Leasing In Big-Box Buildings Breaks Records After Perfect Storm Fuels 2020 Market
The Huntley Outlet Mall in far north suburban Huntley was knocked down several years ago after its occupancy rate fell to an unacceptable level, but this year a new industrial distribution development will rise to take its place, the latest sign of how e-commerce has upended the Chicago region’s retail sector.
The Prime Group developed the 320K SF mall in 1995, then formed a joint venture that purchased it in 2016 from Simon Property Group, originally planning to lease it up. But with occupancy then at 40%, it was too big of a challenge. Along with partners Craig Realty Group and The Capital Cos., Prime now plans to start construction this summer on what will eventually be 717K SF of industrial buildings.
“Our company’s history with this site — having developed the original retail outlet mall — gave us a deep understanding of and insight into its highest and best use,” The Prime Group Vice President Michael Reschke Jr. said in a statement.
Developers across the region are making similar decisions, setting all-time records for new construction in 2020 as the coronavirus pandemic further fueled the rise of online shopping and at-home deliveries. But the pandemic isn’t just boosting the overall amount of space underway. The growing demand has led to users taking down huge amounts of space all at once, creating demand for big-box buildings of more than 200K SF, along with megaprojects of more than 1M SF. Demand for the latter group had largely evaporated before the COVID-19 crisis, leaving some spec buildings vacant for several years.
“We had a real dry spell in 2017, 2018 and 2019 in what I would call the mega-box buildings,” Colliers International principal Matthew Stauber said. “But now much of that spec space has been leased.”
“Between the acceleration of online retailing and the DYI sector, the Lowe’s and Home Depots of the world, there has never been such robust demand,” he added.
Lowe’s Cos.’ decision in early 2020 to lease a 1.3M SF distribution building at 1600 Boudreau Road in southwest suburban Manteno, once occupied by Sears, was an important signal to developers that new buildings would find users, Stauber said.
Leasing activity in Chicagoland big-box buildings larger than 200K SF hit 24.9M SF in 2020, the most ever, and up from 20.7M SF in 2019 and 16.4M SF in 2018, according to Colliers International’s year-end report on the sector. Developers now have 25 such projects underway, totaling 18.5M SF, another regional record. And 61% of that space is for build-to-suit projects, flipping the script from previous years, when spec developments were the norm.
The coming year so far looks similar.
Venture One Real Estate started construction in January on a 1.3M SF distribution building for ScottsMiracle-Gro at its 3.3M SF Crossroads 55 Business Park in southwest suburban Channahon. The lawn and gardening company was originally looking for 800K SF, according to Stauber, but increased demand in 2020 led it to instead sign a lease for the proposed 1.3M SF Crossroads 55 building, allowing Venture One to change it from spec into a build-to-suit.
“Nine big box buildings greater than 1M SF are under construction, a record for the market,” according to the Colliers report. “Only one of these projects is purely speculative, while the remaining seven are build-to-suit projects or have been leased by a tenant.”
Institutional investors again see chances for big returns from the region’s big-box sector, Stauber said. That could help shift the balance between spec and build-to-suit developments.
“We will continue to see build-to-suits from a development standpoint,” he said. “But we’ll also see another big spike in spec development in the coming year.”
