Multistory Distribution Buildings Are Coming To Chicago, Eventually

Ever since the recession ended, the Chicago industrial market has been setting one record after another for leasing activity, new development and rental rates. Many markets around the U.S. experienced similar successes, as the rise of e-commerce fueled more demand for the distribution facilities needed by retailers and logistics firms to get products into the hands of consumers.

Developers have adopted a number of strategies to satisfy this need, such as creating much larger buildings, sometimes exceeding 1M SF, raising roofs up to 40 feet or sprinkling smaller, last-mile facilities throughout urban cores, allowing distributors quick access to dense populations.

But in a select few markets like Seattle and Brooklyn, New York, some developers decided to build up, rather than spreading out. Prologis led the way in 2017 by breaking ground on Georgetown Crossroads, a 590K SF logistics facility and the first multilevel distribution building in the U.S.

The San Francisco-based company had already built dozens of similar structures in Asia, and some believe multilevel buildings will eventually become popular with American users and investors, especially in markets like Chicago with national reach. Experts will tackle that topic and many other issues at Bisnow’s all-day Midwest Industrial & Logistics Summit June 4 in Chicago.

Most feel multilevel distribution buildings will start popping up in the Chicago region, but it is going to take a long time before builders feel comfortable taking such a big step.

“In Seattle, you’re boxed in by Puget Sound, so land is very scarce, and it makes all the sense in the world to have a multistory distribution facility,” Avison Young principal Chris Tecu said.

“Tokyo has had multistory buildings like this for many years, so this would not be like reinventing the wheel,” Brennan Investment Group Chairman Michael Brennan said.

The Chicago region, however, still has massive amounts of open land without the geographic challenges facing Seattle or other metros hemmed in by bodies of water, like San Francisco or Brooklyn.

“If you need to reach all of the millennials who live close to Chicago’s downtown, a truck leaving a building in Bensenville near O’Hare can get there in about 20 minutes,” Tecu said.

That convenience has fed a construction boom.

According to the latest data from CoStar, industrial developers in the Chicago region have 52 buildings totaling 18M SF under construction. Construction accelerated last year around O’Hare, where builders completed 14 buildings totaling 2M SF in 2018. That boom continued into the new year. Developers have already finished an additional five O’Hare buildings totaling 1.2M SF, and have another six totaling 551K SF still underway.

However, Tecu also expects traffic into Chicago will get worse over the next decade as portions of the metro area get denser. He already notices the difficulties travelers experience when traveling on Friday afternoons, and foresees a time when such trips could at certain times take hours.

“At some point, someone who needs to make fast deliveries is going to say, ‘I can’t have this,’” he said.

But don’t expect Chicago developers to begin massive projects like Georgetown Crossing any time soon. The city still presents a lot of far less expensive options.

"Users already have a lot of choices, and are about to get many more, so we will have enough last-mile capacity to last us awhile," Newmark Knight Frank Executive Managing Director Geoffrey Kasselman said. 

After spending decades building in the suburbs, developers recently started breaking ground on massive new distribution warehouses within the city limits. A joint venture between MAT L.P. and institutional investors advised by J.P. Morgan Asset Management recently finished Marina Crossings in the McKinley Park/Stockyards area on the South Side. The 633K SF speculative development is the largest in Chicago in more than 100 years.

In 2017, developer Hilco Partners purchased the 70 acres occupied by the Crawford Generating Station, a decommissioned coal-fired power plant near the Little Village neighborhood on the Southwest Side, and plans to build a 1M SF distribution facility. 

With all these possibilities, Kasselman asked: "Why would Amazon need to build a five-story building, which could cost $500M, on Goose Island?" 

He recently asked a major developer that was considering a piece of land near O'Hare whether a multistory project on the site was an option. 

"They said, 'We looked at the possibility, but it didn't pencil.'" 

Brennan, whose firm acquires and develops industrial projects, such as the new $1B Elk Grove Technology Park near O’Hare, said developers will eventually run short of options. In the next 10 years, he expects demand for industrial space, including e-commerce facilities, data centers and freezer/cooler buildings, will increase and send land prices shooting up in Chicago.

That is when some developer will take the risk of launching a multistory project, most likely on an infill location within the city, and as close to the downtown as possible, according to Brennan. But the expense of developing one will mean rents higher than most industrial users can afford, so it probably won't serve just any e-commerce user. 

Most likely, it will be a special service providing products people use every day, such as food or prescription drugs, that requires a constant flow of trucks or vans, more than a traditional single-story building could handle, and generating far more revenue than businesses that distribute other items.

"In that case, you could probably make the numbers work," Brennan said. 

Kasselman doubts Chicago will see such a property during the current business cycle. It is more likely to occur at the peak of the next cycle, which means roughly in about six to 10 years. 

By then, developers should have created a set of best practices that help users efficiently move the many trucks going in and out of such facilities. That will increase the comfort level of city officials and nearby residents worried about more traffic congestion.

Financing such an expensive product is another challenge that developers need to meet, but he expects many of the multistory buildings in coastal cities will be successful and sell for big money.

"That will open the eyes of capital markets," he said.  

Tecu said he is also optimistic. 

“Someday, someone will find some location, some piece of dirt that’s not even available today, and make it happen." 

Hear more about the future of industrial construction, design and development in the Chicago region at Bisnow's all-day Midwest Industrial & Logistics Summit on June 4.