Real Estate: Industrial resurgence spurs spec development

Southeastern Wisconsin remains one of the strongest manufacturing regions in America. The manufacturing sector has had some of the biggest gains during the tepid economic recovery, which has boosted manufacturers in the region and has helped strengthen the area’s industrial real estate market.

The gains in the region’s industrial real estate market are so significant that some developers are now planning speculative industrial developments, especially in the I-94 corridor between Milwaukee and the Illinois state line. That is a major shift since spec development had been virtually non-existent since the beginning of the Great Recession.

The industrial space vacancy rate in southeastern Wisconsin dipped to 8.0 percent in the second quarter, according to the Commercial Association of Realtors Wisconsin (CARW) and Xceligent. The region’s industrial space vacancy rate has declined steadily since peaking at 9.2 percent in the first quarter of 2010.

Southeastern Wisconsin absorbed 446,378 square feet of industrial space during the second quarter and during the first half of the year has absorbed 1.65 million square feet of space.

Racine County’s industrial real estate market is in particularly good shape. The county had an industrial space vacancy rate of 3.8 percent in the second quarter and has absorbed 372,578 square feet of industrial space this year.

Although Racine has lost a substantial amount of industry that it had decades ago, most of the buildings that were vacated are obsolete for modern manufacturing operations. The county has a shortage of modern industrial buildings that meet the needs of today’s manufacturers, said Jerry Franke, president of Milwaukee-based Wispark LLC, the real estate development division of Wisconsin Energy Corp.

“The Racine market is actually very tight for quality space,” he said. “It has been a tweener market for a long time. It has been considered too far south from Milwaukee and too far north of Chicago. A lot of its growth has been organic and from international companies. It has not been a strong spec (industrial development) market, but that is starting to change.”

During the second quarter, Waukesha County had the highest absorption in the region absorbing 232,046 square feet of industrial space and lowered its vacancy rate to 5.2 percent. Kenosha County had the second highest amount of absorption in the quarter, absorbing 128,469 square feet of space. Its industrial space vacancy rate is now at 9.9 percent.

The strength of the industrial market in the I-94 corridor between Milwaukee and the Illinois state line has prompted three developers to work on plans for speculative industrial developments:

Wispark and Oak Brook, Ill.-based CenterPoint Properties plan to build an 183,000-square-foot speculative industrial building in the GrandView Business Park along I-94 in the Town of Yorkville in Racine County. Anixter Inc. will anchor the building and occupy about 73,200 square feet of space. The building will be built just north of a similar-sized building that Wispark developed and is occupied by Cordstrap USA Inc. and 2nd Wind Exercise Equipment.

Construction is expected to begin in August and should be complete in the second quarter of 2012.

Chicago-based HSA Commercial Real Estate is considering plans to build a 100,000-square-foot speculative industrial building at its Park 94 development in Mt. Pleasant. Park 94 currently consists of two buildings with a total of 448,610 square feet of industrial space on an 83-acre site southwest of Highway 20 and Highway V.

Milwaukee-based Zilber Ltd. plans to build a 60,000-square-foot spec industrial building in the Lakeview Corporate Park in Pleasant Prairie. The project is expected to begin soon and be complete in January.

“I think what’s happening is there are some developers that are putting it out there that they could do (spec industrial) developments,” said Jim Barry III, president of Milwaukee-based Cassidy Turley Barry. “I think they’re seeing that there’s been positive absorption for several quarters now. That is spurring them to take a look at spec projects.”

Financing for commercial real estate development remains tight, so most of the speculative industrial projects that get built will first need to secure an anchor tenant, Barry said.

Indeed, Franke said the Wispark project would not be preparing to break ground without Axiter’s commitment as anchor tenant.

“Spec is a four-letter word in today’s financing environment,” he said.

However, a well-capitalized firm such as Zilber is able to move forward without an anchor tenant.

“Of late we’ve been able to find tenants (for spec buildings) before the buildings are completed,” said Zilber vice president Mike Mervis.

The lack of available land in Lake County, Ill. for new industrial development and the high price of land south of the state line has spurred significant industrial development in Kenosha County for several years.

“That Milwaukee to Chicago corridor, especially north of the border, is very price competitive,” Mervis said.

The existing industrial real estate stock in northern Illinois is aging, and many tenants have moved to newer buildings north of the state line, Mervis said.

“A lot of the buildings in northern Illinois are old,” he said. “A lot of (northern Illinois industrial tenants) are not interested in renewing. They can move 15 miles north for significantly less and get into a newer building that is built out to their specifications.”

In five to 10 years developers will probably start tearing down older industrial buildings in northern Illinois to replace them with newer structures, Mervis predicts.

The reconstruction of I-94 north of the state line and pro-business approach by Gov. Scott Walker and the Republican-controlled state Legislature, compared to the tax hike on businesses enacted this year by Illinois Democrats, is also encouraging Illinois businesses to move to industrial space north of the border, Barry said.

Racine and Kenosha counties benefit from being located between the Chicago and Milwaukee metro areas and within short drives to Mitchell International and O’Hare International airports, Barry said.

Major industrial real estate deals this year in the I-94 corridor between Milwaukee and the Illinois state line include: Lake Forest, Ill.-based Hospira Inc. leased an 82,104-square-foot building in Pleasant Prairie from Zilber Ltd.; AllStates Trucking leased 63,838 square feet of space at Park 94 in Mt. Pleasant from HSA; Sturtevant-based Diversey Inc. leased 150,000 square feet of space in Mt. Pleasant; and Crystal Lake, Ill.-based Catalyst Exhibits announced plans to move to a 144,000-square-foot building in Pleasant Prairie.

“I think a lot of companies are seeing the I-94 corridor as a very favorable place to take a look at,” Barry said.

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