As an industrial real estate broker in one of the country’s hottest submarkets, Patrick Turner sensed opportunity when he heard a news report announcing the closure of a national-brand bakery complex near Chicago’s O’Hare International Airport.
“A light went off in my head,” says Turner, a vice president in the Rosemont, Illinois, office of Colliers International. “When you’re talking about urban infill, you can’t just go out and find 10 acres [4 hectares] anywhere around the airport. It just doesn’t happen.”
Divided by a street, the former bakery property now is home to two light industrial warehouses developed by Colliers with Chicago’s Bridge Development Partners. The facilities total a modest 64,000 sq. ft. (6,000 sq. m.), which, combined with the choice location, fits the profile of some of the most coveted properties in today’s industrial real estate market.
“We have both buildings fully leased at some of the highest watermark rates in the market,” says Turner. “The real gap in the market today is the ability to deliver those smaller units.”
That demand is being driven by the accelerating expansion of e-commerce and the ever-shrinking delivery times promised by Amazon, whose competitors are scrambling to keep up.
“You need to have inventory in more places and closer to the customer,” says Benjamin Conwell, who leads a special e-commerce advisory group for Cushman & Wakefield.
“It wasn’t too many years ago,” Conwell says, “that in the e-commerce space, everybody was all about great big buildings. But light industrial has gone from being an ugly stepchild to the belle of the ball. In just the last few years, both occupiers and investor capital both have developed a super strong appetite for that kind of product.”
A new study bolsters Conwell’s analysis. In October, CBRE reported that light industrial properties outperformed other-sized industrial buildings over the past five years. CBRE found that light industrial warehouses measuring 70,000 to 120,000 sq. ft. (6,500 to 11,150 sq. m.) registered the biggest decline in availability, down 3.9 percentage points, and the largest gain in average rents, at 33.7%.
‘Hottest Coal in the Campfire’
CBRE’s five-year study period roughly parallels the rise of e-commerce. Online sales now account for about 11% of retail purchases and are projected to rise to 17% in 2022, according to CBRE.
“Light industrial is the hottest coal in the campfire,” says Chris Zubel, a senior managing director who leads CBRE’s representation of industrial and logistics investors. “We’ll continue to see strong demand for light industrial facilities as e-commerce grows, which in turn means we can expect to see additional strong rent growth for these warehouses.”
The expense and scarcity of urban infill properties, plus the specific demands of e-commerce, make standing up a “last touch” warehouse tricky. Location is paramount. The analysts we spoke with also agree that abundant space for employee parking and truck turnaround eclipses the need for interior storage capacity, especially when goods are moving in and out quickly.
“We like a higher parking ratio with less coverage on the site. Less building on a bigger lot gives people more flexibility in where they can store last mile trucks,” says Brian McKiernan,” senior vice president of Chicago-based CenterPoint properties, who is active in the light industrial space.
Unlike Colliers, which bulldozed the former Chicago bakery and built from ground up, many developers elect for adaptive re-use of existing infill buildings. That’s a margin call, though, generally made on a case-by-case basis.
“There are no absolutes one way or the other,” says Cushman & Wakefield’s Conwell. “Can I adapt my operation to what’s there already? Can I do some limited amount of remodel and have it up and running within six to nine months? There’s operational risk in going with an older building, but there’s capital and speed-to-market risk by going with an all new development.
“Five years ago,” Conwell adds, “there was virtually no new state-of-the-art urban infill product. Now, as demand has matured a bit and capital sources and developers have gotten more confidence in being able to permit and design these buildings, we’re actually seeing more of a mix.”
Anthony Pricco, Bridge Development’s president, says the decision of whether to adapt or build from scratch can vary by market.
“In a tighter market like New Jersey or the boroughs in New York or the South Bay or Los Angeles, people are going to live with some inefficiencies to get a prime location,” he says. “As developers, we see an old building and wonder how we can take it down and build something new and modern. But for a lot of users, if it’s a well-located asset, they can make do with some things we might view as obsolete.”
Change is the only true constant. Drone delivery, long promised, is getting closer. Less hyped, but perhaps more significant, is the near-term prospect of teams of delivery bots dispatched en masse from autonomous motherships.
“Retailers,” says McKiernan, “still don’t have the perfect profile of how their e-commerce distribution works. There’s no set profile for the perfect building to just go buy or develop. That’s what’s unique about this whole segment, that it’s still to be defined. That’s where it gets pretty interesting.”