Chicago's Class B Industrials Get National Attention

CHICAGO—The intense competition across the US for industrial and flex space has investors working extra hard to find properties that provide higher yields. Most find it difficult to find such deals in coastal markets like CA, FL and NJ, but Chicago-area properties tend to land at the top of many wish lists.

That was the experience of Stan Johnson Co., a net lease brokerage, when it brought to market a two-tenant, 111,667-square-foot flex building located at 545 E. Algonquin Rd. in Arlington Heights, IL. After a flurry of national interest, New York-based Crystal Acquisitions, a private buyer, bought the class B product for $11.4 million.

“The class A industrial buildings get the most attention and headlines these days,” Stan Johnson’s John Zimmerman tells GlobeSt.com, but the low cap rates associated with such product, sometimes in the 5.0% range, causes some private investors to shy away. “There is no way you can get positive leverage on that.” Therefore, “investors of all types are looking at class B deals.”

Intertek, a global quality assurance firm, occupies 85% of the Arlington Heights building. Over the years, the company has spent millions of dollars customizing the structure for its use.

The company’s obvious attachment to the property, which it first occupied as a small tenant in the 90s before growing to its present size, perked the interest of many potential buyers, Zimmerman says. The infill location close to O’Hare Airport, one the region’s most vibrant areas, was also a big draw.

But the fact that Intertek has about eight years remaining on the lease, rather than a more long-term agreement, helped push up the cap rate over 7.0%.

Zimmerman and Stan Johnson’s Craig Tomlinson represented the seller, which was a joint-venture between Minneapolis-based Biynah Partners and Baltimore-based Alex Brown Realty, a privately-owned real estate investment manager.

Tomlinson says Chicagoland properties have an additional advantage with private buyers. Although they are on the hunt for yield, “they don’t want to go to tertiary markets to get it.”

A significant challenge for the Stan Johnson team was to help potential buyers understand this property’s true potential. Many came to the table looking for a generic industrial building, most of which can garner rents between $5.50 and $6.00 per square foot. But a data center operator uses 15% of this building as its headquarters, and Intertek uses almost a third as office space. That means a much higher rental rate, and a sales price beyond what some were willing to pay.

But other potential buyers did the right math, Zimmerman says. They compared the rental rates to other flex properties in the O’Hare area, rather than using comps from strictly industrial properties.

“We had interest literally from the four corners of the US,” he adds. “We never expected it to be a local buyer.”