Timing is Everything: The Industrialization of Retail

Timing isEverything: TheIndustrializationof RetailFactors Driving E-Commerce Site Selectionin the Southeast Wisconsin Region Spring 2015

02 Timing is Everything: The Industrialization of RetailWith the sharp rise of Internet-centric retail,consumers are now increasingly less willingto wait five, let alone ten, business days toreceive their purchases. An expectation ofnext or even same day delivery is rapidlybecoming the norm.As a result, we have witnessed an explosive trend within the industrial real estate sectorspecifically in demand for new distribution facilities. In the 24-7-365 environment ofe-commerce a fine-tuned logistics strategy is integral to be competitive. Therefore,deliberate site selection of warehouses and fulfillment centers has become a crucialaspect of supply chain management for both wholesalers and retailers alike.In this whitepaper JLL Chicago Research examines the impact of evolving distributionnetworks on the Greater Chicago Region, specifically the emergence of SoutheastWisconsin as a logistics and distribution hub.Timing is everything.JLL Research



04 Timing is Everything: The Industrialization of RetailThe Amazon Influence onTime and ShippingAt the forefront of e-commerce distribution is Amazon. Over the past several years the internet retail giant has beendiligently working to advance the efficiency and reach of its distribution network. Most recently the company received agreat deal of media attention following its acquisition of KIVA Systems1, producer of automated material moving robotsdesigned to drastically reduce warehouse processing time. Using KIVA technology Amazon has reduced the time requiredby warehouse employees to process, pack and load an order from 60 minutes to less than 15. In mid-2014 there wereapproximately 1,3002 of the industrial robots operating in a few fulfillment centers; by the end of 2015 Amazon anticipatesthat number will exceed 15,000 as it upgrades facilities throughout the U.S. • $155M Invested • 1.6M Square Feet • 1,250 Job CreationKenosha Fufillment CenterJLL Research

As Amazon shakes up the industry with its revolutionary inventory processing technology, it has quietly been expandingthe spread of its distribution network.Since 2011 the company has established 27 new fulfillment centers including eightdevelopments in 2013 that totaled 7.7 million square feet. Amazon’s warehouse building spree is attributed to the company’scontinual desire to stand apart from its competition in its ability to provide superb convenience to its customers in theform of inexpensive and timely delivery. (This can be observed as far back as 2005 with the introduction of AmazonPrime, an annual subscription service offering customer’s reduced same/next-day shipping pricing and unlimited two-dayshipping at no additional cost.) In theory if Amazon were to establish operations outside just of the nation’s largest 20major metropolitan areas, it could reach one-half of the population with same-day delivery as opposed to the 15 percentBusinessweek estimated it was capable of reaching in 2013.Until recently, the Chicago metropolitan market was serviced by Amazon facilities in Indianapolis, but with a newlyconstructed facility in Kenosha, WI and intentions to lease two additional buildings along the Illinois I-55 and I-80 corridorAmazon is beginning to establish a dominant foothold in the heart of the Midwest. Beginning in 2015, the Kenosha facilitywill serve Chicagoland and the Upper Midwest from its 137-acre development located off I-94 which now consists of a500,000 square foot sortation center and a 1.1 million square foot fulfillment center. According to the Wisconsin EconomicDevelopment Corporation the project is anticipated to kick start and further encourage substantial economic developmentin the region to the tune of $155 million in capital investment and 1,250 additional jobs.1. Daniella Kucera, ‘Why Amazon is on a Warehouse Building Spree,’ Businessweek, (Aug. 29, 2013)2. Andrew Weiland, ‘The Amazon Effect,’ BizTimes, (September, 29 2014)

06 Timing is Everything: The Industrialization of RetailPrimary Factors Identified for Selecting Distribution &Warehousing SitesLogistics expenses typically account for 80 percent of operating costs while real estate typically accounts for less than 5percent3 . Being heavily time-dependent, facility location in the warehousing and distribution sector is perhaps the singlemost important factor in determining supply chain efficiency. With so many moving pieces involved including labor, landavailability and economic incentives, the site selection process for distribution facilities proves complex. The objective of anydistribution center is to lower costs, mitigate risk, and improve profitability. From the initial determination that a new facilityis necessary, a company can expect the process will take a minimum of 10-24 months before the facility is fully operational.Most companies looking to expand have a general understanding of where they need to be but finding a property suited totheir operation is challenging.Average Operating Cost Breakdown for Distribution Centers60% • Transportation, inventory and labor50% 50.3% typically account for 80% of the40% operating costs.30% • Real estate accounts for less than 5%.20% 21.8%10% 9.5% 7.8% 4.3% 2.7% 2.2% 1.2% Labor Rent Admin Supplies Other0% Customer Transportation Inventory ServiceSource: Exchange, Inc.: Logistics Cost & Service ReportJLL Research

1. Proximity labor supply of 1.7 million within a 60 minute drive time. Wages for transportation and material moving occupationsThe ability to minimize transportation and labor costs are in the Kenosha-Lake County metropolitan division are ex-without doubt the key factor when defining an effective dis- tremely competitive.According to the U.S. Bureau of Labortribution center. Naturally, distribution for e-commerce is in- Statistics (BLS), median hourly wages in the Kenosha-Lakevariably more complex and expensive than traditional retail County Metropolitan Division are $13.34 in comparison towhere marginal transportation costs can be offset by distrib- $13.97 for the Greater Chicago MSA and $13.99 for the U.S,uting a greater quantity of goods to fewer locations. With a difference of 4.5 and 4.6 percent between Chicago ande-commerce the most significant transportation expenses the U.S., respectively.are incurred through last mile delivery to the consumer. Yetfor an internet retailer to remain competitive with brick and The location also aligns favorably with Amazon’s ongoingmortar it is imperative that a distribution center is able to objective to better serve its customer base through reducedcost effectively fulfill the demand of its consumer base in fulfillment times. The region’s potential consumer reach is im-as brief a time-frame possible. Based on this assumption it pressive with 30 million households within a 500 mile radiusbecomes evident that strategic expansion in close proximity covering 24.7 percent of the U.S. population. The locationto population centers is growing increasingly advantageous also benefits from being within the vicinity of several majorfor distributors. third party parcel processing centers – including the FedEx Smartpost facility in New Berlin WI, and the UPS flagshipThe advantages associated with developing within an arm’s sortation facility in Hodgkins, IL. As the company seeks toreach of a major population center extend beyond proxim- extend the reach of same-day offerings, such as Amazonity to customers as a larger population is characteristic of Fresh – a same day delivery service of fresh groceries anda larger labor pool. Given the relatively low utility require- everyday products, proximity to this sort of population den-ments of most distribution operations in comparison to sity will be key.heavier industrial users, a distribution center could theoret-ically operate in any region with abundant space and ade- 2. Property Specificationsquate interstate access. While there are clear benefits inrural regions that may prove more cost effective for smaller In today’s increasingly connected consumer market moreusers, a larger user will suffer from a limited labor supply. and more companies, like Amazon, are placing a great-For large-scale users - particularly those intending to oper- er emphasis on efficient supply chain management as aate on a 24-hour cycle - the lack of a deep and diverse labor means to gain a competitive edge. Advancement in ware-pool could be a potential deal breaker. In most cases having housing and inventory management technology has al-to import or compete for a constrained labor supply results lowed the modern distribution center to attain unforeseenin higher wages ultimately proving cost prohibitive. levels of efficiency. In many ways inventory processing is beginning to look more like advanced manufacturing asFrom the proximity perspective, Amazon’s choice to locate automation and robust inventory management systems arein Kenosha, WI made absolute sense.Southeast Wisconsin, becoming standard.on the cusp of the Chicago market, benefits from many ofthe advantages associated with proximity to a major pop-ulation center while avoiding traffic congestion. Kenoshaand Racine Counties boast a striking workforce with a total3. Exchange Inc., Logistics Cost & Service Report

08 Timing is Everything: The Industrialization of RetailAs a result warehousing and distribution centers are evolving to accommodate emergingtechnologies and demand for new logistics facilities is growing exponentially. In 2014,JLL witnessed a significant trend in the demand for ‘Big Box’ distribution centers.Demand for facilities over 500,000 square feet has been rapidly approaching availablesupply, while demand for properties exceeding one million square feet vastly exceedssupply at a nearly 3 to 1 ratio.As post-recession consumer confidence gives way to increased spending, more compa-nies are pressured to expand and modernize their global supply chain and distributionnetworks. Faced with an already scarce supply of existing industrial properties, build-to-suit projects are becoming increasingly attractive. Given the growing footprint of themodern distribution center, the value of large flat tracts of land along interstate corridorscan only grow exponentially more valuable. That being said, any large parcel along theinterstate is not necessarily sufficient. Companies’ pursuing build-to-suit developmentsare often facing a constrained timeframe, seeking to capitalize on their investment assoon as possible. In order mitigate risk and expedite the development process, pref-erence leans toward those sites which offer the fewest hurdles. ‘Shovel Ready Sites’or properties for which the preliminary due diligence has been completed will carry apremium.If engaging a developer to pursue a build-to-suit, the developer’s financial wherewithaland ability to deliver a project within an acceptable timeframe is critical. Selecting adeveloper with a sufficient track record of delivering their project on time and within thebudgetary constraints is important to minimize disruption to the company’s manufactur-ing, supply chain or distribution operations. Issues to consider beyond the capital stackare the control of a suitable and entitled land site and the ability to procure buildingmaterials. Modern industrial buildings are constructed using concrete panels which arefabricated at precast plants and transported to the jobsite to be assembled in a tilt upmethod. It can be challenging to place orders for structural steel and precast wall panelsin advance of a lease execution or while final site plan configurations are being made.Material shortages and labor increases can throw off a building’s pro forma causingdelays which ripple through the user’s supply chain.JLL Research

Of the top 15 global industrial owners, all have a significant 3. Business Climate, Barriers to Development, andpresence and operating history in the Southeast Wisconsin Community Cooperationsubmarket of Chicagoland region with the exception of Cal-ifornia-based Majestic. That is set to change as Majestic The final factor that can make or break a project relateshas received approvals for an 88-acre development site directly to the potential users perception of the region’sjust north of the Lakeview Park. Majestic is active around business climate, particularly for capital intensive projects.the country but took a leap by entering the Chicago market Development in an accommodating environment can great-by going straight to Wisconsin. As other new entrants have ly improve projects odds for success. A key takeaway forsafely picked core assets in the primary markets of O’Hare, developers, site selectors, and tenant representatives is toDuPage, I-55, Majestic has gone straight for a higher return have open lines of communication with the local planningproject. and development agencies.Knowledge of the user profiles and their business needs The Amazon transaction, facilitated by KTR Capital andand finances can help to forecast the space demand equa- originally known as “Project Onyx,” was attracted to thetion for a submarket. Developers and investors must have 137-acre Kenosha location as it was large enough to ac-a deep understanding of the market dynamics in order to commodate the building footprint and parking requirementsguide acquisitions and development plans. Based on the and also had utilities to the site. When “Project Onyx” camebifurcation of the market, it would be unwise to be caught to town, the requirement had significant clout to speed upwith a building that is either too big or too small to appeal regulatory review and work through entitlements to receiveto the cross segment of active tenants in the market. A the green light. Madison-based Next/Partners, a private700,000 to 1,000,000 square-foot speculative building may real estate firm owned the site which needed to be rezonedbe difficult to fill as the pool of users looking for that type of to accommodate the project. KTR was also required to doproduct may be few and far between. The corporate distri- significant roadway improvements to Frontage Road, 38thbution users in this size segment are most likely choosing Street, and Burlington Rd/Hwy S to acco mmodate heavybetween the distribution hubs of Columbus, OH and India- truck and employee traffic. In addition, KTR had to obtainnapolis, IN as well as Joliet, IL. permits from the Army Corps of Engineers and state De- partment of Natural Resources to fill in wetlands on the siteThese transactions most likely become a build-to-suit which could potentially cause downstream flooding and im-where the user can leverage their credit in a transparent pair local water quality. Significant taxpayer subsidies wereopen book fee-development transaction. As the developer granted to the $140 billion dollar company in the form ofinputs their land basis, cost of capital and an exit capitaliza- $17 million in TIF funds from the municipality and $7 milliontion rate, proposals can be generated. For example, Ash- in enterprise zone tax credits from the state through 2024.ley Capital is launching a 375,000 square foot speculativeproject in Sturtevant, WI which they would ideally fill witha single user. Their timing is safe as they have held theirland and recognized that market demand fundamentalshave reached a point of saturation.

10 Timing is Everything: The Industrialization of RetailThe E-Commerce andDistribution ClusterThe logistics and distribution industry is invariably dependent on many externalities. One of the most valuable metrics bywhich to measure the viability of a new market lies within the composition of the regional economy. A region featuring aconcentration of related industries often benefits from what is known as an industry cluster. An industry cluster emergeswhen companies of similar or complementary needs and competencies assemble within a concentrated region.These interconnected businesses, suppliers, and institutions benefit from considerably competitive advantages. Harvardeconomist Michael E. Porter, who coined the term, assessed that regional clusters offer three primary advantages for thosefirms involved: 1. increased productivity, 2. enhanced innovation and, 3. rapid generation of complementary businesses.In the realm of e-commerce and distribution the presence of a complementary industry cluster is not only indicative oflower cost of doing business but also an environment in which similar investments have a proven track record of success.Colocation within an industry cluster is far more beneficially to large scale distributors than regional operators. Midwest Logistics and Distribution Markets Q4 2014 Inventory Vacancy YTD Net Average YTD Under Cap Rate (SF) Absorption Asking Rents Deliveries Construction 5.50-6.00%Chicago 8.1% ($ psf NNN)Indianapolis 1,130,171,960 6.3% 11,285,822 (SF) (SF)Milwaukee 259,531,314 6.2% $4.35Minneapolis 173,159,238 7.8% 4,378,542 10,230,728St. Louis 188,588,627 4.9%Detroit 221,683,446 7.9% 4,201,499 $3.82 2,450,830 4,953,873 6.00-6.75%Cleveland 448,852,850 6.5%Columbus 1,569,000 6.1% 1,886,619 $4.02 253,000 937,144 7.00-7.50%Cincinnati 216,237,183 5.3%Averages/ 234,769,594 6.6% 3,142,584 $4.74 909,847 909,847 6.00-6.75%Totals 2,874,563,212 3,765,904 $3.49 489,500 1,187,000 6.00-7.00% 5,366,371 $4.19 1,006,000 1,569,000 7.80-12.10% 2,662,686 $3.56 1,218,000 288,000 7.20-7.50% 4,704,445 $3.63 5,292,100 1,996,800 6.00-6.75% 4,537,384 $3.49 2,178,914 1,897,366 6.50-7.00% 41,553,314 $3.92 18,176,733 23,969,758 6.40-7.41%JLL Research

Warehouses under construction in excess of 500,000 square feet, Q4 2014 Chicago PHL 5.8 msf 7.6 msf NJ 1.8 msf LA / IE Atlanta10.4 msf 9.9 msf Major Logistics Hub DFW Secondary Markets 11.6 msfAs a result, the bulk of development has remained focused on major logistics corridors within proximity of several of thenation’s largest population centers. According to JLL research, 68 percent of 500,000+ square foot ‘Big-Box’ constructionlast year occurred in just six markets including: L.A./Inland Empire, Dallas-Fort Worth, Atlanta, Philadelphia, New Jerseyand Chicago. Together these markets share 11.7 billion square feet of industrial supply. A common trait of these markets isaccess to a major sea or freshwater port, airport, or Class 1 rail lines thereby making global connectivity the foundation ofthese logistics clusters.Although the six primary hubs remain preferable to most occupiers, many faced with insufficient industrial supply andtightening fundamentals are considering secondary corridors. The secondary corridors developing around smaller Midwestand Great Lakes metropolitan regions, such as St. Louis, Indianapolis and Columbus, are emerging as auxiliary hubsto the nation’s major corridors, where more competitive real estate expenses provide more cost effective build-to-suitopportunities.

12 Timing is Everything: The Industrialization of RetailMigration from the Chicago CorridorThanks to the convergence of six Class 1 railroads, seven distance. Most industrial users prefer to avoid the potential-cross-country interstates, and one of the highest volume ly disruptive consequences that can result from a distantcargo airports in the world (ORD), Chicago has long served relocation in the form of workforce attrition or even dis-as a strong logistics cluster. Home to 9.7 million people, placement. This is of particular relevance to those migrantsthe metropolitan region serves as an anchor to the Midwest motivated to move by real estate prices, taxes and otherand a key intermodal junction linking the East and West matters of public policy.Coast via rail. While the Chicago industrial market remainsvibrant, with 12.3 percent of total US Big-Box construction The shift of industrial users to the suburbs and exurbs hasin 2014, it is by no means immune to competition for in- been occurring for over half a century after postwar inter-dustrial users with secondary/auxiliary markets. In recent state highway construction opened up suburban Chicagoyears, emerging and secondary clusters within a one-day to commercial and residential development. Elk Grovedrive of Chicago have benefited from the residual effects of Village, adjacent to O’Hare International, is home to thethe city’s logistics cluster. nation’s first master-planned industrial park and mainly de- veloped in the 1950s. Development progressed outwardConsiderable economic development has occurred in the 1970s from the inner city to areas such as Niles,throughout the Midwest as result of business migration or Bedford Park, and Melrose Park. Today these areas areestablishment with the intent of serving Chicago from afar. considered less optimal for modern distribution as a resultThere is no indication that Chicago will lose the distinction of aging product, changing land use patterns and trafficof being the premier distribution center at the heart of the congestion. Industrial users and developers began to chartUnited States for the foreseeable future. However, a con- their paths further west and south of Chicago heading tosiderable number of industrial users are locating elsewhere Wood Dale, Woodridge, and Alsip in the 1980s and 1990s.in response to (but not limited to) reasons such as higher Later waves of development in the early 2000s were cen-operating costs and wages, constrained/aging industrial tered on Aurora, Elgin, Bolingbrook, and Romeoville withreal estate supply, state business climate and cost of living. the I-55 corridor becoming almost completely built out.Consequently the warehousing and distribution sectors of The 2000s were marked by the I-80 Corridor opening upcities outside Chicago and throughout the Midwest have as CenterPoint redeveloped a former U.S. Army munitionsgrown sizably as supply chains shift east. depot into a rail served distribution port.While some Chicago-based businesses have previously In the past, large format corporate distribution users wereopted to uproot and relocate their operations in alternative typically drawn to three or four of the 20 Chicago submarketscentral and Midwestern markets such Indianapolis, Colum- depending on the function of the facility and the company’sbus, or even to Louisville, KY, the majority of migrations network strategy. The majority of the large format users arewithin the Chicago market occur over a reasonably small found south and west of the Windy City proper in either WillJLL Research

RACINE 94 Chicago CBD to Wisconsin border: 10 52 milesWALWORTH KENOSHA Chicago CBD to Racine: 65 miles Milwaukee to Racine: 26 miles Kenosha, WI Pleasant Prairie, WI 2 12 1 Zion, IL 5 4 36 11 9 Lake Forest, IL 87 Gurnee Waukegan 110MCHENRY LAKE North Chicago Vernon Hills Libertyville Crystal LakeKANE COOK 90 O’Hare Airport ▼ 10 Illinois Relocations From To Year SF 290 Company Waukegan, IL 12575 Uline Dr., Pleasant Prairie 2009 2,500,000 101 . Uline Zion, IL 10100 58th Pl., Kenosha 2012 627,0002. IMS Waukegan, IL 11290 80th Ave., Pleasant Prairie 2008 500,000 Chicago3. Coleman Cable Gurnee, IL 8500 109th St., Pleasant Prairie 2013 471,0004. Ta Chen Gurnee, IL 55th St., Kenosha 2013 354,000 • 8 years5. Kenall Manufacturing Lake Forest, IL 10501 80th Ave., Pleasant Prairie 2006 303,000 • 12 companies6. Hospira North Chicago, IL 8601 95th St., Pleasant Prairie 2011 260,000 • 5.7 million+ SF7. EMCO Chemical Vernon Hills, Il 9501 80th Ave., Pleasant Prairie 2007 150,0008. Focus Produc81t08Group Waukegan, IL 9800 72nd Ave., Pleasant Prairie 2011 150,0009. Visual Pak Crystal Lake, IL 7809 100th St., Pleasant Prairie 2011 145,00010. Catalyst Exhibits Libertyville, IL 8901 102nd St., Pleasant Prairie 2013 106,00011. Hanna Cylinders Zion, IL 10680 88th Ave., Pleasant Praire 2013 100,00012. L&M Container 294 10

14 Timing is Everything: The Industrialization of Retailor DuPage counties and to some extent the eastern portion of Kane County. The I-80 Corridor includes the towns of Joliet,Minooka, and Elwood and functions as the primary geography for multi-state distributors due to proximity to the Union Pacificand BNSF intermodal terminals. Just north of I-80 is the I-55 submarket which is a more established and nearly fully built-outsubmarket comprising the towns of Romeoville, Bolingbrook, and Woodridge. The North DuPage area includes the towns ofCarol Stream, Glendale Heights, and Addison and is the most mature and most land constrained submarket. Lastly, the I-88Corridor includes Naperville and Aurora and is a fairly mature market and the bulk of the product is located at four interchang-es on both the east and west sides of the Fox River.Southeast WisconsinSubmarket OverviewThe current patterns of industrial development in Southeast Wisconsin share many parallels with the migration trends thatoccurred in bordering Lake County, IL. Following the 1970s, constrained industrial users in northern Cook County beganlooking even further northward. As industrial development slowed in Cook County, construction in Lake County graduallypicked up pace in the 1980s. Spurred on by Panattoni’s development of the Amhurst Lakes Business Park and Centerpoint’sdevelopment of the Tri-state industrial parks, development in Lake County peaked in the 1990s averaging 1.5 million squarefeet of industrial space annually.Following the ‘90s land rush, development in Lake County tapered off, and by 2010 new industrial space averagedapproximately 250,000 square feet a year. Meanwhile, in 1988 CenterPoint broke ground on the 1,496 acre LakeviewCorporate Park in Kenosha County and the impact was almost immediate. From 1990 to 2009, the Southeast Wisconsinarea added close to 19 million square feet of industrial space. Since 2010, industrial inventory in the submarket hasincreased by 11.1 percent and the pace of development is accelerating at an average of about 1 million square feet a year.JLL Research

Historical Growth of Industrial Inventory in the North I-94 Corridor 30,000,000 25,000,000 10.63% 37.14% 20,000,000New Inventory ( sq. ft.) 15,000,000 5.46% 10.37% 50.13% 10,000,000 13.19% 5,000,000 0 79.54% 2010+ 1950-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2009 Southeast Wisconsin Lake County North Cook

16 Timing is Everything: The Industrialization of RetailTimeline of Significant Industrial + Ashley Capital breaks ground 2014 on Enterprise Business Park (2015)Developments in Southeast Wisconsin + Land & Lakes Business Park established (2013)Upon Chrysler’s acquisition of AMC and four assembly plants, 5,500 workers losttheir jobs when car production ceased at the 90-year old lakeside Kenosha 2012assembly plant at the end of the 1988 model run due to overcapacity. This wasa major blow with The New York Times estimating ten percent of Kenosha + Uline opens 200 ac. corporate campus -County’s workforce was affected by this closure but this also presented an 240,000 SF HQ/1M SF DC (2010)opportunity to diversify the economy. + Chrysler closes Kenosha engine plant (2010)Some of the earliest corporate occupiers to establish a footprint 2010in the region are Supervalu/Meijer which built a grocery + Uline breaks ground on 240,000 SF HQ /1M SF DC (2010) + SEDA occupies 323,6`0 SF at HSA Park 94 Phase I (2009)distribution center in 1990 and Sonopress/Arvato which + Rust Oleum 600,000 SF build-to-suit with First Industrial atcame in 1996 and later SC Johnson/Exel Logistics in 8505 50th St., Kenosha (2008)2001. Following Amazon’s announcement in 2014 2007 + Coleman Cable leases 502,000 SF from CenterPoint (2008)to come to Southeast Wisconsin to serve Chicago + Arvato occupies 533,870 SF at 11500 80th Ave. (2007)from two buildings totaling 1.6 million square feet, + Pannatoni develops 627,000 SF 10100 58th Place (2007)the market reached a threshold of legitimacyamong institutional investors and users. 2005 + Pepsi develops 90,000 SF DC (2005) + Hospira opens 302,000 SF DC (2002) + Bombadier moves Evinrude HQ and production to 466,000 SF former Golden Books facility in Sturevant (2002) 2000 + Jelly Belly builds 233,000 SF DC in Pleasant Prairie (2000) + Renaissance Business Park established (1996) + 140 ac. Business Park of Kenosha established (1994) 1995 + Grandview Business Park established in Sturtevant (1994) + Supervalu opens $51M 580,000 SF Pleasant Prairie grocery DC (1990) + Village of Pleasant Prairie incorporates, 1,200 ac. LakeView Corporate Park development commences (1989)1988 + Chrysler closes AMC Kenosha Assembly Plant (1988)JLL Research

Who Locates in Southeast Wisconsin?Big Boxes and Small Foot Prints, that’s who....Southeast Wisconsin directly competes with two main sub- easily be distinguished by their characteristic space needsmarkets from the Chicago industrial market. Large format with big box demanding spaces of 400,000 square feet andcorporate users are drawn to the towns of University Park, smaller scale users requiring no more than 250,000 squareMinooka, and Joliet, about 40 miles south of downtown feet, very rarely will user needs fall between. Characteris-Chicago, which features mega distribution centers serving tic examples of large corporate users who have establisheda wide regional network. The other segment is the north in Wisconsin include Arvato, UNFI, and IMS. Uline’s oneshore suburban user involved in healthcare and life scienc- million square foot Pleasant Prairie facility is the largestes, specialty manufacturing, or smaller scale distribution. owner-occupied distribution center in the region. The dis-From a Midwest distribution perspective, Chicago and tribution center and corporate headquarters sit on nearlySoutheast Wisconsin compete with Indianapolis and Co- 200-acres located at 15275 Uline Drive near the 104thlumbus on a regional level. street exit on the east side of the interstate. In April 2014, Uline purchased land directly adjacent to their distributionLarge corporate occupiers entering the region are either center and corporate campus and is proposing a secondnew entrants to the market or consolidating. As firms re- million square-foot warehouse in the future to accommo-align global supply chains and consolidation of multiple date growth. The company described this acquisition as aoperations into one larger facility can make sense. For ex- ‘defensive move’ in order to control the land at the south-ample Home Depot consolidated from two 700,000 square- east quadrant of Highway Q and Highway U.foot facilities into a 1.6 million square-foot build-to-suitregional distribution center developed by CenterPoint in Small to midsize users contribute a strong component ofJoliet. Conversely, the firm’s fully optimized supply chain the region’s industrial sector and account for a significantmay dictate that the company split up and operate more driver of demand although they are not the ones grabbingthan one facility in the region to serve Chicago and the Mid- the headlines. Firms such as Hanna Cylinder, Parker Plas-west. An example of the latter would be having two small to tics, Allstates Trucking and other similar sized businessesmidsized facilities in the region in two different submarkets. account for significant component of industrial absorption. The smaller format user most typically preference typicallyBig box users targeting the Il-WI-IN tri-state area are typ- favors leased space in multitenant buildings. For a manu-ically distributing to a region extending beyond the three facturer such as Federal Signal, K&K Screw or Emersonstates themselves. On the flip side is the smaller footprint InSinkerator a freestanding building with heavy power anduser, who is defined by a local or at relatively small regional fewer doors in a single load configuration fits the bill.focus. The demand profile for these two types of users can

18 Timing is Everything: The Industrialization of RetailUser SegmentsE-commerce and distribution represent a young, albeit In 2013 McLane Foodservice expanded its existing 170,000growing sector, in Southeast Wisconsin, especially in con- square foot facility in Racine by 118,500 square feet nowtrast to the regions well established manufacturing sector. employing over 300 workers. In 2014 United Natural FoodsManufacturing continues to retain strong roots in Southeast (UNFI), the leading independent national distributor of nat-Wisconsin employing approximately 23.2 percent of the re- ural, organic and specialty foods, took delivery of a 425,000gion’s overall workforce. The sector remains particularly square-foot LEED Gold grocery distribution center, theirvibrant in Racine, where manufacturing employment con- first in the Wisconsin market. The facility employs 220 fullcentration is approximately 2.6 times greater than that of time workers serving as a Midwest hub. Shortly thereaf-the rest of the United States4. Emerson InSinkerator, Snap- ter, UNFI announced their intention to develop an addi-on, and The S.C. Johnson Company represent some of the tional 300,000 square-foot distribution center in Prescott,region’s most recognizable employers. WI to service the Twin Cities and the upper Midwest. In April 2014 California based bottled water producer Niaga-A significant portion of Wisconsin’s overall manufacturing ra Bottling announced plans to develop a 377,000 squareactivity can be attributed to the food and beverage industry foot plant in Pleasant Prairie, WI after a yearlong site se-which has long served as a vital component to the state’s lection process spanning the IL-IN-WI tri state region. Theeconomy. The seven county region surrounding Milwaukee new facility, scheduled to open in early 2015, will houserepresents one of North America’s most productive food production and distribution operations. The primary driverand beverage clusters. The region, which contains both of Niagara’s site selection decision was rooted in the facili-Racine and Kenosha, is home to over 240 food manufac- ty’s need to utilize 1.4 million gallons of water per day withturers including some of America’s most familiar household potential to expand to an upwards of 2 million gallons pernames5. day. Pleasant Prairie’s close proximity to Lake Michigan made it an ideal fit for the project. The largest recent foodMany food processing, manufacturing, and distribution and beverage transaction was supermarket chain Meijer’soperations have established in Southeast Wisconsin, cap- acquisition of a former 570,000 square foot SUPERVALUitalizing on the strategic location between Milwaukee and grocery distribution center in Pleasant Prairie. Meijer in-Chicago. Notable examples include Oceanspray, Meijer, tends to expand the facility by 245,792 square feet.and GFS in Kenosha, as well as Nestle in Racine. The foodand beverage sector accounts for some of the region’s ear- As increased consumption leads to constrained freightliest industrial occupiers and continues to gain momentum. capacity, companies across the nation are clamoring toRecent development/expansion by UNFI, Kerry, Meijer, Mc- mitigate rising transportation costs through greater empha-Lane and Niagara accounts for over 1.2 million square feet sis on the supply chain. Many of which still wary from theof new industrial space in Southeast Wisconsin solidifying recession, are averse to divesting significant capital intothe importance of the sector. fixed assets. In order to mitigate the risk associated with4. U.S. Bureau of Labor Statistics: Quarterly Census of Employment and Wages, 20145. The Milwaukee 7: South East Wisconsin: Food Industry Report - http://choosemilwaukee.com/en/Open-For-Business/Lead- ing-Industries/Food-and-Beverage-ManufacturingJLL Research

financing new infrastructure and technology more compa- until the market cycle improved; allowing them to eithernies are seeking outsourced logistics solutions. As a result increase rents or secure a long term tenant. Despite thedemand for third-party logistics (3PL) services across the drawbacks, these leases are attractive in that they typicallycountry has grown exponentially, and Southeast Wisconsin involve minimal tenant improvement dollars and the spaceis no exception. is offered “as is.”Outsourcing to an established 3PL reduces both the time Being very cost/efficiency conscious 3PL users were quickand expense associated with extending a distribution net- to recognize the benefits of Southeast Wisconsin from awork, simultaneously providing short term supply chain distribution standpoint. Exel logistics, one of the leadingsolutions that are pliable to economic ebb and flow. In contract logistics providers in North America, operates amany cases a 3PL facility enters into an exclusive contract 432,000 square-foot Prologis owned facility located in thewith a producer to manage distribution operations from Renaissance Business Park in Sturtevant. Four miles away,transportation and labor to warehousing and inventory global supply chain solutions firm Ozburn Hessey Logisticsmanagement. For 3PL firms, the flexibility of a shorter term recently renewed a lease for 239,370 SF with Liberty Prop-lease is key, in order to reduce risk. The contact logistics erty Trust. APL Logistics, another worldwide 3PL provider,outsourcing model dictates that 3PL firms must win new operates in Pleasant Prairie out of a 134,000 square feetbusiness prior to making commitments for space. From a building owned by CenterPoint. At present 3PL providerslandlord’s perspective a 3PL lease can be a double edged in the Southeast Wisconsin are primarily serving region-sword. In the flat market following the recession, 3PLs had ally based manufacturers such as S.C. Johnson and Rust-leverage and investors would welcome any deal even if it Oleoum.was only short term. This could hold property owners overSoutheast Wisconsin Submarket Building Stock4Q 2014 Number of buildings Total SF 51,412,730*Southeast WI industrial submarket 646 28,741,592 23,157,458Warehouse/distribution 286 13,528,293Manufacturing 316Class A Non-owner-occupied Over 100K, 45built after 1980*Total reflects special purpose properties in addition to WD and MFGExisting Conditions & Real Estate SolutionsThe overall Chicago Industrial market encompasses 1.2 billion square feet of product and the Southeast Wisconsin submarketcomprises roughly 50 million square feet of said product. The submarket as defined by Jones Lang LaSalle encompasses allbuildings over 10,000 square feet in Kenosha and Racine Counties. The majority of the institutional grade assets (as definedby JLL) are in Kenosha County which is more mature than Racine County. Following Amazon’s announcement in 2014 tocome to Kenosha, the market has reached a threshold of legitimacy among institutional investors and users. The strength ofthe submarket is clearly substantiated by the current challenge of finding available existing product which is perpetuating theland rush and corresponding construction boom.

20 Timing is Everything: The Industrialization of RetailTowards the end of 2013 and into mid-2014, the bulk of proposed for industrial use on market. Racine, being a rel-the demand in the Chicago market was in the sub 300,000 atively young/emerging market, features a supply of 1,946square-foot range and there were very few requirements acres. Just across the border, in neighboring Lake County,over 500,000 square-feet. Our reasoning was that during the market is evidently more constrained, with a total of 852the depths of the recession in 2010 and 2011, large blend acres actively listed. An examination of the industrial landand extend deals were locked up at attractive terms for five transactions that occurred in the last five years reveals ato ten year terms. Towards the end of 2014, the demand has median sale price of $2.51 per square foot, a considerablereturned and big box leasing velocity is ramping back up. premium in comparison to Racine and Kenosha at $1.41 andThis scarcity of land has caused the land rush by national, $1.90 respectively.regional, and local developers to stake their claim in South-east Wisconsin to attempt to land the next large requirement. Lake County remains a highly desirable market for manyThe issue of land availability will eventually come into the users, however a dwindling supply of suitable land makesforefront which may come as a surprise to someone unfamil- substantial industrial development challenging. In an effortiar with the market. to measure the feasibility of these three markets’ ability to support the increasing space demands of the modern megaTraveling the I-94 corridor one may view vast expanses of distribution center, JLL ran a comparative analysis of the Chi-farmland and assume that these are all potential development cago market’s Class A industrial developments that occurredsites. When the recombination of platted land parcels with- over the course of the past decade. The results indicate thatin existing business parks is insufficient for a large building the typical site for a 500,000 to 1 million square feet develop-footprint, developers must expand their search horizons. In ment ranges between 26 to 53 acres. With this assumption,this case the solution is putting farmland under contract and based on present supply on market Kenosha and Racinestarting the entitlement process. Within Kenosha’s LakeV- could theoretically support a cumulative 92 deliverables iniew Corporate Park, Southeast Wisconsin’s largest industrial the 500,000 square feet range and 37 in the 1 million range.park, large parcels are virtually nonexistent. TaChen’s de- Lake County on the other hand exhibits capacity for as fewvelopment of their 471,000 square-foot manufacturing facility as 15 deliverables in the 500,000 range with no current list-was a recombination of lots 54, 55, 62, and 63 for a total of ings capable of accommodating a million plus square foot31 acres. Niagara Bottling purchased lot 75 for a 377,000 development.square-foot bottling plant and CenterPoint’s decision to builda 410,000 square-foot spec at lot 117 leaves only smaller padsites available.Despite dwindling space within Lake View, Kenosha main-tains a sizable supply of land with approximately 1,428 acresJLL Research

Vacant Land Proposed for Industrial Development on Market, Q4 2014County Active Listings* Acreage on Market* Median Sale Price per Potential Development Capacity SF** 500K sf 1 Mil. sfLake, IL 72 852 $2.15 15 0Kenosha, WI 44 1428 $1.90 36 14Racine, WI 48 1946 $1.41 56 23*Based on active CoStar listings/**Based on industrial land sale comparables from 2010 through 2014At the end of 2014 there was approximately 2.1 million square feet of industrial product under construction in SoutheastWisconsin with another 12.8 million square feet of proposed product. As the more established market development activity inKenosha surpassed that of Racine by a considerable margin. Although Racine only accounted for 14 percent of the submarket’songoing construction, the community has positioned itself well to accommodate new industrial development.In 2013 the Racine County Economic Development Corporation and the Southeastern Wisconsin Regional Planning Commissionsupported a study assessing industrial land absorption trends within Racine County6. According to the report the fifteen parks,encompassing 2,223 acres of gross area, were at 65 percent capacity with exactly 614 available acres remaining. Of the614 acres the report assessed that there were approximately 231 deemed ‘shovel ready’ along the 1-94 corridor, with anadditional 384 in close proximity to utilities. The shovel ready sites are shared between three industrial parks – Grandview, TheRenaissance, and the recently established Land & Lakes. Given Racine’s historical trend of industrial absorption, the studyestimates that the County’s industrial parks will be at capacity within the next 10 years. That being said, the study also identifiedan additional 4,300 acres that show potential for future developments.Kenosha, with a proven track record for successful industrial development, set the wheels in motion for Southeast Wisconsin.As more and more developers set their sights on Kenosha, development in Racine is sure to pick up pace. With an increasingnumber of users demanding larger footprint distribution and fulfillment centers, development in the region seems almostinevitable given the abundant supply of land and proactive/accommodating development environment.6. Southeastern Wisconsin Regional Planning Commission & The Racine County Economic Development Corporation: Racine County Industrial ParkLand Absorption Study, 3rd ed. (August, 2014)

22 Timing is Everything: The Industrialization of Retail...it’s only a matter of time beforeothers follow suit.The impact of e-commerce distribution on firms approach to the supply chain has beenprofound. As companies race to adapt to the evolving logistics landscape demand fornew mega distribution facilities is skyrocketing. With existing facilities of adequate scalelocated in the traditional U.S. distribution clusters in short supply distributers are examiningalternative markets within an arm’s reach of the nation’s largest population centers.Considering Chicago’s already sizable population, anticipated to grow by as much as9.2 percent through 20307, the development of e-commerce driven industrial propertythroughout the region is inevitable. The Southeast Wisconsin submarket presentsa viable opportunity to cost effectively penetrate the Chicago consumer market, whilesimultaneously serving the population of the upper Midwest. Considering the northwardmigration of industrial users in recent years, further development in the Kenosha andRacine County industrial markets seems to be the next logical step. Situated between twomajor metropolitan areas, Southeast Wisconsin presents attractive prospects for users,developers, and investors alike.At the time this whitepaper was being produced Wisconsin became the 25th state topass Right to Work (RTW) legislation. This recent public policy development will likelyenhance the state’s competitive position throughout the Midwest, Great Plains and GreatLakes regions by placing it on an even playing field with states such as Indiana, Iowa andMichigan, which have all become RTW states since 2012. Consequently, by adoptingRTW laws, Wisconsin offers e-commerce distribution firms a more pro-business operatingenvironment as even minimal labor disruptions carry substantial consequences in thesupply chain; therefore a decision between Southeast Wisconsin and other competingnon-RTW states could become much easier during the site selection process.Given the submarket’s proximity to the Chicago logistics cluster and ample supply ofundeveloped land it is without doubt the optimal fit for the emerging needs of the e-commerce.Offering an impressive labor supply, substantial market reach, and an accommodatingbusiness environment, the outlook for the Southeast Wisconsin e-commerce and distributioncluster is bright. With the recent establishment of Amazon’s mega fulfillment center it is onlya matter of time before others follow suit.JLL Research

7. IL. Department of Commerce and Economic Opportunity (DCEO): Illinois County Population Projections (2010)

For more information, contact:Kurt Sarbaugh Robin Stolberg Steve Trapp Roger SiegelSenior Vice President Vice President Senior Vice President Executive Vice President+1 773 458 1413 +1 773 458 1418 +1 773 458 1415 +1 262 901 [email protected] [email protected] [email protected] [email protected] Kramp Chad Buch Paul MarshSenior Vice President, Director of Research Analyst Research AnalystResearch, Midwest & Great Lakes +1 773 458 1405 +1 773 304 4108+1 312 228 2470 [email protected] [email protected]@am.jll.comKristen JaworekMarketing Manager+1 773 458 [email protected] Addresses: JLL – Milwaukee, WI 245 S. Executive Dr.JLL – Chicago, IL Suite 3008755 W. Higgins Rd. Milwaukee, WI 53005Suite 750Chicago, IL 60631@JLLnews jllblog.com/chicagoblogJones Lang LaSalle © 2015 Jones Lang LaSalle IP, Inc.All rights reserved. All information contained herein is from sources deemed reliable;however, no representation or warranty is made to the accuracy thereof.