America's Property Tax Advisor

Distribution Centers are Hot in
the Windy City

BY BOB TIVNAN, CMI, FEBRUARY 2022

Chicago is one of many industrial markets experiencing phenomenal growth. Demand for modern warehouse space has never been higher, particularly for third-party logistics, consumer goods, and e-commerce companies.

 

Industrial vacancy rates in the Chicago area are at historic lows, rents are increasing, and new construction is holding strong. These trends point to rising assessments and higher property taxes.

 

Market Metrics

 

Key points from CBRE’s Chicago Industrial MarketView for last quarter show:

 

  • The Chicago market continued to tighten as space became occupied, pushing vacancy down to its lowest figure of 2.7%, an improvement by 30-basis points from the previous quarter and an 80-basis point decline year-over-year

  • Average asking rent rates climbed to $5.77/sq. ft. by year’s end, a 3% increase quarter-over-quarter, and a 5% improvement year-over-year when averages stood at $5.50/sq. ft.

Demand for new Class A product has been gaining momentum over the past two years. Land scarcity in some areas has pushed developers to re-purpose older, obsolete sites, as well as re-zone certain regions to make way for highly sought-after warehouse and last-mile facility construction.

 

By the end of December, there were 68 construction projects underway totaling 25.2 million sq. ft., slightly below the 25.8 million sq. ft. tracked by the end of 2020. Year-to-date completions totaled just over 31 million sq. ft. comprised of 60 projects. Of these 60 building sites, 74% were constructed as build-to-suits and 26% as speculative.

 

The South suburbs witnessed the highest levels of new product delivered during the year, fueled by an e-commerce user totaling approximately 9.5 million sq. ft. The second-most active submarket for delivered product was the Joliet Area, touting 4.5 million sq. ft. of delivered new inventory. An additional 29 new projects broke ground between October and December, totaling over 8.5 million sq. ft. in the Chicago market. Several speculative projects are in the pipeline and are scheduled to break ground in 2022, as demand for new product is predicted to remain heightened.

 

Tax Planning

 

Investors and developers of industrial properties in Illinois need to consider tax planning prior to construction. Illinois offers a competitive range of incentives for locating and expanding a business, including tax credits and exemptions that encourage growth and job creation.

 

Additional grant programs and access to loans can assist with working capital, machinery and equipment, land acquisition, building construction and public infrastructure improvements. For those looking to invest in Illinois companies, early-stage investment incentives are also available.

 

County Incentives

 

Cook County, IL offers a Class 6b industrial property tax development incentive for new construction, the rehabilitation of existing industrial structures, and the industrial reutilization of abandoned buildings. The goal of Class 6b is to attract new industry, stimulate expansion and retention of existing industry and increase employment opportunities.

 

Under the incentive provided by Class 6b, qualifying industrial real estate would be eligible for the Class 6b level of assessment from the date that new construction or substantial rehabilitation is completed and initially assessed or, in the case of abandoned property, from the date of substantial re-occupancy.

 

Properties receiving Class 6b will be assessed at 10% of market value for the first 10 years, 15% in the 11th year and 20% in the 12th year. This constitutes a substantial reduction in the level of assessment and results in significant tax savings. In the absence of this incentive, industrial real estate would normally be assessed at 25% of its market value.

 

Push Back

 

Not all the reports on the Chicago warehouse market are encouraging. Speculative construction deliveries are expected to decline as developers deal with pandemic related labor disruptions, sourcing materials, lengthening entitlement periods, and community pushback to warehouse development.

 

For example, Allstate is selling their Northbrook, IL headquarters to a warehouse builder, a deal that stems from changing work patterns and the insurance giant’s desire to cut expenses. The buyer is Dermody Properties, a Reno, Nevada-based developer of warehouses.

 

The sale could lead to a land-use fight in the northern suburbs. Area communities have organized to oppose new distribution sites they believe will create congestion, noise and pollution, as reported by the Chicago Sun-Times.

 

The sale agreement filed with the U.S. Securities and Exchange Commission includes contingencies on the buyer getting local approval to redevelop the property.