Industrial flex business parks booming in Chicago and Midwest
Industrial real estate continues to be one of the most in-demand asset classes that is dominating the nation and headlines. Chicago is one of the country’s most critical industrial markets, an international trade hub for the Midwest, and remains a growing market for distribution networks. Despite the year starting with talks of a looming recession, inflation and federal rate hikes, the industrial market is as strong as it has ever been as the city and the region have seen historic low vacancies, growing rents and strong leasing demand for space. According to Colliers International, the Chicago industrial real estate market is demonstrating great resilience in 2023 and is one of the leading industrial markets in the nation, surpassed in importance by only the Southern California region. The city has a strong industrial market with robust demand and a current vacancy rate of 3.5%
Chicago is a vital industrial market due to several key factors, including its access to intermodal railway transportation, air freight from O’Hare airport, a high volume of national and international shipping, barge access for waterborne freight, and a densely populated area. One of the contributions to Chicago’s long-standing success is its diverse range of industries. The multi-tenant flex business park is a unique class of industrial real estate which has continued to experience sustained industrial demand. These flexible spaces have evolved to meet the escalating consumer demand for light industrial needs both in convenience and affordability. While this sector has not received the attention of traditional big-box industrial assets, the appeal of these highly accommodating multi-use spaces has continued in Chicago and markets alike.
Light industrial flex business parks are proving to be a thriving property type and a sound investment that is meeting the growing demand for flexible space. They offer several advantages as compared to high-rise office buildings and traditional big-box industrial assets, particularly when it comes to versatility. The flex buildings within these business parks can accommodate multiple uses, providing tenants with 100% pure office units, pure industrial units, lab spaces and blended-use unit offering a 50/50 mix of office and warehouse (flex space). Repositioning and converting these properties is relatively easy, which minimizes market exposure to one specific unit type or industry and allows for flexibility in space utilization.
Moreover, the ability to address tenant space needs by combining units, redesigning industrial spaces, or adding office elements provides owners with the flexibility to accommodate fluctuations in market demands and enables them to secure a broader range of tenant demand. When a tenant vacates, the opportunity arises to redesign the space to meet the current office-to-warehouse ratio preferences. The single-story format of these flex buildings on a large plot of land enables the conversion of current office space into flex industrial space, accommodating the needs of various tenant types. This contrasts with traditional high-rise office spaces that do not allow for loading conversion. The single-story configuration of flex buildings is also beneficial because it is easier to combine units to create an attractive layout as tenants grow within the same location, if loading is a necessary component.
Accessibility is another key factor attracting businesses and their employees, further driving high lease-up rates. Industrial and flex business parks generally provide direct access to their individual unit entryways, allowing privacy which reduces tenant traffic and minimizes interaction which mitigates possible potential health concerns. These industrial business parks also allow owners to minimize the cost associated with providing and maintaining common area spaces such as common entryways, lobbies, bathroom facilities, mailrooms, and additional space that is unable to provide leasing returns due to needs required of the communal property design. These single-story buildings also allow tenants to provide their employees with the amenity of more immediate access parking as they are often able to do so directly or very near to their units due to the dispersion of parking availability.
The industrial flex space also benefits from additional positive impacts on reduced capital expenditures due to its convenience factor. With renovations occurring within a single business park, owners can efficiently bid out multiple jobs to a single contractor. The ability to complete renovations, improvements, or quick flex suite touch-ups like paint and carpet more easily and efficiently within a single location attracts contractors to provide more favorable quotes for bids. This approach also minimizes vendor time spent visiting multiple tenant sites, provides quick access to shared parking, and increases efficiency for property managers on site. These convenience and efficiency elements offer multiple cost-saving benefits for owners.
The town of Elk Grove Village is a prime example of a flourishing industrial market within the greater O’Hare submarket. Westmount has a tenure of both owning and operating industrial properties within this marketplace. In late 2022, Westmount sold one of these assets, Elk Grove Commerce Park. The property includes a portfolio of 21 light industrial and flex buildings spanning 757,557 square feet, and it sits directly adjacent to O’Hare International Airport. It is one of the very few privately owned properties which directly borders O’Hare airport. Elk Grove Village’s strategic location and proximity to multiple highways and O’Hare make it a solid warehouse location for logistics, transportation, distribution and other flex users. Westmount owned the Elk Grove Commerce Park property for three years and at the time of sale, the portfolio was 97% leased to 107 tenants.
After the completion of the Elk Grove Commerce Park sale, Westmount owns and manages 65 industrial and flex buildings throughout Chicagoland totaling 6.9 million square feet. These buildings are in Buffalo Grove, Vernon Hills, Elgin, Wood Dale, Addison and Wheeling. Buffalo Grove Commerce Park consists of eight buildings, Vernon Hills Commerce Park consists of five buildings and Elgin Commerce Park consists of four buildings. The portfolio includes major companies such as two publicly traded automobile manufacturers, and an international salt producer, as well as smaller startups with as little as 2,000 square feet of space. The business parks and flex buildings have consistently experienced robust demand, rent growth, and higher occupancy rates. Westmount has successfully revamped the spaces it owns and is currently undertaking four office demo projects that will commence in 2023. These projects aim to offer tenants smaller office ratios and make the units more marketable to attract and accommodate incoming tenants. By adapting to evolving market demands, Westmount has positioned these assets for long-term success and sustained high demand. As of now, these light industrial flex business parks sit at 95% occupancy.
Westmount has been active in the industrial market for more than 35 years and our knowledge of the industry and various markets has allowed us to make solid investments in extremely desirable asset classes in high-growth markets like Chicagoland. To date, we have built a portfolio of over 15 million square feet of industrial properties. We currently own and manage 58 buildings totaling 5.4 million square feet across the Chicagoland market, and we continue to see increased demand for industrial and flex space in the Midwest and Chicago in particular. We know the history of the industrial real estate market and believe that its future outlook is strong for the rest of 2023 and beyond. This asset class has had a long-standing history of resilience and continues to perform well despite economic headwinds that have had a greater impact upon other asset classes.
About NAI Hiffman:
NAI Hiffman is one of the largest independent commercial real estate services firms in the Midwest, with a primary focus on metropolitan Chicago, and part of the NAI Global network. We provide institutional and private leasing, property management, tenant representation, capital markets, project services, research, and marketing services for owners and occupiers of commercial real estate. To meet our clients’ growing needs outside of our exclusive NAI Hiffman territory, we launched Hiffman National, our dedicated property solutions division, which provides property management, project services, and property accounting services across the country. NAI Hiffman | Hiffman National is an award winning company headquartered in suburban Chicago, with more than 250 employees strategically located throughout North America.
About Hiffman National:
Hiffman National is one of the US’s largest independent commercial real estate property management firms, providing institutional and private clients exceptional customized solutions for property management, project management, property accounting, lease administration, marketing, and research. The firm’s comprehensive property management platform and attentive approach to service contribute to successful life-long relationships and client satisfaction. As a nationally bestowed Top Workplace, and recognized CRE award winner, Hiffman National is headquartered in suburban Chicago, with more than 250 employees nationally and an additional six hub locations and 25 satellite offices across North America.