Sterling Bay Ramping Up Industrial Development Even In The Face Of COVID-19
The COVID-19 crisis has stalled much of the U.S. economy, but with certain segments like grocery stores, pharmacies and hospitals, along with their underlying supply chains, still operational, industrial developers have opportunities to sign big deals.
Chicago-based Sterling Bay, primarily known as a driving force behind the transformation of the city’s Fulton Market neighborhood from an industrial district into a high-tech office hub, has branched out into industrial development, and after the recent signing of two major leases at Chicago-area properties, company officials say they are still confident about expanding into select cities around the country.
LGSTX Services, a national 3PL, just signed a lease for 335K SF at 2350 Frieder Lane in west suburban Aurora, a 503K SF facility Sterling Bay completed on spec in partnership with Levy Family Partners and Development Resources Inc. That brings the building, which has frontage on Interstate 88, up to 65% leased.
The developer also secured a 90K SF lease for its 153K SF 1035 South Frontage Road in Darien, another new spec distribution building, this one near I-55, and developed in partnership with DWS Group. Sterling Bay did not reveal this tenant’s name, but principal Ron Frain said the present crisis was not an obstacle to forging a deal.
“They were clearly on board and committed. Their business plan is the same as when they started pursuing the space in the third quarter.”
Mark Barbato, director of Sterling Bay’s industrial division, added that although many users are stepping back to reassess the economy and how public health concerns may impact their business, the nation’s humming supply lines mean some pending deals will go forward.
“Good buildings in good locations that stuck to the fundamentals will do well even in the current environment,” he said. “These two deals are good examples of that.”
Barbato said that whatever disruption is caused by the spread of the coronavirus, the crisis will eventually bolster demand for industrial spaces. Brick-and-mortar retail was already vulnerable to e-commerce, he pointed out, and the shuttering of most stores in many regions after lockdown orders, along with the simultaneous growth of at-home deliveries, will reinforce that trend. In addition, the need to accumulate vital medical supplies to treat patients and protect healthcare workers in case of future pandemics should drive demand for more domestic manufacturing.
New facilities won’t take shape overnight. Lenders will in the near future approach potential developments with caution, and may wait until the coronavirus subsides or is seen as under control before committing their dollars, Frain said.
“They have to let this thing plateau,” he said. “It will take a little while for banks to wrap their arms around it.”
In the Chicago region, there will be a significant amount of new spec space that can absorb whatever demand remains over the next few months. In the first quarter, developers completed 23 buildings totaling 6.3M SF, including 3.7M SF of speculative product, according to Colliers International’s latest market report.
That first-quarter activity continued the pace of an active 2019. New Chicagoland deliveries increased to 19.8M SF last year, a 70% boost over 2018, while leasing transactions totaled 34.8M SF, a 12.3% increase over 2018, according to Cushman & Wakefield. That sent the region’s vacancy rate down 60 basis points to 4.9%, a 19-year low.
Food and e-commerce users are running out of space, according to Colliers International principal Brian Kling, and Amazon is realigning its business to meet the escalating demand for essential items, which may lead the internet giant to start taking up more space in the near term.
“E-commerce users are the ones who really understand the benefits of being in modern industrial distribution facilities,” he said.
Sterling Bay plans to be in the industrial space for a long time, Frain said, and unlike merchant builders, which build, lease up and quickly sell off their properties, Sterling Bay may decide to hold onto developments like the ones in Aurora and Darien.
“We may hold them for a few years,” he said. “The market will dictate what we do.”
Although Sterling Bay was originally known as a Chicago developer, the company recently launched a 300K SF office building in Miami, and the industrial division also plans to branch out to other regions, including possible deals in Phoenix, Dallas, Denver and port cities in the Southeast.
Wherever Sterling Bay ends up launching new projects, Frain and Barbato say infill locations, such as the new Aurora and Darien sites, are the future. Giant buildings on the periphery of populated areas are no longer considered as desirable as properties within cities that facilitate last-mile deliveries, or nearby suburbs with access to highways.
“That’s what’s being demanded by a lot of e-commerce companies,” Frain said. “We don’t want to be out in the greenbelts.”