Chicago Tops All Metros In Office-To-Industrial Conversions. Could Angry Locals Halt The Gravy Train?

America's Second City will probably never convert the rest of the country into believing deep dish is pizza in its purest form. But its industrial players have effectively converted aging office assets to in-demand industrial properties at a rate that is second to none in the U.S. 

The Chicago area is embracing the office-to-industrial trend more than other parts of the country, with hundreds of millions of dollars invested in ambitious industrial projects across its suburbs. The Windy City leads the way in such conversions among all U.S. metros, according to Newmark.

Yet not all communities are friendly to industrial development: Deerfield made headlines when it greenlighted an amendment to its zoning code in February barring several types of industrial assets, including motor freight terminals, logistics centers, fulfillment centers and facilities designed for trucks.

Whether that is an anomaly or the beginning of a reversal that stops the trend in its tracks is now playing out.

Vocal area residents are the biggest obstacle to developers convincing cities to approve these conversions, said Suzanne Serino, vice chair at Colliers. Serino brokered deals for the former suburban headquarters of Allstate and Sears, which developers are converting to an industrial park and a data center, respectively. 

“It's not so much convincing the cities as it is the residents,” Serino said. “Cities are getting tougher, certainly tougher, because the residents are objecting.” 

Since 2018, there have been roughly 16M SF of office-to-industrial conversions completed or under construction across roughly 80 properties, according to Newmark data acquired by Bisnow. Chicago leads all metros with 3.9M SF of converted space, with Los Angeles' 2.6M SF and Orange County's 2.5M SF rounding out the top three.  

Serino said she can boil down Chicago’s countrywide lead in office-to-industrial conversion to one simple factor: a high demand for industrial space and a low amount of available land to develop. 

“If you look in O'Hare, there's no land,” Serino said. “Even in I-55 and now in DuPage. So then you start saying, ‘OK, well, we need land. OK, who's got land to give up? Yeah, that office building is empty.’ I think it's really that simple.”

Office-to-industrial conversions will likely play only a small role in addressing a slew of unused suburban office stock. But developers plan to transform about 1.1M SF of Chicago-area offices into 1.6M SF of industrial. 

Dermody Properties’ revamp of the former Allstate corporate campus in Glenview, which will slash 1.4M SF of office property in favor of a 3.2M SF industrial development, is under construction. 

Dermody acquired the 232-acre site for $232M in October 2022. It is developing a 10-building logistics park, with half of the buildings now in the works. 

The developer is on track to complete the first phase of its conversion by the end of the second quarter, Midwest Region Partner Neal Driscoll said. Dermody is pre-leasing all five buildings it is set to deliver in Phase 1, with a completed lease on one property and letters of intent out for the remaining buildings, Driscoll said.

Driscoll said the company garnered community support for the project through an effort to improve the parcel’s surroundings and educate residents about how the company plans to minimize noise and light pollution. The project’s adjacency to the interstate also made it more digestible for the community, diverting truck volume from a major residential corridor, he said. 

“There is a lot of pushback for industrial, which is primarily driven by fear of the unknown,” Driscoll said. “Yet the role of a well-functioning planning department at any municipality is anticipating and trying to guide the direction of their community based on what's happening in the economy.”

Vacant office stock is a major problem for suburban Chicago. The availability rate in the first quarter was 31.4%, an increase of 50 basis points from the year prior, according to a Q1 Savills report. Several landlords “remained out of position to execute deals due to inadequate capital,” the report says. 

With vacant office properties leaving a sizable hole in many municipalities’ tax rolls, suburban governments could have to choose between allowing industrial developments or weighing down their residents with a larger tax burden, Southland Development Authority CEO Bo Kemp said. 

For many suburbs, Kemp said “the battle” over the next 10 to 15 years will be the degree to which they allow more commercial and industrial properties to integrate into their communities.

Rising operating costs and a lack of suburban density are pressing the issue, he said. 

“It's forcing everybody to have to consider the possibility of taking existing commercial property and expanding it, bringing in potentially new industrial property,” Kemp said. “Those things sit contradictory to the desires of most of the community. There is no squaring that circle. You have to make a choice about what you want.”

Deerfield made that choice in resounding fashion in early February when its board of trustees unanimously approved amendments to municipal zoning code that effectively ban industrial developments. The amendments clearly define warehouse and distribution facilities and make it “abundantly clear” that they are prohibited in the village, Deerfield Deputy Village Manager Andrew Lichterman told the Chicago Tribune.

Bridge Industrial shelved a proposal to convert the Baxter International headquarters in Deerfield into a 101-acre industrial park last year after opposition from residents, The Real Deal reported.  

Office-to-industrial conversions have increased truck traffic and led to “related adverse impacts,” including safety risks to smaller vehicles, bicyclists and pedestrians and an uptick in street maintenance costs, according to a memo from the Deerfield Plan Commission to the village’s mayor and the board of trustees.

“It’s important to set that expectation with developers so they can choose a different community that allows these types of developments,” Lichterman told the Tribune.

Other municipalities may pass ordinances banning such conversions, Driscoll said. The burden falls on the industrial industry to work with communities to educate them on the goals of different industrial developments and how they can be complementary to the area. 

If industrial players don’t, it is likely more communities will adopt Deerfield’s stance, Driscoll said.

“It's a much more transparent media landscape, and so people pick up on the story from Deerfield, Illinois, in California or in New Jersey,” he said. “It's happening everywhere, and I'm sure we will continue to have communities who are fearful of this use and are trying to create roadblocks for industrial development.”

But even in communities that welcome office-to-industrial conversions, those projects remain a fairly “niche story” for both asset classes at large, said Lisa DeNight, managing director of national industrial research at Newmark. 

“It's a more impactful story for the office market,” DeNight said. “It really does improve the health of the office market if obsolete, vacant inventory is removed … even if it is a small amount. The industrial market is such a behemoth that it's a smaller part of the industrial story.”

DeNight said as the office-to-industrial trend has evolved, the story has widened in scope to include conversations about the “highest and best” use of the land underneath buildings. The power supply and built-out infrastructure on some office campuses lend themselves well to industrial and data center conversions, DeNight said. 

Compass Datacenters scooped up the former Sears corporate headquarters in Hoffman Estates for $194M last year and plans to convert the site into a 200-megawatt data center campus, CoStar reported. The company planned to start demolition of the 2.4M SF office campus in January, according to the outlet.

But data centers come with their own set of conversion challenges. They have greater energy needs than standard industrial properties, which may not make them feasible for all potential sites, Serino said.

“The infrastructure has to be there, the power and the fiber has to be there,” she said. “If it's not, then you're not going to go in that direction.”

Some municipalities recognize the benefits of certain industrial assets to help towns bring high earners to their area and further onshoring and reshoring goals, Serino said.

“Not all industrial is built equally,” she said. “There's a difference [between] a high-use daily distribution facility and a manufacturing facility, and those bring in really high-paying jobs.”

And not all experts are convinced Deerfield is the beginning of a larger trend of towns thumbing their noses at industrial development.

“I don't know if … municipalities are going to all start banning industrial,” said Jared Morzinski, senior research analyst at Newmark. “I think they all want properties around their residences that help out the communities as best as possible in terms of tax revenue and also don't have a negative effect on the people that live in those areas.”