The office and industrial real estate markets have moved in opposite directions since the COVID-19 virus arrived on U.S. shores almost three years ago. There may be no better illustration of their divergent paths than what is happening at the Allstate Insurance headquarters in north suburban Chicago.
In late October, Dermody Properties broke ground on an industrial mega-development on 232 acres (94 ha) of the sprawling corporate campus, the insurer’s home for 55 years. The property’s dramatic reincarnation is the result of a pandemic that emptied out Allstate’s offices since most of its 8,000 Illinois employees worked remotely, rendering its 1.9 million-square-foot (176,500 m sq) suburban headquarters all but obsolete.
The pandemic also helps explain why Dermody was willing to pay Allstate $232 million to buy the site in Glenview, Illinois. The growth of online shopping during the public health crisis supercharged the industrial market, making such a large land site near Chicago a precious commodity for warehouse developers.
“This redevelopment project stands at the intersection of two significant and durable trends—work from home and e-commerce,” said Dermody President Douglas Kiersey Jr. when the company completed the acquisition in October.
The Allstate project is one among many that highlight the pandemic’s lasting impact on real estate, boosting demand for some property types, and depressing it for others. It has forced companies to rethink how they use office space, and developers how they build it. And it has forced businesses to retool their supply chains, giving developers like Dermody the confidence to move forward with its massive industrial development in Glenview.
“The pandemic forced structural shifts in how and where we live, work, and recreate in ways that seem destinated to endure at least at some level, even if less extreme than our behaviors during the peak of COVID,” according to the 2023 Emerging Trends in Real Estate® report by the ULI and PwC.
A New Normal?
Many companies are still trying to figure out how to adapt to those shifts. Some are coaxing employees back to the office for two or three days a week, hoping to restore a semblance of their pre-pandemic work culture.
But many companies like Allstate decided early on that the change was more or less permanent, concluding that many of their employees can be just as productive and happy working from home as in the office. Though Allstate has retained about 60 acres (0.243 km sq) of its Glenview campus and also has acquired an office building in downtown Chicago, the insurer has been vague about where it plans to locate its headquarters. Allstate representatives did not respond to requests for comment.
The pandemic merely accelerated a trend that was well underway: The migration of big companies from pastoral suburban campuses to downtown locations, where many of their younger employees would prefer to work. Being in the suburbs can be a major disadvantage in the hunt for talent.
McDonald’s moved to Chicago’s West Loop from west suburban Oak Brook in 2018. Walgreen Boots Alliance has been expanding in downtown Chicago over the past few years while shrinking the headcount at its headquarters in Deerfield, north of the city. Part of its Deerfield campus went up for sale in July, and an industrial redevelopment is a possibility there, too.
In Hoffman Estates, a suburb northwest of Chicago, the parent company of Sears, Transformco, put its entire headquarters up for sale earlier this year, including office buildings totaling 2.4 million square feet (222967.3 m sq).
“The old corporate headquarters are basically a thing of the past,” said Hoffman Estates Mayor William McLeod. “It’s a different world now.”
It’s especially different in the Zoom era, now that companies and their employees have figured out how to work from anywhere, without the hassle of a long commute.
Trading Up While Cutting Back?
With many companies cutting back on office space, the office vacancy rate in suburban Chicago rose to 27.3 percent in the third quarter, a record high, according to JLL. Yet business has never been better for warehouse landlords: The Chicago-area industrial vacancy rate dropped to a record low of 4.5 percent in the second quarter, according to Colliers International.
Industrial rents and property values also have risen, pushing up investment returns and motivating developers to do some things that would have been unthinkable before the pandemic. Like tearing down an entire residential subdivision.
That’s what San Francisco-based Prologis and ML Realty Partners, based in Itasca, Ill., did just west of O’Hare International Airport, one of Chicago’s hottest industrial submarkets. In 2021, they went through the trouble of buying out more than 100 homeowners in the Mohawk Terrace subdivision in Bensenville. Then they scraped the site clean and constructed two large industrial buildings there. These are already leased.
The Allstate redevelopment would have been hard to imagine before the pandemic as well. Industrial has traditionally been the least expensive type of development, certainly not as valuable as office, said Tom George, vice president of acquisitions in Chicago for NorthPoint Development, a Kansas City, Mo.-based industrial developer. So it’s “amazing to think about tearing down office buildings” to make way for warehouses, he said.
Most suburban office buildings were built in the 1980s and 1990s, and JLL estimates that 57 percent of suburban office space is functionally obsolete today, said Christian Beaudoin, managing director of research and strategy at the Chicago-based real estate services firm. Typically, developers would buy outdated buildings and invest in technology and amenities to bring them up to modern standards. But Beaudoin doesn’t expect that to happen much now.
“In most suburban locations, the rents have not been high enough to justify those expenses,” he said.
So industrial is becoming the highest and best use for many properties. In Glenview, Dermody plans a 10-building, 3.2-million-square-foot (297,289.7 m sq) logistics park on the Allstate site. The Reno, Nev.-based developer is kicking off the project with five warehouses totaling 1.2 million square feet (111,483.6 m sq) that it’s building on speculation, or without tenants lined up in advance of construction. Dermody expects construction of those buildings to wrap up in the second and third quarters of 2023.
With its close proximity to the city, Interstate 294, and O’Hare, “it’s a perfect industrial and logistics hub,” Beaudoin said.
Dermody executives did not respond to requests for additional comment.
Though demand for industrial space is starting to slow, it took off during the pandemic, led by Amazon, which gobbled up millions of square feet as e-commerce sales took off. Today, many e-commerce companies, traditional retailers, and logistics firms are seeking more warehouse space to avoid the kind of supply-chain bottlenecks that have left them without inventory to fill orders, said NorthPoint’s George.
Retailers like Home Depot need to be prepared for the first warm day in May when consumers decide they want to grill out after a long winter.
“If your barbecue grills are not in the Home Depot on that day, then you lose that sale for the year,” said George. “You can’t afford that. We’re the insurance policy.”
ALBY GALLUN is a senior reporter with Crain’s Chicago Business.
More on Electric Works/Fort Wayne:
