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From Shopping To Shipping: A Dead-End Outlet Mall Project Gets A New Lease On Industrial Life

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From Shopping To Shipping: A Dead-End Outlet Mall Project Gets A New Lease On Industrial Life

A funny thing happened on the way to an outlet mall in Chicago's south suburbs. It became a logistics complex.

Actually, the Chicagoland Outlets, which was to be developed as a regional shopping destination in Country Club Hills, 23 miles from Chicago, never broke ground. After more than a decade of waiting for a brick-and-mortar revival, the landowner, Capri Capital Partners, LLC, threw in the towel. In late December, Capri sold the 102-acre site to Chicago-based Logistics Property Co. (LPC), a new player in the industrial property segment, for $7.1 million. LPC rebranded the property LogiPark 57-80 after the two interstate highways that converge at the site, and announced plans to build four distribution centers totalling 1.4 million square feet at a cost of $75 million to $100 million. Work on the two-phase project is expected to begin in the spring.

The transaction is a template for the times. The original outlet mall project was made public in 2007, a time when cracks were starting to form in the commercial real estate model and long before online shopping was mainstream. Outlet malls, known in the trade as "power centers," were past their heyday of the 1980s and 1990s. Yet the model was still considered viable.

The 2008 financial crisis and subsequent Great Recession altered the landscape. The downturn devastated an already over-leveraged commercial real estate industry. Then came e-commerce, Amazon.com, Inc. (NASDAQ: AMZN) and all the e-merchants to follow. Retail would be forever changed; outlet malls would struggle; and the Country Club Hills project would never see the light of day. Faced with an inability to land suitable anchor tenants, Capri gave up the ghost.

Country Club Hills is not the only structure rising from the outlet mall ashes. Last spring in Huntley, about 50 miles northwest of Chicago along Interstate 90, another Chicago-based developer, Prime Companies, Inc.,demolished a long-standing outlet mall it had acquired in 2016 but couldn't be sustained as brick-and-mortar. In its place will be a three-building, 670,000 square-foot logistics complex to be built on 60.6 acres. Prime has submitted its application to the village of Huntley and expects approval sometime in the first quarter, said Michael Reschke Jr., Prime's vice president and son of the company's founder. Prime expects to begin making "general site improvements" in the spring, Reschke said. Prime has invested in nearly all real estate asset classes in its 35-plus years in business, Reschke added.

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For its part, LPC, which marks its first year in business this month, has 10 industrial projects underway in various markets as part of a 20-million square foot development pipeline. It manages properties in Chicago, Dallas, Houston and Seattle-Tacoma, and plans to close on properties in Georgia and Pennsylvania. It did not disclose a timeline for the latter two states. None of the 10 projects involve conversions of retail space, said Jim Martell, LPC's CEO.

Today, e-commerce accounts for about 10-12 percent of U.S. retail sales. But it may be as high as 18 percent if retail transactions that can't be digitized, such as motor fuel sales, are excluded from the total amount. Consumers are increasingly abandoning the malls for their computers, tablets, and mobile devices, making it untenable in many cases for retailers to justify the cost of physical rent. Taxes are also a problem; it is believed that high Cook County taxes were an obstacle to getting Country Club Hills off the ground. In another sign of the times, the county will provide $29 million in financing to subsidize the industrial project.

At the same time, industrial space is harder and more costly to come by, especially in markets around seaports and in bustling commerce centers like Dallas and Atlanta. Industrial vacancy rates have repeatedly hit record lows in many U.S. markets; vacancy rates have been as low as 2 percent in the area surrounding the Los Angeles/Long Beach port complex.

Shopping malls, with large land footprints, near dense population centers, and in close proximity to major roadways and highways, are being eyed as candidates for new-fangled fulfillment centers. The key is having an acceptable "floor area ratio," defined as the ratio of the existing building to the total amount of land, and whether the existing structure can be re-configured to meet the needs of e-commerce fulfillment and distribution.

The fourth-quarter "availability" rate for industrial real estate declined by 8 basis points, while warehouse demand exceeded the delivery of newly built supply by about 6 million square roughly 6 million sq. ft., according to a report released yesterday by real estate services firm CBRE Group Inc. (NYSE: CBRE). Availability of U.S. industrial real estate dipped to 7 percent in the fourth quarter, the lowest point since 2000, the data showed. Availability is defined as the total amount of vacant space plus space currently occupied but being marketed for use by new tenants.

In a report expected to be published next week, CBRE said it had identified 23 retail-to-industrial conversions across the country. The projects range from those that have been recently completed to those still in the development and planning stages, the report is expected to say.

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