.
Diversey Ave. in Chicago offers a glimpse at the opportunities that can take shape in
the Chicago industrial/distribution market.
Acquired by Marshall Field’s in 1965 to serve as a massive warehouse, the site on
Chicago’s Northwest side had been languishing, largely empty, for years. Then, in
January 2014, Aaron Paris of Merit Partners was part of a team that purchased it for $8
million. So far, more than 300,000 square feet has been leased as it is reimagined for a
variety of uses, including retail and residential.
“What Aaron is doing with the former Marshall Field’s warehouse is brilliant,” said fellow
panelist Harvey Camins. “We looked at that building and couldn’t figure it out, so my
hat’s off to Aaron. I think that’s a great play.”
There are “a lot of those types of opportunities” in Chicago, said Camins, because
companies still need to stay close to labor, customers and suppliers.
“The core industrial business may have changed, and the make-up of industrial users
may have changed, but there is still a very strong demand in the city of Chicago for
industrial,” Camins added.
Chicago’s Hidden Industrial/Distribution
Market: Challenges & Opportunities
One of the key reasons why the transaction was possible, said Paris, is that prior owner
Macy’s was taking “hits on developers controlling the building but not doing anything.”
“They were ready to get out, and wanted out, and they were spending $1 million a year
keeping the building going….so we were there at the right place, the right time, and the
right money,” Paris said.
Others in the industry deemed it to be too far from the highway or the flow of activity, but
“Marshall Field’s wouldn’t have gone there in 1965 if that was the case,” Paris
reasoned. “It is well located.”
Also, its three-acre truck port is a unique element in the city and putting parking on the
second and third floor of the building has “opened up an array of things,” he added,
including residential and retail components.
The space, which he said has been coined by the New York Times as “super-wide,”
features a single tenant that uses 175,000 square feet with 400 parking spaces. The
result is a holistic combination that is attractive to the market. “People want to work
(and) live all near each other, near amenities, and that’s what our building is all about,”
Paris said.
Kevin Matzke, whose company does ground-up new development and primarily serves
institutional investors, works in both the suburban and Chicago markets. Among other
projects, his firm is currently working on a 1 million-square-foot spec commercial
building with JP Morgan in Joliet.
With a city population of 2.7 million and a Chicagoland population approaching 10
million, decisions on where to locate an industrial building hinge largely on where
suppliers and stores are situated, and, to a lesser extent, the proximity of other
industrial users, said Matzke.
Labor costs are another key driver. Meanwhile, the cost of real estate, in the overall
equation, amounts to only about 5 percent of the cost of business, he said.
“When you start talking about the differences in rent between one location and another,
just keep in mind it may be (a factor), but that’s not as much of an issue as you might
think,” he said.
Newer buildings tend to have higher ceiling heights, operate more efficiently and have
lower operating costs than older facilities, offsetting the higher rental costs that they
command, said Matzke.
ULI CHICAGO: Meeting Summary
Chicago’s Hidden Industrial/Distribution
Market: Challenges & Opportunities
With a $600 billion Gross Domestic Product, Chicago is the third largest economy and
has the third largest industrial market in the U.S., Matzke added.
“The idea of new development of warehouse space in Chicago is new…there have
been a few build-to-suits in the past, a few spec buildings here and there, but (projects
by Clarius Partners and others) really represent a new wave of bets, I guess, on
whether the user base in Chicago can take advantage of new modern distribution
space.”
The trend in user types are food, companies servicing either homes or stores, archival
storage, and some manufacturers located in Chicago who need nearby warehouse
facilities, he said.
For Paris’s firm, the biggest tenant is in the food business, the next-biggest is Studio41,
the home design showrooms whose warehouse serves its locations in the city and
north. Another significant tenant is an ecommerce fulfillment center that does much of
its selling via Amazon.com and is looking to provide same-day and next-day order
fulfillment.
After moderator Ronan Remandaban noted that Amazon recently signed a new lease
on Goose Island, he asked panelists what the future held for that section of the city.
Camins called Goose Island “a tremendous opportunity because of the location, but it’s
a nightmare to get around.”
With the new technology center and new office development in the neighborhood, he
added, “I think it’s great because it’s so close in.”
Paris likened the area to Manhattan, starting with the need to cross a bridge to access
it: “I don’t know if there’s even any mass transportation on Goose Island.”
Picking up that thread of the discussion, Matzke said he does not believe a warehouse
distribution company will “locate close-close in to the Loop unless they absolutely,
positively have to be there.”
Pilsen, Matzke added, is a desirable industrial spot because of its ample labor supply,
and companies want to be in Chicago, but also have the benefit of proximity to I-55 via
the Damen Avenue interchange.
Panelists also discussed the phenomenon of the West Loop changing from an industrial
food hub to other uses that are driving up property values. Many companies in that area
are second- and third-generation family-owned operations.
ULI CHICAGO: Meeting Summary
Chicago’s Hidden Industrial/Distribution
Market: Challenges & Opportunities
“I am willing to bet all those food guys…never thought they had real estate worth a
darn,” Paris said. “They had no carports, they used to use the street for loading their
trucks. They had no parking, it was free (on-street parking) and all of a sudden Google
comes and now they have parking meters and now they can’t unload their trucks from
the streets.”
The influx of buyers like Google in West Town, added Paris, has created “an opportunity
to cash out” for some, while other industrial companies will relocate to neighborhoods
like Pilsen.
Panelists also discussed the pros and cons of Planned Manufacturing Districts (PMDs).
“Landmarking that neighborhood doesn’t make a lot of sense to me,” said Camins.
“Companies looking to stay in there will not want a lot of trouble when they go to make
changes.”
Echoing remarks that Paris made, Camins later noted that relaxing PMD standards
would represent an “opportunity for higher and better use of redevelopment where we
can be collecting real estate taxes, maybe sales taxes—car dealers are phenomenal
sales tax generators.”
Matzke offered a more favorable viewpoint of PMDs, saying that they should be treated
on a “case-by-case” basis by the city and, while acknowledging it may be a “romantic
notion,” they could be a helpful tool to draw more technology campuses to the city.
On the topic of cap rates, Matzke said that there is a premium for the suburbs—of
roughly 100 basis points—as compared to the city. “That’s just a function of the liquidity,
the volume, the velocity of transactions,” he said.
Paris, meanwhile, likened the cap rates to 2007 levels and noted that an influx of foreign
money is fueling it. “You’re going to see very much a compression between the suburbs
and city…I can’t see the suburbs going much below 5, but I can see the city collapsing
toward that figure.”
Based on the sheer size of companies like leading industrial real estate developer
Prologis, in order for them to grow, they need to develop millions of square feet of
space—and that simply is not possible in the city, said Paris.
“It’s not just demand driving the suburbs,” he continued. “Supply is driving that too.
Rents out in Joliet and some of those areas, it’s not much different than what we were
asking for in Rochelle 10 years ago. Where’s the upside? I’m not a big fan of suburban
development.”
ULI CHICAGO: Meeting Summary
Chicago’s Hidden Industrial/Distribution
Market: Challenges & Opportunities
Prompted by Remandaban to discuss “hidden opportunities” in the city, Camins
acknowledged those are getting tougher to find.
“I still believe things are moving due west, southwest and northwest,” he said. “If you
can pick off anything in that triangle close in…my personal preference is I’d never buy a
property that didn’t have some extra vacant land for parking... It’s hard to do in the city.”
He cited his company’s acquisition of a 70,000 square-foot building at 1440 Hubbard,
with nearly 100 parking spaces. The tenant’s first check bounced and his firm “had to
start over,” he said. Fortunately, though, “having that parking saved our bacon……it
turned out to be a great deal because we had land for parking,” said Camins.
Panelists also fielded questions from the audience, including one about the impact of
the infusion of Chinese capital on industrial real estate in Chicago. Paris responded with
a pointed criticism of the EB-5 visa program, through which foreigners can obtain a
green card, then citizenship, by investing $1 million—or half that sum in a highunemployment area—and creating a proscribed number of jobs.
Terming it “an interesting scam our federal government came up with,” Paris said the
effect of the incentive “is for real.”
“So long as a green card is still waved in front of these people with money, they’re going
to do it,” Paris continued. “Bottom line, immigrants to the United States are not
predominantly poor, they’re predominantly wealthy and people want to be here.”
Reflecting on another question about opportunities for redevelopment, Matzke said that
the prime time for land buys was 2010 through 2012, when people could buy distressed
land and then turn it around profitably.
“The ship has pretty much sailed in terms of new opportunities,” he said. “…we’re going
to see a lot of adaptive re-use.”
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ULI CHICAGO: Meeting Summary