DCT Industrial Featured on Crain’s Chicago Business: Warehouses are sexy all of a sudden. Here’s why.

August 27, 2016

An Article on Crain’s Chicago Business by Ryan Ori

Warehouses are sexy all of a sudden. Here’s why.

CHICAGO– In the shadows of the apartment, hotel and office towers rising in recent years, an often unnoticed form of real estate has begun taking off in Chicago: warehouses. Developers are on track to complete at least seven speculative warehouses—constructed without leases signed in advance—in Chicago between late 2015 and the end of 2017, adding up to more than 1 million square feet of space.

That is more than double the amount of spec industrial space built in the city in the previous 14 years combined, according to commercial real estate brokerage Cushman & Wakefield. And this could be just the beginning.

“We’re just scratching the surface,” says Todd Vezza, a senior vice president in the Oak Brook office of DCT Industrial. The Denver-based industrial landlord is building a warehouse in the Stockyards Industrial Park on the South Side. “I think there’s a lot of runway left,” he says. “The only thing that’s holding it back is the scarcity of land.”

Overall industrial construction has ramped up in 2015 and 2016 in the city, after three years of no activity. The uptick in spec projects is especially surprising, though, because they’re the riskiest type of development. Spec construction typically happens only when demand surges.

Developers are wagering that big changes in the economy, workforce and supply chain will cause urban warehouse space to be absorbed as quickly as it’s built.

For years, manufacturing facilities, storage buildings and distribution centers have popped up in far-flung, less congested areas. But as consumers order more and more products online—and demand speedy delivery—e-commerce companies may need more warehouses in the city.

The most prominent example so far is Amazon. The online retailer has been building up a network of mammoth warehouses outside the city. But Amazon also has leased smaller spaces on Goose Island on the North Side and near the Stevenson Expressway on the South Side as it offers deliveries as fast as one hour. “Others will follow as Amazon proves the business model,” says Howard Wedren, principal at Chicago’s Dayton Street Partners, which is building a warehouse in Old Irving Park on the North Side.

Gentrification of longtime industrial pockets of the city is also creating a need for new facilities, developers say. In the Fulton Market District, meatpackers and food distributors have been leaving as the area switches to a mix of restaurants and shops, hotels and offices for corporations such as McDonald’s and Google. North of Fulton Market, there are plans for office developments on and around Goose Island, a longtime industrial stronghold.

As industrial developers rush to meet demand, their biggest obstacle could be a dearth of available land. Especially on the North Side, developers of taller projects such as residential towers can pay much more for land.

One area experiencing a revival is Pullman, where Whole Foods plans a new distribution center. The grocer will join a Method soap factory and the world’s largest rooftop greenhouse, owned by Gotham Greens. Chicago’s Clarius Partners, meanwhile, plans an industrial development in North Lawndale that would include two warehouses built on spec.

Another site that could be in play is a 430-acre parcel along Lake Michigan where McCaffery Interests of Chicago once planned an ambitious mixed-use development. Owner U.S. Steel recently put the South Side property up for sale. A chunk of that land could be ripe for warehouses, says Larry Goldwasser, a senior director at Cushman & Wakefield who ismarketing the site.

“There are more industrial users looking in the city than I’ve ever seen,” Goldwasser says. “As certain areas within the city run out of sites, developers are going to figure out the next up-and-coming areas.”