Chicago’s food distribution sector is further fueling red-hot local industrial market

Food distributors leased over 6 million square feet the last two years, and the industry might be just getting started

May.May 09, 2019 12:00 PM
From left: Pullman Crossings with (left to right) Bridge Development Partners' Brian Niven, Newmark Knight Frank's Corey Chase, and CBRE's Steve Livaditis

From left: Pullman Crossings with (left to right) Bridge Development Partners’ Brian Niven, Newmark Knight Frank’s Corey Chase, and CBRE’s Steve Livaditis

Bridge Development Partners got into the cold storage business around 2009, a time when getting into any real estate market was tough. But the local industrial developer quickly learned something about cold storage and the larger food distribution industry.

“Even in 2009, vacancy rates were going down and lease rates were going up,” said Brian Niven, senior vice president of cold storage at Bridge. “Food distribution is one of those things that is recession-proof.”

Ten years later, the food distribution industry is seeing a period of growth, and is further fueling a red-hot industrial market. As e-commerce begins to impact the food business — helped by Amazon’s entry into the industry — Chicago’s warehouse market is poised to benefit from the changing grocery sector, industrial real estate experts said.

In the last two years, the Chicago market has seen over 6 million square feet in leasing activity involving food manufacturing and distribution, according to a recent report from Newmark Knight Frank. The growth in that sector might just be getting started, with the online grocery market expected to triple in volume over the next five years, according to the report.

Amazon’s acquisition of Whole Foods turned heads in the grocery business.

Now Amazon seeking to incorporate grocery shopping into its massive online retail operations, opening Whole Foods in areas that will bring customers into its Prime membership two-hour delivery service. And it’s making Whole Foods stores larger, with the extra space being used for Amazon’s delivery service and online order pickup.

That’s leading more grocery companies to overhaul their e-commerce and supply chains to compete, said Corey Chase, senior managing director at NKF.

“It changed the way grocery stores do business,” Chase said. “It shifted the way they handle e-commerce. People are following the Whole Foods model.”

More online grocery shopping means a need for more warehousing and logistics space, especially near urban centers and transportation hubs. In that sense, the changes to the grocery business are part of the broader e-commerce push that has propelled Chicago to its spot as the second biggest industrial market in the country, Chase said.

“It’s only going to market the market even tighter,” said Chase, who works primarily with food business clients. “We don’t see a lot of speculative building. When we have a tenant needing space, sometimes they need to scramble.”

The big difference between the grocery distribution business and other e-commerce users is food distributors need ample cold storage and freezer space. In an industrial market that is seeing historically low vacancy rates, cold storage and freezer space is particularly hard to come by, said Steve Livaditis, senior vice president at CBRE.

“It’s a very tight market,” he said. “Developers are aware of this.”

The problem with developing cold storage space is it’s considerably more expensive to build than regular warehouses. A cold storage facility needs metal panel walls that are four inches thick, an insulated roof and a massive air conditioning unit. A freezer building needs all that too — plus an insulated floor, Niven said.

“Very few developers are building on spec because of the cost,” he said. “It’s not something you can just jump into. There’s an education process.”

Developing freezer space can cost four times as much as a regular warehouse, Niven said. The costs stifle speculative development, but Bridge has helped show how successful freezer and other food distribution warehouses can be.

In 2014, Bridge acquired a shuttered 55-acre Dominick’s grocery distribution center in suburban Northlake. The firm expanded the center’s existing 135,000-square-foot freezer building to 250,000 square feet on spec. Bridge also tore down the original Dominick’s dry storage facility to make way for a new nearly 600,000-square-foot distribution center.

The development lured companies including candy maker Fannie Mae and third-party logistics firm Frozen Assets Cold Storage, which leases 132,000-square-feet in the freezer building. The logistics center is nearly fully occupied, Niven said.

“There’s definitely demand,” Niven said of cold and freezer storage facilities. “The yield is typically higher (for developers), but there is higher risk because it is more expensive to build.”

Because their product is perishable, food distributors seek space within the market’s urban core, and the closer the better. The growth of food distributors, and their desire for inner-core warehouse space, could change the industrial market’s makeup.

For one, it has spurred further development in Pullman. The catalyst was Whole Foods’ decision to open a distribution center in the Far South Side neighborhood last year. Now Minnesota-based Ryan Companies is working to build a 400,000-square-foot speculative development in Pullman that’s designed for the growing food industry, according to the NKF report.

Thanks to the increased demand from food companies, rents for urban core facilities will likely rise. That will push out more traditional warehouse users to the outskirts of the market, Livaditis said.

“Food companies are the ones who will pay that premium, because location really benefits them and their supply chain,” he said. “If you’re a company storing widgets, you’re going to go to Bedford Park.”

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