How the I-55 Corridor is shaping the new e-commerce supply chain

Ajlatrace

Rooftops. Population. Talent. These are just a few of the buzzwords you’ll hear developers and brokers mention when they talk about the I-55 corridor. And there’s a good reason for it.

Running from downtown Chicago southwest out towards Bolingbrook and then further south to Bloomington/Normal, Springfield and beyond, I-55 provides a combination of easy access to Chicago population density, the sprawling industrial rooftops of Will County, and everything in between. And you’ve also got Midway airport, the Bedford Park Rail Yard and the CenterPoint Intermodal Center all within reach.

It’s no wonder why I-55 has really become known as being one of the region’s main logistics and distribution corridors. Developers are building spec facilities at a feverish pace and yet tenants continue to line up to occupy these new Class A spaces along the route.

“In Chicago, the focus tends to be on O’Hare, and O’Hare is ground zero for where institutions want to place money and where people want to be,” says Nick Siegel, Chicago Region Partner with Bridge Development. “But I-55 has a lot of the same dynamics as O’Hare: a good, modern highway system, access to labor, access to the city of Chicago, and access to rooftops.”

“Frankly, [the I-55 corridor] is our most modern distribution submarket that can reach Chicagoland quickly,” Siegel adds. “It checks all the boxes of somewhere that you want to locate.”

And indeed, the I-55 corridor is witnessing somewhat of a “Field of Dreams” effect, if you will. If you build it, they will come. And they just keep coming.

Some of the companies with a big distribution and logistics presence along the corridor include RJW Logistics, Best Buy, Crate & Barrel, and of course, there was also Amazon’s $50 million purchase of the 119-acre former Old Chicago amusement park in Bolingbrook which the e-commerce giant plans to use as yet another major distribution center for the metro area.

And then there’s the upcoming Wayfair fulfillment center in Romeoville being developed by Duke Realty. The online furniture retailer will bolster its Chicago distribution via a 1.2 million square-foot facility spanning over an 81-acre site.

“I-55 is a very important piece of our strategy for Chicago,” says Susan Bergdoll, midwest regional leader and SVP of Leasing and Development for Duke Realty. “I have four projects under construction right now and three of them are in the I-55 submarket, so that’s how bullish we are on that market.”

Because it’s a mature, built-up submarket, there are additional layers of complexity when planning new developments. For instance, Duke has already completed at least one redevelopment along I-55 where the existing structure was demolished and a new one built in its place. And for deals like the Wayfair facility, it required patience and timing to piece together multiple properties in order to create the one large industrial site.

The nature of I-55’s reputation as a distribution and logistics corridor, combined with the increase in e-commerce shopping and even the supply chain disruptions for raw building materials equates to scarcity of industrial product in the corridor, meaning that landlords are finding themselves in an even more ideal situation in terms of leverage and negotiating power.

“Rents are going up as we speak. Typically, people were used to a 2-3% increase per year, but if you’re coming up on your lease now, you could be getting a 20-30% increase,” says Jeffrey Kapcheck, Executive Vice President with CBRE. “I’m in the process of representing different tenants with lease renewals and new leases, but the renewal part is the most glaring aspect of it because of the large increases that landlords are asking for, and getting for the most part.”

Until supply catches up with demand, the industrial landscape throughout the I-55 corridor will remain a landlord’s market. But the continued strain on the supply chain for building materials isn’t helping.

“We’re up to 92 million square feet [of industrial space] and the vacancy rate is down to 7%, so I think developers and landlords realize that with the scarcity of land, they’re taking advantage of the lack of product on the market,” Kapcheck adds. “And I mean, COVID didn’t help because construction is down 40% from last year.”

At the end of the day, it’s the shifting buying habits of consumers and the need for labor that is helping drive the industrial e-commerce boom in the Chicago area.

“It’s not that we’re buying more products, it’s that we want them quicker,” Kapcheck says. “I think everyone right now is reimagining and reinventing their supply chain. It’s usually a three-step process where you’ve got the larger building, the mid-sized building, and the smaller urban logistics or last mile building.”

Kapcheck elaborates, suggesting that the larger distribution centers, which can range from 1 million to 2 million square feet might be located out along the I-80 or I-57 corridors, while the mid-sized facilities that span 500,000 to one million square feet are more likely to be found along I-55. Then there’s also the smaller last-mile hubs of 100,000 to 500,000 square feet which will be the closest to the population center.

While there’s been a lot of emphasis put on and attention paid to e-commerce, there’s much more to the Chicago area’s industrial market when you zoom out of the I-55 corridor, Bridge’s Nick Siegel suggests. And in many ways, having a healthy blend is good for landlords, tenants, and the municipalities that rely on the good jobs and taxes that industrial facilities provide.

“If you step out of I-55 and look at the market in general, Amazon is leasing a lot of space, but they’re also not,” Siegel says. “The leases in our portfolio that we’ve done on our spec buildings are with large manufacturing companies. We’ve done two separate manufacturing consolidations; one in Wood Dale and one in Itasca.”

And the blank slate spec building is designed to be flexible for a reason, Siegel adds. We can’t predict how markets will evolve and which industries will be hot, but if you build a space that meets the demands of many different types of businesses, you’re going to be safer in the long run.

It’s trying to get the right mix of users, which not only further promotes economic development, but provides stability and insulation from any future economic downturns. After all, real estate is a cyclical market, and there’s always a need for some level of caution when looking at the big picture risk. But Chicago’s geography, infrastructure, talent and sheer size also help provide further insulation from fluctuating economic conditions.

“One thing that I think gets lost in the mix is that we’re the second largest industrial market in the country,” Siegel says. “So this is just a massive, massive market with so many factors at play and I think we’re insulated from a lot of that risk because we’re not so dependent on one user type. We’re a really diversified, mature market and I think that benefits us tremendously when it comes to leasing velocity and keeping supply and demand in check.”