June 2013

Build-to-Suits Key to I-80/Joliet Corridor Growth

By Steve Connolly, SIOR, Executive Vice President and
Partner, NAI Hiffman

The I-80/Joliet Corridor Submarket has historically
attracted some of the largest transactions in the market; at the same time it
is among the most scrutinized by developers and investors. At the peak of the
last cycle in 2006 and 2007, many national investors, developers and REITs with
land positions in the Corridor developed speculative industrial projects.
Shortly thereafter the global recession hit suppressing tenant demand and
pushing vacancy rates to 20%. With limited tenants in the market, owners were
forced to reevaluate their proformas and make tough deals to carry their
projects forward.

As the market has recovered over the past four years and
vacancy has returned to a more normal 11.5%, many investors are asking
questions again about the future of the I-80 submarket. Most questions are
centered on rent growth and speculative development. Some owners won’t consider
the sub-market given the pain endured during the past cycle but they will be
missing an opportunity. When large requirements come to Chicago, many choose to
locate in the I-80 Corridor and build-to-suits have historically been a driver
for growth and activity in the area; this was true during the past cycle and as
the market recovers this trend will continue.

Big Market — Big
Deals

Regardless of investors’ opinions of the I-80/Joliet
Corridor submarket, it is too large a market to be ignored. The submarket
totals nearly 65 million square feet and has quickly grown from only 20 million
square feet in 1990. The area, combined with the I-55 Corridor submarket, has seen
the most development during the past 20 years by far. Between 2003 and 2008 a
number of large deals landed in the I- 80/Joliet Corridor, and many of these
were build-to-suits. The following is a list of build-to-suit transactions over
400,000 square feet completed in the I-80/Joliet Corridor between 2003 and
2009:

As the economic recovery has progressed over the past few
years, several large build-to-suit projects have been announced or completed in
the I-80/Joliet Corridor submarket including:

Build-to-Suit Drivers
– The I-80/Joliet Corridor submarket historically offers numerous available
options for users. Several factors have contributed to the build-to-suit
activity in the area.

Larger, specialized requirements – Big
requirements need ample land and the I-80/Joliet Corridor is one of the few
areas it can be found. In addition, as requirements have grown in size, many
large users have specialized requirements for trailer parking, clear height,
maximum loading, bay sizing, and floor loads.
Technology Innovation – Many users today are
making significant investments in material handling equipment and
inside-the-box technology to improve efficiency, reduce labor costs, and
provide better inventory management. In many cases a building is designed and
built around the material handling system making a state-of-the-art
build-to-suit a better alternative versus retrofitting an existing building.
Entitlement, Utilities, and Experience – The
Corridor has over 25 business parks that are “shovel ready” with
entitlements completed and utilities in place to deliver a large building
inside of nine months.
Intermodal Development – The I-80/Joliet
Corridor is home to the BNSF and UP intermodal ports. These are multi-billion
dollar investments designed as a driver for global transportation. Leading
import companies like Walmart and Home Depot have developed build-to-suits
within these intermodal ports, seeking to improve their supply chain and lower
transportation costs.