Are Suburban Office-to-Industrial Conversions Feasible?

Last-mile industrial space remains much needed, while a lot of suburban office space stands empty. Converting abandoned suburban office space into industrial use makes great sense. But given headwinds, proposals to turn empty suburban office into in-demand industrial and the actual ability to do so can sometimes be two very different things.

“Office-to-industrial conversions are happening nationally from a geographic perspective but are primarily concentrated in markets where obsolete office coincides with strong industrial performance metrics, including Los Angeles, Chicago and Atlanta,” Ermengarde Jabir, senior economist at Moody’s Analytics, told Commercial Property Executive.

The Chicago suburbs are seen as particularly fertile ground for conversions, said Jim Adler, executive vice president of office services at NAI Hiffman in Oakbrook Terrace, Ill.

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“Chicagoland is dotted with a number of large, dated and underutilized corporate office campuses. It’s a natural evolution for these campuses to be converted into alternative real estate,” he said, pointing to the recent acquisition of the 197-acre former Sears headquarters in Hoffman Estates, Ill., by Compass Datacenters.

Building horizontally

That most of the conversions are occurring in suburban settings is a logical outgrowth of more space being available to build horizontally in such areas, Jabir noted. “Developers and investors are able to capitalize on land that has once again become comparatively inexpensive because the value of the improvements on that land—the office building, for example—has dropped significantly because of obsolescence,” she said.

In addition, compared to big cities, suburban areas usually benefit from more flexible infrastructure, making it easier to accommodate specialized electrical needs of industrial spaces that require industrial-grade machinery and automation, Dale Crawford, executive director of the Steel Tube Institute, based in Glenview, Ill., told CPE.

Also driving the trend of suburban conversions are sea changes in the ways Americans obtain goods, reported Matt Rotolante, South Florida president with Lee & Associates.

Once, the orientation of industrial real estate centered on retail storage. But e-commerce has amplified demand for direct-to-consumer, rather than direct-to-store delivery. That places a premium on last-mile distribution. Conversion-targeted office parks are within that last mile.

Also worth noting are that suburban municipalities are now more agreeable to approving land use changes to property types like industrial and data centers, Jabir said. In the past such proposed changes might have been stillborn by NIMBYism. But in recent years, declining tax revenues from retail center and regional mall obsolescence have taken some of the edge off such worries, she added.

Also appealing are tax incentives being offered by state and local governments to redevelop and revitalize areas that have fallen out of use, Jabir reported.

Typically, when conversions occur, one-time office campuses are razed to create brand-new industrial properties. A number of factors make adaptive reuse of existing office impractical, said Edward Easton, founder, chairman & CEO of The Easton Group. These include lower ceilings than the 28-foot ceilings industrial properties usually require and, in office buildings constructed during the last two decades, structural steel of insufficient strength to support industrial operations.

Last-mile dynamics

Suburban office-to-industrial conversions are not always easy, Brad Werner, national leader of the construction and real estate practice at Wipfli LLP, also observed. He referenced a tale of two Chicagoland municipalities.

In north suburban Glenview, Dermody Properties is transforming the one-time Allstate corporate campus into an enormous logistics center. In 2022, the company completed its acquisition of the 232-acre property, with plans to demolish the office buildings and redevelop the site into The Logistics Campus, a $500 million, 10-building, 3.2 million-square-foot Class A logistics park.

In nearby Deerfield, however, a proposal to convert the 10-building former campus of medical products maker Baxter International into warehouses was deep-sixed by resistance from a neighborhood in adjacent Riverwoods. Residents feared disruptions from truck traffic and operations.

“You could have the perfect project on the perfect property, but converting from one asset class to another is not easy,” Werner said. “Now you are trying to convert office to industrial, and sometimes you don’t get approval, because it’s right across from a suburban development, and the citizens get mobilized to reject the deal. In theory it makes all the sense in the world. But the mechanics of getting it done are really complicated. The local zoning can trump everything.”

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Rotolante agreed, noting that the very reason suburban office-to-industrial conversions make sense—excellent access to the homes of e-commerce-loving consumers—also makes them unpopular with nearby residents.

“People tend not to want to live near industrial,” he said. “Trucks can be noisy and cause traffic issues, and there can be noxious smells or loud noises coming out of a manufacturing plant, and things that don’t look so friendly or nice. In most cases, to change the zoning, you have to go before the neighborhood, while in other cases the municipality can okay the change. But it can be a challenge. People may fight the possibility of an industrial development coming in.”

Pyrrhic victory

However, if municipalities or their residents succeed in preventing suburban office-to-industrial conversions from taking place, that triumph may later be viewed as a pyrrhic victory, Werner noted. When the dollars generated by now-failing office properties fall off the tax rolls, the individuals left to shoulder the tax burden will be homeowners.

Most experts agree the convertibility of suburban office to industrial will continue to differ widely on a market-by-market basis. “Where the office rents are still high enough so that the industrial pricing can’t overtake the value of the office, there’s no land owner who will do all the work to change the zoning,” Rotolante said. “It will be predicated on the dynamics of that market and what the office rates are for that market.”

Werner forecasts a future in which federal and state legislation may address the creation of incentive packages. “If they can help incentivize some of the development, whomever figures that out, especially at the local level, will have a great deal of opportunity to pull in a lot of economic development.”