Southeast Wisconsin positioned to be next big industrial hub?

By Mia Goulart, Senior Staff Writer

Southeast Wisconsin has remained an unmined gem compared to neighboring submarkets, but it’s unlikely it will stay that way for long, as the region continues to making a name for itself as a hub for industrial end users.

This month, Illinois Real Estate Journal turned to Colliers Executive Vice President Ned Frank and HSA Commercial Real Estate Vice Chairman and CEO Robert Smietana to discuss the region’s industrial market in greater detail, as well as specific projects currently underway.

Illinois Real Estate Journal: What’s unique about the region that makes it an attractive location for industrial end users?

Ned Frank: The area is unique in that it is still an untapped market. Everything that an end user could want is available, like abundance of labor, direct access to an interstate, ongoing construction of modern warehouses, and municipalities that work hard to not only keep companies in the region happy, but to attract new business. It’s evident as you continue to see companies look to relocate across the border into Southeastern Wisconsin.

Robert Smietana: In Southeast Wisconsin, industrial end users can find large parcels of improved land available to accommodate buildings of one million square feet or more with plenty of space for trailer parking as well. These users are also attracted to the easy access to Interstate 94, which has recently been expanded to eight lanes, four in each direction, for quick deliveries to customers in the Milwaukee and Chicago metros. In addition, the region benefitted from the hundreds of millions of dollars in infrastructure improvements made in recent years to draw large corporations to the region. Finally, industrial end users enjoy a lower cost of business compared to Illinois while maintaining proximity to customers in both states.

Illinois Real Estate Journal: What does the supply/demand ratio look like in the region? Is there enough supply to match the demand?

Frank: Last year experienced record supply and demand in the region, with developers delivering 18 buildings totaling 6.9 million square feet during 2022, 73% greater than the previous record of four million square feet in 2021. Despite this large amount of supply, the net absorption in 2022 totaled 4.7 million square feet—another record for demand.

This year, developers continue to build and will deliver 13 speculative projects totaling 5.8 million square feet across the market, and it’s safe to assume that the supply will match the demand.

Smietana: Fewer new industrial buildings will deliver in 2024 because of the higher cost and lower availability of capital, which will create a tighter market for tenants.

While demand for space from manufacturers and warehouse tenants has slowed, vacancy rates in Southeast Wisconsin remain near historic lows. Fewer new construction projects on the horizon will keep absorption rates from falling.

Illinois Real Estate Journal: How have rising interest rates affected activity in the region? Has this affected the pace of construction of new projects and/or the amount of investment activity in the sector?

Frank: The region did not seem too affected by rising interest rates what with the record-setting supply and demand in 2022, also shown by how much supply will also be delivered in 2023. The largest lease transaction between Illinois and Wisconsin at 1,048,961 square feet was executed in Southeastern Wisconsin, which further proves that the region is being paid more attention in terms of new projects and investment activity.

Smietana: Short-term interest rates quickly rose from near 0% to levels over 4.5%, which is starting to slow the economy as intended. Because of rising rates, some lenders are not lending, so we’re seeing fewer new construction starts, which will keep vacancy rates from rising.

Illinois Real Estate Journal: What specific industrial projects are going on in Southeast Wisconsin that are especially exciting?

Frank: There are a lot of exciting projects to come in Southeast Wisconsin. One of the projects that stands out to me is the 288,000-square-foot cargo facility that Crow Holdings will be building at General Mitchell Airport, another example of an untapped resource the area has to offer.

Smietana: Construction on a 550,647-square-foot speculative warehouse, the first of three buildings in HSA Commercial’s new Bristol Highlands Commerce Center West, is nearly complete. Located at the southwest corner of 136th Avenue and Wilmot Road in Kenosha, Wisconsin, the new 82-acre warehouse park will total 1.3 million square feet upon full buildout. Scheduled to deliver in Q3 2023, the building will feature 40-foot clear heights, 79 truck docks, four drive-in doors and parking for 106 trailers and 256 cars. The space will be leased by CBRE.

When complete, Bristol Highlands Commerce Center (East and West) will comprise six buildings containing 2.4 million square feet of industrial space.

cities, has seen one of the highest changes in return rates in the nation since the beginning of the year, at over 50%, based on a report by Kastle Systems. With a job market that’s less frothy, people are realizing in person face time and collaboration is more important than ever.

But the numbers won’t continue to rise without the incentive of experience. Quality over quantity is still being prioritized when it comes to leasing office space as highly amenitized, smaller footprints are favored over those stiff and cubicle-dense with more square footage.

Wallenberg said it starts with addressing two questions: the reason behind employees’ reluctance to go back and the means by which the issue can be resolved. It’s all about the experience. JLL is seeing their clients, as well as others in the market, try to manage what that experience looks like from employees’ morning commute to their lunch break and ending with errands or happy hour on their way home.

“We’re not trying to entice them to come into a designated seat, but rather take part in the entire experience,” Wallenberg said, which does, of course, include the work being done within the space.

Increasing productivity through a positive, exciting experience that is looked forward to, rather than dreaded. That’s the objective, and part of that is creating a space within the office footprint that’s equally as vibrant and productive as the footprint itself, specifically of the West Loop and Fulton Market.

For outdated buildings, and those unwilling to evolve, Marrion said they’re in trouble. More and more are going back to the lender or traded and sold. 161 N. Clark and 200 S. Wacker are both examples of buildings changing hands due to users’ flight to newer, amenitized space.

“Both are beautiful, well-located buildings but have below-average amenity packages,”

Marrion said. “They will need to be renovated to remain competitive, and since the current owners have chosen to not move forward, it’s likely both will be sold to new owners willing to take the plunge.”

In these cases, Marrion said one must spend money to make money, and these value-add opportunities—if done right— are likely to pay off in the long run. For example, 161 N. Clark is directly across from Google’s Thompson Center and will certainty benefit, as will the neighborhood around it, once the project is completed in 2025.

It also must be noted that the reluctance of some employees to return to the office has not only affected the office sector but retail and mixed-use buildings, as well. JLL has observed changes in schedules to adjust to the number of people in and around certain buildings in the CBD—Tuesday through Thursday are the weekdays that reflect the highest employee occupancy, and the nearby amenities have been scaled up on those days to meet the demand. While this approach aids in retaining employees on those days, solely offering amenities during that time might reinforce their desire to work from home on other days.

“Limiting our attention to Tuesday through Thursday only furthers the issue at hand because the standard work week is Monday to Friday,” Wallenberg said. “Some of the surrounding businesses are offering certain specials on the quieter days to entice people to come then, too.”

Looking ahead, large users are exploring opportunities in the market and the second half of the year will reflect if more companies have chosen to take advantage of long-term commitment strategies or continue their short-term cycles of rightsize and renew.

Another exciting bit that will be tracked in the second half of the year is the announced office conversions on LaSalle Street, such as 135 S. LaSalle and 111 Monroe, and how it will affect other businesses on LaSalle.

As for the return-to-work movement, JLL and Cresa are optimistic about the future, albeit cautiously so. It’s not as simple as a one-size-fits-all solution, but companies across all sectors are starting to experiment with solutions that allow for flexibility.

“Employees will continue to return to the office, but companies will be more thoughtful in ensuring the space is evolved for the new way of work,” Marrion said. “Boasting a space hat is desired is, and will remain, the priority.”

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Market Leader Joseph Ahrens confirmed increased interest in the number of end user projects, as opposed to the boom of spec buildings, which represented a majority of PREMIER’s projects 18 to 24 months ago.

When it comes to the construction of tailored properties, there exists a distinct category of design trends, including the emphasis on sustainability and environmental, societal and governance (ESG) initiatives. More and more clients are showing interest in eco-friendly design elements like solar energy to replace or supplement electricity from a grid—PREMIER Design + Build Group has also looked into geothermal energy as a substitute for conventional gas and electric heating and cooling, driven by a concern for the volatility of fossil fuel costs, though it’s not yet being marketed to the same caliber as solar.

It’s encouraging that sustainability, along with amenities such as EV charging stations, is becoming increasingly commonplace—and while it does cost more on the back end, it can result in long-term savings for users. Ahrens said alternative energy sources like solar have made significant progress in the past decade and continue to be promoted and incentivized to attract financially cautious but forward-thinking users.

In some cases, the current cost of fuel itself has proven incentive enough. And contrary to decades past, those financing these projects are willing to spend more on the back end to ensure they will be an eco-positive contribution long term.

Another trend that’s taken a turn is the type of user demanding space. While manufacturing and e-commerce companies previously dominated the landscape, the current clientele is much more varied, as the tech, food and beverage and medical sectors are among those expanding their footprint in Chicagoland.

“There’s a lot of pent-up growth that was put off as everyone was booming through the last few years and focused on making their business work while dealing with demand and challenges like supply chain issues,” Ahrens said. “Now it seems those companies have a chance to take a breath and invest into the future of their business after experiencing such growth the past few years.”

Similarly, Ahrens said as the market has pivoted in the last few months, there doesn’t seem to be one submarket that stands out above the rest in terms of construction/ leasing activity, as the firm’s current projects are representative of many, including a handful of build-to-suit, expansion and redevelopment projects, like the former Allstate Campus in Glenview, Illinois, on which PREMIER serves as the GC.

Construction of Dermody Properties’ The Logistics Campus commenced in October beginning with the first five buildings, representing over 1.2 million square feet, scheduled for completion in Q2 and Q3 of 2023; Phase II will deliver five additional buildings totaling more than two million square feet.

Despite the changing patterns of demand and the methods used to meet them, the sector is still considered one of the most robust, even amidst the ongoing recession. Ahrens said it’s a matter of perspective. The market conditions of late 2021 and 2022 established a new precedent for what is considered “normal,” but experts foresaw that it was unlikely to be sustainable long term, which has proven true by the ongoing challenges that are still working their way through the system.

“It might feel like less activity because of the volume of projects built in the last two years,” Ahrens said, “but there are a healthy number of projects that are out there and climbing.”

Of course, any discourse on industrial activity would be incomplete without acknowledging the significant role played by Amazon and the effect it’s had on the region in the last several years. As Amazon continues to curb the pace of its expansion and shift its focus to enhance the infrastructure of their current facilities, its evolving dynamics in the coming months are something to monitor, as it’s bound to have a profound impact on the overall market.