Dermody’s Deal for the Allstate Campus Isn’t an Isolated Case

Although Dermody Properties’ plans for the Allstate campus in Northbrook, IL are still evolving, one thing is pretty certain: the two-million-square-foot office complex, Allstate’s headquarters since 1967, will be undergoing fundamental repurposing. The $232-million acquisition, expected to close in 2022 pending local approval for Dermody’s redevelopment scenario, starts to look like Exhibit A for a trend identified by Newmark researchers. 

“Unprecedented levels of industrial demand across the U.S. have left tenants with a critical shortage of space options, reflected in an all-time low industrial vacancy rate of 4.6% as of the third quarter of 2021,” according to a report from Newmark’s Liz Berthelette, Mike Laccavole and Lisa DeNight. “Comparatively, the U.S. office market is contending with uncertainty in the post-COVID-19 world, and the pandemic has only accelerated obsolescence of some older, less-amenitized product.”  

Such a disparity among asset classes is increasingly driving investors and developers to consider industrial redevelopment opportunities for some unproductive office properties, Newmark reports. Since 2018, at least 45 office properties totaling 11.3 million square feet have been redeveloped, or are undergoing redevelopment, into industrial use.  

“This observed activity is predominantly concentrated in markets where density and land constraints are driving forces resulting in perennially tight industrial vacancy,” the report states. “While office space generally costs significantly more to build than industrial and yields higher rents when occupied, the economics supporting industrial redevelopment in these regions are buoyed by exceptionally strong market fundamentals, particularly when compared to each metro’s office market.” 

As the conditional nature of the Allstate campus redevelopment suggests, redeveloping office to industrial isn’t cut-and-dried. Aside from finding suitable conversion candidates, investors and developers also need to factor in zoning considerations, existing land availability, industrial and office submarket fundamentals and other geographic attributes.  

“Sites may face challenges including community opposition and zoning restrictions, increasing development costs, as well as challenges from competing uses; in particular, multifamily, healthcare and life science reuse,” the researchers caution. Nonetheless, there’s a compelling case to be made for redevelopment, which can both create much-needed space for industrial tenants and cull dead wood from local office markets.  

Dermody’s target market squares with the metrics of the actual conversions that have been done. The Chicago metro area leads the way in the volume of older office space repurposed into industrial and in the average vintage of the office stock undergoing such conversions, although Los Angeles and Northern New Jersey—both home to extremely tight industrial markets—aren’t far behind.