January/February 2024 Chicago Industrial Properties by REjournals

Navigating a new year:

Is Chicago industrial poised to bounce back in 2024? Page 4

VOL.34 NO.1

THE LEADING NEWS SOURCE FOR INDUSTRIAL REAL ESTATE PROFESSIONALS & USERS

JANUARY/FEBRUARY 2024

‘Renewed activity’:

2024 promises clarity after bumpy 2023

First Industrial's cutting-edge 450,000-square-foot spec building, expandable to 620,000 square feet, is now in lease-up mode in the Kenosha submarket. With a strategic location near I-94, 40’ clear height and pending LEED Silver Certification, this state-of-the-art cross-dock facility offers flexible, future-proof options for tenants. Additionally, pad-ready build-to-suit sites at First Park 94, equipped with all utilities, provide an expedited construction timeline, with projects available as early as the fourth quarter of 2024. (Photo courtesy of First Industrial.)

By Brandi Smith

ndustrial experts across the Chicago area are watching a number of factors as we transition from a challenging end of 2023 into what looks like a promising 2024. To understand what’s ahead, Chicago Industrial Properties first asked these experts to shed light on the past year's trials and triumphs, as well as the path those paved. 2023 stood out as a distinctive year for Neal Driscoll, Midwest Region Partner with Dermody Properties, who suggested the industry collectively held its

breath, awaiting the impact of the Federal Reserve's efforts to cool inflation on businesses.

because interest rates cooperated, and lease rates continued to rise.”

“We saw a dramatic slowdown in the acquisition and development pipelines because interest rates forced many of us to reset the pricing expectations buyers and sellers witnessed for the past few years,” said Driscoll. “The value of existing buildings and land for development had been escalating but owners and developers could afford to pay the escalating prices

Despite these challenges, Driscoll highlighted the resilience of industrial demand, emphasizing that the health of the market remained robust. The strategic focus on expanding Driscoll's footprint through acquisition, development and redevelopment showcased

FORECAST (continued on page 14)

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CONTENTS

PUBLISHER Mark Menzies menzies@rejournals.com 312.933.8559 MANAGING EDITOR Dan Rafter drafter@rejournals.com VICE PRESIDENT OF SALES & MW CONFERENCE SERIES MANAGER Ernie Abood eabood@rejournals.com VICE PRESIDENT OF SALES Frank E. Biondo Frank.biondo@rejournals.com CLASSIFIED DIRECTOR Susan Mickey smickey@rejournals.com Chicago Industrial Properties® (ISSN 1546-377X) is published bi-monthly for $59 per year by Real Estate Publishing Corporation, 1010 Lake St Suite 210, Oak Park, IL 60301. Contact the subscription department at 312.933.8559 to subscribe. © 2024 by Real Estate Publishing Corporation. All rights reserved. No part of this publication can be reproduced or transmitted in any form or by any means, electronic or mechanical including photocopying, recording or by any information storage or retrieval system.

2024 EDITORIAL BOARD Corey Chase Newmark

Joe Pomerenke

Arco/Murray National Construction Company, Inc

Dan Fogarty

Stotan Industrial

Adam Moore

First Industrial Realty Trust Inc.

Ron Behm

Colliers International

Adam Roth NAI Hiffman

Mike Yungerman Opus Group

Glen Missner

The Missner Group

Dan Barrins

Associated Bank

Industrial pros looking forward to a busier year: Industrial experts across the Chicago area are watching several factors as we transition from a challenging end of 2023 into what looks like a promising 2024. To understand what’s ahead, Chicago Industrial Properties asked these experts to shed light on the past year’s trials and triumphs, as well as the path those paved.

Navigating a new year: Is Chicago industrial poised to bounce back in 2024? Throughout 2020 and into 2022, industrial construction was speeding down the freeway, rolling at 100 miles per hour with few obstacles in sight. Interest rates were at or near an all-time low, demand for industrial space was on the rise due to e-commerce and reshoring, and developers and end users were kicking off new projects at an unprecedented clip.

We all learned a lot: Capital markets experts express optimism: Odd. Educational. Soft. Those are the words Matt Mulvihill, Vice Chairman of Industrial and Logistics at CBRE, used to describe Chicago-area capital markets in 2023. He also called it “unusual."

CRG’s Susan Bergdoll: Signs point to a busier 2024 for industrial real estate: Yes, industrial real estate remains one of the strongest commercial sectors. This doesn’t mean, though, that this asset class didn’t face challenges in 2023. Higher interest rates slowed sales activity. An influx of spec buildings in the first half of the year boosted the sector’s still-low vacancy rates. And those same higher interest rates resulted in a slowdown in new industrial product during the last quarter of the year.

Subleasing activity continues to soar throughout Chicago industrial market: Tenants looking for industrial space to sublease in the Chicago market were in luck as 2023 ended: Avison Young reported that sublet availability across Chicago's industrial market increased nearly 40% from the fourth quarter of 2022 through mid-December of 2023, with a total of 3.7 million square feet vacant.

CORFAC Members final 2023 survey reveals mixed feelings about market conditions: Results are in for CORFAC International’s year-end 2023 survey of global members. Despite economic uncertainty and inflation causing 67% of respondents to report lower transaction volume than earlier this year, local market business sentiment remains positive for over half of respondents.

Chicago industrial market returned to normal in 2023. What’s Next? It has been a head-spinning few years in Chicago industrial real estate. Now, the market is showing signs of a return to more normalized levels after record activity in 2021 and 2022 driven by e-commerce trends.

Industrial News Roundup: A look at the latest industrial deals and milestones in the Chicago market.

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Navigating 2024: Is Chicago-area industrial construction poised to bounce back? By Brandi Smith

Meridian Design Build completed a full building buildout for Ryder Logistics in Aurora, Ill. last year within a 392,973-square-foot building it delivered for Logistics Property Company in early 2023. (Photo courtesy of Meridian Design Build.)

hroughout 2020 and into 2022, industrial construction was speeding down the proverbial freeway, rolling at 100 miles per hour with few obstacles in sight. Interest rates were at or near an all-time low, demand for industrial space was on the rise due to e-commerce and reshoring, and developers and end users were kicking off new projects at an unprecedented clip. That is until the Fed began pumping the brakes in March 2022, initiating a series of interest rate increases totaling 500 basis point by the end of 2023

Vice President of Rosemont-based Meridian Design Build. “There's still work out there, but everyone is adjusting to the fact that things are no longer moving at the rate that they were.”

“The recent Fed rate hikes significantly impacted the availability of capital and lending for new speculative projects resulting in an abrupt deceleration in construction activity that has made it feel to most in the industry like we’re doing 45 in a 55,” says Howard Green, Executive

"It became significantly harder for developers to make the numbers pencil for new projects with higher financing costs. The capital markets and lending environment changed dramatically over a very short period of time,” Green explained.

For the first six months of 2023, Green explained, Meridian remained busy finishing and closing out projects that it had broken ground on in the prior year. However, the latter half of 2023 witnessed a marked slowdown in speculative construction, attributed primarily to the interest rate hikes.

As the market slowed in late 2023, Meridian Design Build remained active, focusing on build-to-suit projects and full-building tenant fit-outs within buildings that it had recently delivered for developer clients such as Logistics Property Company and Prologis. Green also noted that the general downturn in developer-driven construction activity provided the firm with an opportunity to catch its breath and look to the future. The company made several strategic hires, implemented new software systems and used the time to focus on existing and new client relationships. The good news for most of the Chicago industrial market is that despite an uptick in vacancy rates, the decline in speculative construction starts this past year will ultimately lead to a need for more new space. Green anticipates that

this pent-up demand will be what drives the next wave of speculative construction. “There are quite a few projects in the planning stages that we’re being told may break ground in the spring, summer, or fall,” said Green while discussing his company’s emphasis on helping clients navigate current market challenges and position themselves for future opportunities. “We’re looking at new projects for several of our developer clients that they are excited about and interested in kicking off in 2024, provided economic conditions and the capital/ lending climate allow for that.”

CONSTRUCTION (continued on page 6)

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Venture Park 47 is a 729,800-square-foot speculative industrial building constructed last year by Meridian Design Build for developer Venture One Real Estate in Huntley, Ill. The building is being marketed for lease by Colliers. (Photo courtesy of Meridian Design Build.)

CONSTRUCTION (continued from page 4)

There is a cautious but growing sense of optimism with the Fed recently signaling potential interest rate decreases in 2024. Green expressed skepticism that rates will to return to early 2022 levels, but a consensus that rates may have reached a peak is expected to have a positive impact on the market. Although the impact that recent interest rate increases will have on the overall economy is not fully known, sentiment is growing that the Fed might be able to pull off a “soft landing” and avoid a recession. “Our bid schedule has been more active over the past three months than any time I can remember.” said Green, “In addition to helping developer clients budget for the next round of speculative projects, we’ve been busy responding to bid requests on quite a few user-driven deals.” He indicated that Meridian’s national reach and ability to assist its clients in other geographic markets has also been a plus, noting that the company broke ground on two large build-to-suit projects outside of Illinois within the past

"Signs of stability in interest rates may start to instill confidence in lenders and make it a bit easier for developers to secure capital for projects that make financial sense." 90 days that will deliver in the third and fourth quarter of 2024. "The expectation of most people who I’ve spoken with is that signs of stability in interest rates may start to instill confidence in lenders and make it a bit easier for developers to secure capital for

projects that make financial sense," said Green. “With the turn of the calendar, many capital sources and lenders reset their allocations and we’re hoping that will help move some projects forward that did not get approved last year.”

Addressing questions about escalating materials costs, Green noted a positive shift, with pricing for key materials such as structural steel, precast and roofing coming down in a meaningful way over the past several months and pricing related to other materials stabilizing. Meridian has also seen a more balanced availability of labor and subcontractor resources as a result of the decrease in construction activity. “I feel like this is a very good time for a developer or user to buy construction services,” said Green. “I’m a bit concerned that if everyone waits to jump back in at the same time, we could potentially see a repeat of the material shortages and price escalation issues that we saw after the pandemic.” "We're exited about what’s ahead - we feel like we're in a great position," he added, highlighting Meridian Design Build’s strong client base, the resilience of the industrial sector and the company’s readiness to help its clients any way it can as Meridian gears up to deal with the challenges and opportunities that 2024 will bring.

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‘We all learned a lot’: Chicago-area capital market experts express optimism in 2024 By Brandi Smith

Stephen Dawson via Unsplash

dd. Educational. Soft. Those are the words Matt Mulvihill, Vice Chairman of Industrial and Logistics at CBRE, used to describe Chicago-area capital markets in 2023. He also called it “unusual.” “We had experienced decreasing interest rates and cap rates for a few years in a row leading up to 2023. That momentum slowed in 2023 and we saw less volume of sales in the capital markets,” Mulvihill explained. “There were a handful of notable portfolios that traded, but many owners spent the year repricing portfolios based on the volatile debt markets and smaller buyer pools.” Mulvihill identified the primary challenges of 2023 as the volatility in interest rates, cap rates and debt markets. Large and regional banks exhibited hesitancy to lend on acquisitions and developments. “Thus the only lending opportunities were with private groups and life insurance companies, which is expensive.

" Chicago fundamentals still are fairly solid. We're still seeing historically low vacancy throughout the market and we're still seeing sustained tenant demand." This meant that the industrial speculative development pipeline shrunk materially and thus created more of a supply issue,” said Mulvihill. “Additionally, for stabilized and/or value-add portfolios, the volatility and rapid increases meant that an acquisition that worked in June might not have worked by the time a loan could be finalized in July.”

Erik Foster, Principal and Head of Industrial Capital Markets for Avison Young, added that buyers and sellers struggled to align on value, primarily due to increased debt costs for buyers. This discrepancy in expectations contributed to a decline in prices. “But Chicago fundamentals still are fairly solid,” he added. “While we're seeing a

little bit more vacancy in some submarkets, we're still seeing historically low vacancy throughout the market and we're still seeing sustained tenant demand.” Foster predicted those low vacancy rates will strengthen in 2024.

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“We’re seeing developers continuing to be eager to put a shovel in the ground and develop new product because there is that sustained demand, yet the equity and debt markets are still beginning to rebound,” he said. “I think you’ll see that sustained low vacancy here for at least the first half of this year, if not the second half of this year, because there's just not going to be a lot of product delivered.” Mulvihill echoed the significance of strong rent growth for all product classes, which he said helped offset the challenges associated with more expensive debt. Discussing other highlights of 2023, he added, “For our industrial business, we saw an uptick in sale-leaseback transactions based on the low cost of capital relative to floating rate debt with banks. Additionally, we feel developers are more motivated than ever and spent 2023 doing homework and planning to ramp back up in 2024.” Mulvihill also mentioned a silver lining of riding the industrial roller coaster of the past few years: “We all learned a lot going from the record low interest rate environments of 2021 and 2022 to the challenging increasing rate environment of 2024. We real estate profession-

Erik Foster

Matt Mulvihill

Kurt Sarbaugh

als are much smarter now and better positioned to help our clients achieve success and remain successful.”

the 10-year we saw in December really helped with liquidity and confidence,” he said. ”We’ll also continue to monitor leasing activity and the construction pipeline; overall though we’re expecting a pretty strong year for capital markets in 2024.”

“We’re hopeful to see more speculative industrial development as the debt markets become less volatile, especially since we’re still feeling occupier demand outpacing the supply,” he said.

Rolling into 2024, Kurt Sarbaugh with JLL Capital Markets remarked that institutional capital plans to be much more active on the buy-side this year. “We’ll continue to watch for a couple months of stability in the treasury markets, but the general downward trend in

That’s one of the reasons Mulvihill might choose “optimistic” to describe the year ahead.

Similarly, Foster anticipated a higher sales volume in the back half of 2024. “This year will be better than 2023,” he said with confidence.

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CRG’s Susan Bergdoll: Signs point to a busier 2024 for industrial real estate By Dan Rafter, Editor

es, industrial real estate remains one of the strongest commercial sectors. This doesn’t mean, though, that this asset class didn’t face challenges in 2023. Higher interest rates slowed sales activity. An influx of spec buildings in the first half of the year boosted the sector’s still-low vacancy rates. And those same higher interest rates resulted in a slowdown in new industrial product during the last quarter of the year. What will 2024 hold for this sector, especially now that the Federal Reserve Board has said that it is no longer increasing its benchmark interest rate? We spoke with industry veteran Susan Bergdoll to find out. Bergdoll understands the industrial market. Senior vice president and partner for the Midwest industrial region at the Chicago office of CRG, Bergdoll has logged more than 25 years in commercial real estate. Here’s what she had to say about the state of the industrial sector as 2024 gets its start. Now that the Federal Reserve Board has said that it is done increasing its benchmark interest rate, do you expect to see more industrial sales in 2024 than we saw last year? Susan Bergdoll: The start of the year is always a little intimidating to us. We start over at zero again. It’s fun and exciting, but at the same time it’s always daunting at the beginning of the year when you have a zero on your scorecard. How do we get to our goals for the year when everything resets to zero in January? Somehow, though, we always manage to get there. I think that will be the case again this year: We expect 2024 to be a busy year for us and the industrial market. The biggest drag on the industrial market is uncertainty. By having the Fed state its plans, saying that we are done with rate hikes, it takes some uncertainty out of the equation. It doesn’t remove uncertainty 100%, but it does remove some. I think we will start to see more sales activity in the industrial market in the first quarter of this year. That uncertainty is a killer. How do you underwrite a project? What kind of numbers can you expect? There is question after question when there is so much economic uncertainty. That is what stops people from moving forward with projects and acquisitions. Being able to say that we at least know this one piece of the equation brings more certainty to the market.

CRG’s The Cubes at French Lake is in Dayton, Minnesota, 35 miles from the Minneapolis-Saint Paul International Airport and 20 miles from downtown Minneapolis’ strong labor pool. (Photo courtesy of CRG.)

"I think that 2024 will continue that solid path. We will get that activity started again. It will take a little while, but construction activity will start to increase. Of course, you are talking to someone who is a developer at heart." How about with new development? Do you think we will see an increase in new industrial construction throughout the Midwest in 2024? Bergdoll: I do. Both development and sales and leasing will pick up in 2024. Last year was still a good year. If you look at the numbers compared to 2022 and 2021, yes, 2023 doesn’t look as successful. But if you look pre-pandemic, we were still in the same ballpark in 2023. The 2023 leasing numbers are on par with 2019. We were all saying that the market was terrible last year, but it really wasn’t, not historically. Rent growth was still strong. The supply was more constrained in 2023 because people weren’t building as much. But the rental numbers went up. Vacancy rates

remained low. The metrics for 2023 were still OK. I think that 2024 will continue that solid path. We will get that activity started again. It will take a little while, but construction activity will start to increase. Of course, you are talking to someone who is a developer at heart. The glass is always half-full with me. Developers find a way to look at things positively. It’s what we do. Is the demand for industrial space still high from tenants? Bergdoll: It is. The big thing in 2023 was that people hunkered down and renewed their industrial space. Renewals dominated industrial leasing activity last year. Given the choice of relocating

versus staying, unless there was some other driving force, tenants stayed where they were. If something was driving them such as labor issues or supply chain issues, then they relocated. But a lot hunkered down and stayed where they were. Is the reshoring trend leading to more demand for industrial space, too? Bergdoll: Overall, we are seeing a focus on reshoring. But this doesn’t happen as often in the Midwest as it does in port cities. Given their geography, West Coast and East Coast cities are seeing more of this than we are seeing in the Midwest.

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Are there any Midwest markets that are particularly strong right now outside of Chicago?

That will always be one of the hottest submarkets in the city because it is an ‘A’ location.

Bergdoll: Louisville is strong today. Nashville is strong. Columbus and Indianapolis given their locations will always be strong. Indianapolis is temporarily oversupplied with certain industrial product right now. They have overbuilt a bit with the bigger buildings, buildings of 500,000 square feet and above. But that is just temporary. Indianapolis will always be a strong industrial market.

How strong is the Chicago industrial market today? Bergdoll: Chicago is the engine that drives the Midwest, no doubt. Vacancy continues to fall in the Chicago market. I think it will continue to fall in 2024. There weren’t that many projects started in the second half of 2023 because of the uncertainty in the economy. The Chicago industrial market will be in a good position in 2024.

What type of industrial product was developed last year? Bergdoll: Developers in 2023 pulled back on building some of the bigger buildings. Building bigger requires more capital. There is bigger risk. With that size range, developers decided last year to sit tight and see what happened in the market. But we have still seen a lot of industrial space of 250,000 square feet and below. That has been the biggest size range for leasing activity. Developers who developed in that size range have continued to see good success. They have continued to see

How have developers adapted to the changing industrial market during the last year? Susan Bergdoll

rent growth in those properties. They leased up in a reasonable timeframe. When the market is uncertain and you can develop in an ‘A’ location in a size range that is easy to finance, meaning it is under 600,000 square feet? You can do those projects all day long. Just look at the O’Hare submarket in Chicago.

Bergdoll: CRG’s strategy has been to develop large buildings of 500,000 square feet and above. While that will continue to be a focus, we’ve also said that it’s important to build smaller properties, too, infill product in the 75,000-square-foot to 200,000-squarefoot range. That has been our focus for the past couple of months. If you can build a product of that size in a plus location, there is always demand. You can finance a project of that size in

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that location more easily. I think that some folks have had to pivot a little bit on their strategy and find a new niche. Of course, no one is going to stick with one thing forever. For the next 12 months or so, though, that will be our focus in Chicago. The other thing that some developers have focused on is sustainability. A lot of clients are interested in LEED certification. They want to locate in a green building. They want electric truck charging stations. They want to know that developers are using sustainable construction materials. Sustainability is something that is more appealing to potential tenants. Because of that, developers have focused more on it. Why has the industrial market been so resilient for so long? Bergdoll: We are all buying so much stuff. Think of how many times the Amazon truck comes to your house every week. Consumer demand is driving the industrial market. Even though we’ve had this financial uncertainty, look at consumer spending. It has continued to rise. That is pushing the industrial market. We are all buying stuff.

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Subleasing activity continues to soar throughout Chicago industrial market By Dan Rafter, Editor Photo courtesy of Pixabay.

enants looking for industrial space to sublease in the Chicago market were in luck as 2023 ended: Avison Young reported that sublet availability across Chicago's industrial market increased nearly 40% from the fourth quarter of 2022 through mid-December of 2023, with a total of 3.7 million square feet vacant. That vacancy number represented 47% of all available industrial sublet space in the Chicago area. Avison Young also reported that a total of 5.4 million square feet of sublet space had been leased throughout Chicago from the first quarter of 2022 through the middle of December of last year, with the top five submarkets accounting for 76% of all sublet leasing. Among these markets, the south Interstate-55 corridor emerged as a hotspot for subleasing activity, accounting for 2.2 million square feet or 42% of all sublet leases. Not surprisingly, logistics, distribution and parcel delivery companies have dominated subleasing activity through-

"One reason that I-55 south has been so popular is because of its central location around major highways." out the Chicago industrial market, accounting for 48% of the 5.4 million square feet of sublet leases. NFI, a national 3PL company, signed the largest sublease in March of 2022, taking an additional 997,802 square feet within the south I-55 submarket.

I don't think anyone is surprised that industrial sublease activity has increased. But are you surprised at how much this activity has increased since the fourth quarter of 2022? Can you outline some of the reasons for such a hefty increase?

We spoke with Adam Haefner, principal in Avison Young's Rosemont, Illinois, office, and Kathleen Cavanaugh, research manager in the Chicago office of Avison Young, about the rise in industrial subleasing activity across the Chicago market.

Adam Haefner: We are neither surprised nor alarmed by the increase in sublease activity. Sublease space still only makes up a very small percentage of overall industrial vacancy, which is still below 5% in the Chicago market. There are many reasons for the uptick

in sublease space, but a few of the reasons include companies adjusting their supply chains based on post-COVID demand, a slowdown in the transportation industry and consumers' increased demand for services over goods. Related to the decreased demand for goods, Avison Young is expecting increased inventories to keep demand for industrial space high in 2024. The Avison Young report cites the south I-55 corridor as a particularly strong spot for subleasing activity. Can you explain what makes this such

JA NUARY /FE BR UAR Y 2 02 4 CHI CAG O I ND U STR I AL P R O P ER TI ES a strong industrial submarket in general and why it's been so strong for subleasing activity?

existing space and it's move-in ready. Rental rate growth in that market increased 18.7% year-over-year. The terms are typically shorter, which is a plus, instead of signing a traditional sixto 10-year term.

Haefner: The I-55 south corridor has historically been an attractive market for distribution to the Chicago metro market. I-55 offers streamlined access to the city and suburbs, attractive business park settings, newer functional buildings, proximity to labor and lower real estate taxes than Cook County. Kathleen Cavanaugh: One reason that I-55 south has been so popular is because of its central location around major highways. It has also historically been a very tight market with limited availability and construction that is already accounted for. When sublease space is available in this submarket it is quickly absorbed. The logistics/distribution tenants typically have a need to be close to urban areas to meet consumer demands and delivery timeline expectations, especially with increased online sales, and south I-55 is a great location. Why has sublease activity been so strong among logistics, distribution and parcel delivery companies?

I know it's difficult to predict the future, but do you expect industrial sublease activity to rise or fall in 2024? Haefner: Our local market may see continued sublease activity in 2024 as companies continue to adjust their supply chains, but we expect that space to be leased by companies with growing inventories. Overall leasing activity will remain strong, and vacancies will remain low.

Kathleen Cavanaugh

Adam Haefner

Haefner: Avison Young has seen slowing demand for goods and increased demand for services. This has caused some of these companies to reduce the size of their supply chains that had to be dramatically increased post COVID. We expect this trend to decrease as the supply chain disruptions dissipate and inventories build up again.

3PL users are also willing to take spaces on an “as-is” basis, and most sublessors do not want to make any improvements to the space.

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Cavanaugh: I think that the main reason logistics, distribution and parcel delivery has been so active with subleases is that it’s a cheaper option, it's

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In general, do you expect demand to remain high for industrial space next year? If so, why? Haefner: Demand will certainly stay high based on growing inventories and overall economic growth. This coupled with a major decrease in deliveries of new space in 2024 will keep vacancies low and continue to put upward pressure on rents.

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LogistiCenter at Pleasant Prairie: Dermoody Properties is transforming 190 acres of former We Energies power plant into a hub for future growth. With strategic access to power, UP and CPKC rail networks, the project anticipates nationwide connectivity. (Photo courtesy of Dermody Properties.)

FORECAST (continued from page 1)

Dermody Properties' commitment to navigating these challenges. Adam J. Moore, Senior Regional Director at First Industrial Realty Trust, offered insights into the pacing of the year, noting a slow start that fueled optimism for a summer rebound. However, this optimism faced headwinds as leasing activity continued to decelerate in the second and third quarters, paralleled by ongoing speculative deliveries. “The fourth quarter brought some renewed activity on the demand side as companies started to see the end in sight for interest rate increases by the Fed and greater hopes for a soft landing for the overall economy,” he shared. It was a return to normalcy, marking a transition with both expected and unexpected consequences, said Josh Udelhofen, Senior Vice President at Trammell Crow Company. “On the positive side, we are still seeing reasonably strong tenant demand in many size cohorts, and overall rental rate growth,” he explained. “That said, when combined with record deliveries, the resulting impact was an increase in vacancy in most submarkets.” Udelhofen did express optimism, anticipating a balancing effect on vacancy rates due to a significant reduction in new project starts, a consequence of dislocated capital markets.

Dermody Properties prioritizes ESG at The Logistics Campus, implementing sustainable practices such as recycling steel, interior items and repurposing concrete and asphalt during demolition. In response to community feedback, the company is preserving the park-like atmosphere by relocating 165 mature trees and maintaining 50 years of ground cover, ensuring continuity with the former office campus. (Photo courtesy of Dermody Properties.)

Kevin Mohoney, Vice President of Molto Properties, framed 2023 as a year of transition for the Chicago industrial market, witnessing a normalization of tenant demand after two years of record leasing. “While this was expected and is not entirely concerning, you have to remember that it was against a backdrop of record new deliveries,” he emphasized. The equilibrium between industrial real estate supply and tenant demand, coupled with consistent rent growth, made Chicago an attractive market in 2023,

according to Brian McKiernan, Senior Vice President of Development, Central Region for CenterPoint Properties. “Industrial real estate supply and tenant demand are well-balanced, and rent growth is consistent, which long-term owner-operators like CenterPoint find favorable,” he elaborated. So what are industrial pros keeping an eye on now that we’ve reached 2024? McKiernan is focused on logistics, specifically how the industry could be impacted by events in the Middle East and economic headwinds.

“Rising consumer confidence and reduced inflation rates seem to have helped imports, as ports, by and large, outpaced volume forecasts last quarter, which is good news for investors in port markets and critical distribution hubs like Chicago,” he said. “Now that labor impasses on the West Coast have imports moving back to ports there, supply should tighten, and rents in infill port-proximate submarkets will bounce back from recent lulls.” Cap rates are also top of mind – for McKiernan, Moore and Driscoll.

JA NUARY /FE BR UAR Y 2 02 4 CHI CAG O I ND U STR I AL P R O P ER TI ES

“We’re watching the Fed, and as a result the economy in total, like everyone else, trying to anticipate the needs of the market and the needs of our customers specifically,” said Driscoll. Any interest rate decreases will have a considerable impact on supply and demand, as any change will affect cost and availability of capital. “A silver lining to the dysfunction in the capital markets is that it has severely impacted new construction and there will be limited new starts in 2024. This is positive in terms of limiting oversupply,” Mahoney said. “What is less clear heading into 2024 is the overall demand story and whether leasing will simply normalize to pre-covid levels or decrease below long-term averages.” Moore indicated that First Industrial is already seeing more activity and optimism by prospects. “The key is for that activity to translate into signed leases and net absorption. That will help the market’s confidence. We will also be watching the financing markets in terms of both cost and availability of capital as they impact investment transaction volumes and the pace of new construction.”

Trammell Crow Company partnered with with Krusinski Construction, crafting a cutting-edge 778,000-square-foot food distribution facility for Kraft Heinz at ChicagoWest Business Center in Dekalb, featuring a remarkable 118' clear height, full automation and a distinctive synthetic lease capital structure. Anticipated delivery in 2025. (Photo courtesy of Trammell Crow Company.)

At Trammell Crow Company, Udelhofen highlighted the focus on ground-up development, specifically bulk warehouse space. “If tenant demand maintains reasonable levels of activity, we should begin to see a draw down in the vacancy associated

with 2023’s new deliveries. This in turn should continue to support lease rate increases, which are critical to compel capital to seek development returns,” he said. “Should we also see capital market functioning return, we can then have greater clarity as to what underwriting

metrics will be necessary to justify new project development.” Clarity is certainly something we can all hope for in 2024 as Chicago’s industrial tenants are hungry for new product and developers are anxious to start building their next project.

STOTAN INDUSTRIAL PROJECT HIGHLIGHTS

Stotan is a national industrial investment platform headquartered in Chicago IL, whose executives and principals average 25+ years of experience within our industry. The breadth and depth of Stotan’s relationships result in a broad pipeline of compelling investment opportunities across several key growth markets throughout the US.

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$500M

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MISSION STATEMENT Our mission is to be a leading national developer of industrial real estate. We will measure our success by the career growth of our employees, tenant satisfaction, investor returns, and our partners’ success. Our shared values are the guideposts for achieving success.

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C H I C AG O I ND U STR I AL P R O P E R T I E S JA N UA R Y / F E B R UA R Y 2 02 4

CORFAC Members final 2023 survey reveals mixed feelings about market conditions By CORFAC International

esults are in for CORFAC International’s year-end 2023 survey of global members. Despite economic uncertainty and inflation causing 67% of respondents to report lower transaction volume than earlier this year, local market business sentiment remains positive for over half of respondents.

Photo courtesy of Pixabay.

More than 40% of markets surveyed are benefitting from inbound business and population migration. For others, repeat customers who are expanding, downsizing or choosing new locations are buoying their transaction activity. The sectors fueling business for many CORFAC members shifted slightly in the latter half of the year. The warehouse/distribution sector filled the transaction pipeline for over 67% of respondents, bumping industrial/ manufacturing into second place. Retail, office and investment sales rounded out the top five sectors contributing to members’ deal stacks. Recession concerns decrease, but other worries persist Recession worries eased among respondents with about half expressing concerns, down from 70% who expressed concern earlier this year. When making real estate decisions, members say their clients also cite interest rates and lack of available financing as roadblocks. “Inflation and rising interest rates have significantly impacted our small business owner clients’ ability to tap into lower-interest financing,” one respondent said. Yet high costs for construction materials and workers’ reluctance to return to the office continue to hamper activity overall. “Companies and their employees are still resistant to returning to the office,” a respondent said. “The returnto-work pace has been much slower than expected.” One positive trend for Midwest businesses to note is that the region is leading the rest of the country when it comes to return to work. That supports the more than 30% of respondents who think office mandates are having a positive impact on CRE activity.

"Companies and their employees are still resistant to returning to the office,” a respondent said. “The return-to-work pace has been much slower than expected." Looking ahead to 2024 Survey respondents said the office sector is poised for the most change in 2024. Return-to-work mandates will continue to have an effect, but as leases come due many office clients are still looking to sublease excess space. “We also expect creative repurposing of aging office space in our market,” a respondent noted. The investment sector is likely to be active in the new year as well. “There is a potential levelling of significant capital value declines over the

last 18 months providing good value for money,” said a respondent. Stabilizing interest rates should also ease the worries of some buyers, fueling more investment activity in the coming months. Referrals highlight network benefits Sources of new business remained steady from early in the year, including clients downsizing, clients expanding, new companies locating to the market and business won from competitors. In addition, 26% of respondents received an inbound referral from another CORFAC member since mid-year, a positive

indicator of the network’s value for business development in challenging conditions. Amid continued market uncertainty, those looking to invest or divest in CRE need an advisor with on-the-ground intelligence as well as understanding of macroeconomic trends. It’s especially imperative to time decisions to the inflation and interest rate curve. With local market presence bolstered by an international network of partners, CORFAC brokers are poised to help their clients make the most of opportunities as they become available.

JA NUARY /FE BR UAR Y 2 02 4 CHI CAG O I ND U STR I AL P R O P ER TI ES

Chicago industrial market returned to normal in 2023. What’s Next? By Jay Farnam, principal, Lee & Associates of Illinois

t has been a head-spinning few years in Chicago industrial real estate. Now, the market is showing signs of a return to more normalized levels after record activity in 2021 and 2022 driven by e-commerce trends.

Photo courtesy of Pixabay.

Industrial absorption in the Chicago market ended 2023 at 17.8 million square feet, a 48% decline from the prior year. Eight of the 22 submarkets posted negative absorption, returning to the historically consistent levels of activity that we witnessed in 2019 and 2020. Absorption standouts included South Cook, Will County and Southeast Wisconsin, each with more than 1.1 million square feet of absorption, while I-80 achieved 6 million square feet of absorption for the year. Overall Chicago industrial vacancy ended the year at 5%, after dipping slightly below 4% in 2022. The demand pullback and new speculative deliveries should open up new options for occupiers just as rent growth tapers off. The most active developers in 2023 included Bridge Development, Dermody Properties, Midwest Industrial Funds and Prologis. 2023 dynamics, mixed-signals

space here is in Class-B buildings, and as a landlocked market new development will continue to be limited.

There are mixed signals closing out 2023. On one hand, vacancy is still in historically low territory but tenants are taking longer to make capital decisions while overhauling their supply chains. Investors continue to push rents, although rent growth has dialed back from more aggressive levels earlier in the year.

In the Chicago North Submarket, characterized by older properties and limited amenities, redevelopment faces more challenges because of rising residential prices. The vacancy rate stands at 7.8%, encompassing 4.5 million square feet of second-generation spaces. Rents here range from $10 to $12 a square foot net for existing properties, while new developments command higher rates at $15 to $18 per square foot net. The Kinzie Corridor and West Fulton Market are prime targets for value-add developers, with average sale prices hovering around $125+ per square foot.

Developers are also pulling back on new speculative starts due to capital constraints and higher costs of debt, which will lead to supply shortages when looking ahead into 2024 and 2025. From a macroeconomic perspective, the U.S. unemployment rate has ticked slightly lower, but consumers are feeling the pinch from inflation on everyday purchases. The holiday season was busy for shoppers as well as parcel and logistics delivery companies, but slowdowns at the ports in LA and Long Beach are expected to translate into lower demand for space from some of the large 3PLs and retailers receiving intermodal containers in Will County. Even with the pandemic gridlock, though, port activity is starting to normalize. Port of Long Beach CEO Mario Cordero, recently stated that “We are in a normalized state of mind — and

Jay Farnum

also in operations,” with 2023 container volumes at the Port of Long Beach projected to be about 5% above 2019 numbers. He also stated that “projection of long-term loss has not come about.” Submarket spotlights The Central DuPage submarket is the tightest of all Chicago industrial submarkets with a 2.5% vacancy rate. Approximately 60% of the available

The O’Hare market is one of the most land-constrained infill markets in the country. New deliveries in 2023 were limited to a pair of two-building developments constructed by Prologis and Bridge Development. Absorption dropped 60% in 2023 when compared to 2022, while user sales remained strong, but the lack of available inventory is driving up pricing. Southeast Wisconsin’s vacancy rate has climbed from a low of 4.4% in 2021 to the current rate of 12.7%— the highest in Chicagoland— and should continue to tick higher following

new 2024 construction deliveries. Southeast Wisconsin is an institutional-grade market with more than 90% of the market composed of existing Class-A or new construction. We will be watching to see if Illinois labor legislation or the City of Kenosha’s potential casino plans impact demand for area industrial buildings.. I-55 Corridor’s vacancy rate has doubled when looking at the 1.33% posted at year-end 2022 but still remains historically low at 2.6%. As one of the most robust big box markets in Chicago, if not the country, absorption has fallen significantly over the last 12 months. Future climb

projections:

Vacancy

will

Looking ahead, we expect vacancy to climb in Chicago’s industrial market but certainly not into double-digit territory. Additionally, while rental abatement incentives have increased, we expect that most landlords will be able to maintain net rent stability and hang onto annual rent escalations in the 3% to 4% range. Jay Farnum is principal with Lee & Associates of Illinois.

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Industrial news:

The latest deals and milestones in the Chicago-area industrial market DarwinPW Realty closes disposition of 93,911-square-foot industrial property in Chicago

Photo courtesy of DarwinPW Realty

DarwinPW Realty/CORFAC International vice president Terry Lynch represented JLO Metal Products in its disposition of a 93,911-square-foot building at 5841 W. Dickens Ave. in Chicago to Elite Auto Corporation. The former manufacturing facility will be repurposed into a car sales business. The building is a World War II-era manufacturing facility and has heavy power and bus ducts throughout the building from its previous uses. Zoned for industrial use, 5841 W. Dickens has four docks and one drive-in door. It has off-street parking for the new owner’s employees and customers. Elite Auto Corporation is expanding from its successful location in Chicago’s Logan Square neighborhood. The Galewood neighborhood offers access to customers on the west side and in the near west suburbs. Avison Young’s Steve Kohn represented the buyer.

na-Champaign; Xavier Papillon from the University of Illinois at Urbana-Champaign; and Anna Zimmerman from the University of Wisconsin-Madison. Each of the students received a scholarship of $3,000 presented by SIOR Chicago 2023 Scholarship Committee members Sergio Chapa, SIOR of Newmark and Denise Chaimovitz, SIOR of Paine Wetzel. Since 1984, the SIOR Chicago Chapter has provided approximately $215,000 in real estate scholarships to more than 100 students. The program recognizes and rewards outstanding academic performance in business and real estate courses. In addition to education funding, recipients are also provided access to career opportunities and internship programs available within the Chicago real estate community. Professor Roger Cannaday, Associate Professor Emeritus at University of Illinois at Urbana Champaign helped create the SIOR Chicago Scholarship award. The SIOR Foundation’s mission is to promote and support initiatives that expand, educate and enrich the commercial real estate community. Established in 1962 to publish the industry’s first graduate level textbook on industrial real estate, the SIOR Foundation has maintained its dedication to expanding an understanding of the commercial real estate industry. The Foundation has a matching scholarship program available to the various local SIOR Chapters.

± 172,000-square-feet. Building A will feature 36-foot clear heights; 25 exterior docks; 2 drive-in doors; and 106 car parking stalls with the ability to expand up to an additional 117 car parking stalls. Building B will feature 36-foot clear heights; 43 exterior docks; 2 drive-in doors; and 107 car parking stalls. In addition to the features listed herein, the site will be delivered with 90 trailer parking stalls as a stand-alone lot to have the flexibility to serve both Buildings A and B. The development will also be designed in accordance with LEED Certified standards. The buildings’ flexible design will cater to a range of user needs — with divisibility options from 40,000 square feet up to 170,000 square feet — and a wide variety of tenant types seeking modern Class A space in the core I-55 submarket.

Clear Height Properties closes 34 leases totaling 523,000 square feet in fourth quarter of 2023 Photo courtesy of Clear Height Properties.

Bridge Industrial acquires 22-acre site in I-55 submarket Photo courtesy of Bridge Industrial.

Oak Brook, Illinois-based Clear Height Properties completed 34 new and renewal leases totaling 523,000 square feet in the fourth quarter of 2023, bringing its total to 1.289 million square feet leased in 2023 compared to 498,000 square feet leased during the same period in 2022.

Chicago chapter of SIOR awards $12,000 worth of scholarships

Significant transactions in the fourth quarter of 2023 included: • 1675 Watkins, Columbus, Ohio Bridge Industrial acquired a roughly 22-acre site at the core of the I-55 submarket at the intersection of Rt. 53 and Joliet Road in Romeoville, Illinois.

Christian Krull of university of Illinoia a Urbana-Champaign, Jordyn Dellis from the University of Wisconsin-Madison, Sergio Chapa, SIOR of Newmark, Denise Chaimovitz, SIOR of Paine Wetzel, Anna Zimmerman from the University of Wisconsin-Madison and Xavier Papillon from the University of Illinois at Urbana-Champaign. Photo Courtesy of SIOR Chicago.

The Chicago Chapter of the Society of Industrial and Office Realtors (SIOR) and the SIOR Foundation recently awarded its 2023 Len Caldeira Scholarships totaling $12,000 to four deserving students: Jordyn Dellis from the University of Wisconsin-Madison; Christian Krull from the University of Illinois at Urba-

The project will serve as the future home of ‘Bridge Point I-55 Commerce Center,’ for which Bridge plans to construct, on a speculative basis, two industrial Class-A facilities totaling 292,011 square feet. Bridge acquired the site from Chicagoland-based Orange Crush, LLC., which previously used the facility as an asphalt crushing and transloading facility. Construction is slated to begin in the second quarter of 2024, with project delivery anticipated in mid-2025. Dan Leahy of NAI Hiffman represented Bridge in the sale and will serve as the leasing agent for the development once completed. Bridge Point I-55 Commerce Center will consist of two modern industrial warehouses — Building A, totaling ± 120,011-square-feet and Building B, totaling

• 290,573 square foot lease with a regional HVAC contractor. • The tenant was represented by Mike Semon with NAI Ohio Equities and Nick Tomasone, Joe Davis, and Josh Weithman represented Clear Height. • Kroto, Inc. / iCanvas, Morton Grove • 60,000 square foot renewal and consolidation with iCanvas, an ecommerce printing company specializing in canvas art prints. • The tenant was represented by Marat Safir with TMG Real Estate Advisors. • March Quality Used and New Foodservice Equipment, Addison

JA NUARY /FE BR UAR Y 2 02 4 CHI CAG O I ND U STR I AL P R O P ER TI ES • A 30,000 square foot renewal was completed with March, a foodservice equipment sales company that has been in Addison for over 30 years.

609 Kirk Road is a 504,152-square-foot industrial building that was constructed in 1988. The 30’ clear, precast building is equipped with 45 docks, 3 drive-in doors and an ESFR sprinkler system. Additionally, the property is partially air-conditioned in the warehouse area.

• 4701 W. 135th Street, Crestwood • 23,000 square foot renewal with the largest lawn treatment company in the United States.

1750 Wallace Avenue is a 281,029-square-foot industrial building that was constructed in 1990. The 21’-31’ clear, precast building is equipped with 15 exterior docks and 1 drive-in door. Additionally, approximately 80,000 SF of the warehouse area is air-conditioned.

• The tenant was represented by Aaron Sommer, Elise Couston, and Jimena Sayavedra with Newmark.

The Missner Group leases-up 80,464-squarefoot industrial development in Addison Photo courtesy of The Missner Group.

Photo courtesy of ML Realty Partners.

ML Realty Partners’ deals included: • Undisclosed Tenant: new lease of 70,360 square feet at 1203 Lakeview Drive, Romeoville. • American Signature: new lease of 70,117 square feet at 55 W. Army Trail Road, Glendale Heights. • Ole Mexican Foods: new lease of 18,500 square feet at 14503 S. Gougar Road, Lockport.

Mike Tenteris, Jim Carpenter, Adam Tyler, Scott Goldman and David Friedland of Cushman & Wakefield represented the Seller in the transaction. VK Industrial VI is co-sponsored by Venture One Real Estate and Kovitz Investment Group. The fully discretionary fund targets industrial acquisitions in the Chicago, Northeast and Florida markets.

Marcus & Millichap closes sale of 30,000-square-foot industrial property in Wheeling

• Ferrara Candy Company: lease renewal of 234,000 square feet at 2300 Maywood Drive, Bellwood. The Missner Group announced that its 80,464-squarefoot speculative industrial building at 50 S. Fairbank St. in Addison, Illinois, is fully leased. This was The Missner Group’s second project completed in its three-project joint-venture partnership with Realterm, a Maryland-based investment management firm. The state-of-the-art, A-class building completed construction in July of 2023 with 30,387 square feet of space leased prior to completion to PGW Auto Glass, a leading automotive parts manufacturer and glass replacement service. The Missner Group served as the general contractor of their space, overseeing the construction of office space.

• Pepperidge Farm: lease renewal of 87,602 square feet at 15901 W. 147th Street, Lockport. • Gruma: lease renewal of 61,163 square feet at 14407 S. Gougar Road, Lockport. • United Trading: lease renewal and expansion within 201 W. Oakton Avenue, Des Plaines, now occupying 60,311 square feet. • Nimlok Chicago: lease renewal and expansionwithin 111-115 Rawls, Des Plaines, now occupying 51,133 square feet. • Shape: lease renewal of 39,291 square feet at 2105 Corporate Drive, Addison.

Following the completion of the building The Missner Group leased 20,032 square feet of space to Professional Parts Group, a local distributor of automotive parts. The space will be used for warehousing and distribution. The Missner Group will serve as the general contractor for the build-out of their warehousing facility and office space for employees. Construction began in early November of 2023 and is expected to be completed in the first quarter of 2024.

“ML Realty Partners continues to see demand for highly functional buildings located in key markets.” said Matt Novak, Leasing Director of ML Realty Partners. “In maintaining our investment strategy of acquiring, developing, and operating assets such as these, we continue to experience existing clients wanting to grow with us. We are also attracting new clients seeking a strong partner that aligns with both their current needs and a future growth plan.”

The final 30,045 square feet was leased to Midwest Solutions a Solar Energy company specializing in renewable energy solutions. Their space will serve as an office, warehouse, and distribution center.

Venture One Real Estate acquires 785,181-square-foot industrial portfolio in Chicago suburb

The 80,464-square-foot building is situated on 5.7 acres near I-355 and I-90. The development features two drive-in doors, 13 exterior docks, and a 32’ clear ceiling height.

Photo courtesy of Venture One Real Estate.

CBRE’s Cal Payne and Genna Nicketta represented The Missner Group and Realterm. Stephanie Park of CBRE represented PGW Auto Glass. Chris Nelson of Lee and Associates represented Professional Parts Group and JLL’s Phil Reiff represented Midwest Solutions.

ML Realty Partners celebrates strong end of 2023 Itasca, Illinois-based ML Realty Partners leased 692,477 square feet in the Chicago market during the fourth quarter of 2023. About 300,000 square feet of those deals represent existing tenant expansions and new leases.

Photo courtesy of Marcus & Millichap.

Marcus & Millichap brokered the sale of 200 E Marquardt Drive, a 30,000-square-foot industrial property in Wheeling, Illinois. The asset sold for $1.9 million. Dylan Hyde and Peter Doughty, investment specialists in Marcus & Millichap’s Chicago downtown office, had the exclusive listing to market the property on behalf of the seller, a private investor. The asset is located at 200 E. Marquardt Drive in Wheeling. The property ultimately sold above list price and closed within 40 days of going to market.

Brennan Investment Group acquires seven industrial buildings in Chicago market Brennan Investment Group has acquired seven industrial buildings in Wood Dale, Illinois. Situated on 12.5 contiguous acres in the heart of Chicago’s O’Hare submarket, the portfolio spans 280,947 square feet and features frontage on I-390 and Thorndale Avenue. The portfolio has been institutionally owned for over 20 years and is 100% leased to a diverse tenant base that operates across several key business sectors.

Venture One Real Estate through its acquisition fund VK Industrial VI, LP has closed on the acquisition of a 785,181-square-foot two-building industrial portfolio at 609 S. Kirk Road and 1750 Wallace Ave. in the Chicago suburb of St. Charles, Illinois. The acquisition was a sale-leaseback.

Located in DuPage County, the portfolio sits within a well-established O’Hare industrial corridor that features just 2.1% vacancy across 101 million square feet. The immediate area offers a robust, diverse labor pool, and provides seamless access throughout O’Hare and the greater Chicagoland market.