As The Chicago Industrial Market Heats Up, Experts Encourage Due Diligence As A Pre-Leasing Strategy

The Windy City may be preparing for winter, but its industrial real estate market is heating up. There was 10M SF of new leasing activity in Chicago during Q3 2018, and industrial vacancy dropped to 6.4%, Colliers reports. According to CBRE, Q3 also saw 3.7M SF of industrial construction completed. 

As Chicago’s industrial market continues to soar, developers and buyers are taking advantage of the city’s location at the center of the U.S., as well as its proximity to Lake Michigan and several major roadways. But this popularity and increased competition have prompted many owners and developers to purchase industrial facilities without conducting the proper due diligence. 

“The market is hot, and now that we’ve entered Q4, there are a lot of people who are just buying to get ahead of the competition,” EBI Consulting account executive Nathan Schaefer said. “But at the end of the day, it is nearly impossible to figure out what your return on investment is when you don’t take into consideration the condition of building components and the real-world costs of ownership once you actually acquire the asset. It’s important to heighten your level of due diligence, understand your assets and make sure your property conforms to the needs and wants of tenants.”

Schaefer has seen this problem play out firsthand. As an account executive and adviser to the Chicago real estate community, he works with clients who struggle to invest in due diligence for their industrial properties. To ensure buyers are getting the most from their investment, they need to look critically at each aspect of a facility and investigate the problems that could occur in the future, Schaefer said.

Roofing, for instance, is one of the most expensive big-ticket items people look at before they purchase an industrial asset, Schaefer said. Roofing materials can cost up to $5/SF, with labor costs of up to $8/SF. By conducting due diligence, potential buyers can make sure the roof supports the facility and avoid unnecessary expenses. They can also measure clearance heights, and ensure that trucks and other vehicles entering the facility have the space they need.  

When working with clients, Schaefer and the EBI Consulting team conduct a standard property condition assessment, which helps people understand the complexities of a given property. These services are not only useful for people buying assets but can also give lenders visibility into the type of facility they are investing in. 

Schaefer also recommends hiring a third party to do a deeper dive into a property, especially when it comes to roofing. 

“A roofing specialist can give expertise and gauge the life of that roof and what it will actually cost to replace it down the line,” Schaefer said. “A lot of times people go straight to a local roofer, often someone they’ve worked with in the past, but they don’t always consider that that roofer has skin in the game. At the end of the day you’re getting a clearer and better understanding of what condition your roof is actually in with a roofing specialist who can give more of an impartial opinion.”

When conducting due diligence activities, it is also important to hire a team with local market knowledge. In a city like Chicago, there are specific code violations and zoning laws that can impact commercial real estate operations. Knowing how an industrial facility was previously used and understanding the history of a submarket can help buyers make the most of their investment. 

This feature was produced in collaboration between Bisnow Branded Content and EBI Consulting. Bisnow news staff was not involved in the production of this content.