Building a warehouse without a tenant may seem like a risky investment, but experts say it is a best practice in today’s economy.
Speculative buildings — also known as shell buildings — are a hot topic in Johnson County because, for the past several years, local governments have approved several, and city and town officials often agree to incentives, such as tax breaks, for developers to build the facilities.
But the developments are more than just empty warehouses. City leaders and economic development experts say having an inventory of available buildings is essential in today’s economy due to increasing demand.
Three quarters of companies say they want a completed warehouse that is ready to move into, said Amanda Rubadue, vice president of economic development at Aspire Johnson County, which regularly works with companies and site selectors.
The idea of speculative development in the county took off in about 2012, when the City of Greenwood began looking into adding shell buildings east of Interstate 65 to meet an increasing demand for industrial space.
Now, almost a decade later, speculative development is booming. Franklin, Greenwood and Whiteland often approve annexations or rezones and incentives for the buildings.
On the market
Currently, there are four speculative buildings on the market in Johnson County.
One is part of a multi-tenant building finished in 2017 in Greenwood, at the South Point Business Park on Graham Road and Main Street, according to data from Aspire, a local chamber of commerce. The other section of the building already has a tenant.
Two buildings are on the market in Whiteland — one 800,000 square feet and the other 1 million square feet, both at the soon-to-be Mohr Logistics Park, west of Interstate 65 and north of Whiteland Road. Construction has started on one of the buildings and construction on the other is set to begin in a couple months. Both spaces are already being advertised.
Those two buildings are the first phase of Mohr Capital’s plans to build an 11-building industrial park on nearly 400 acres. The development, as well as other recent industrial feats, earned the small town backlash and protests from nearby residents.
In Franklin, Sunbeam Development Corp. has an available building without a tenant, on State Road 44 just east of I-65, but Franklin Mayor Steve Barnett said the developer has a few possible tenants in mind.
It is also part of a four-building industrial park planned for the city which, similar to Whiteland, did not bode well with nearby residents.
In a rare move last month, the Franklin Plan Commission failed to decide whether to recommend a proposed annexation and rezone to the Franklin City Council for the project.
Time is of the essence
The term “speculative” is often associated with a negative connotation that plans are hypothetical, or decisions are being made without a plan in place. That is not the case, officials say. Yes, speculative buildings are constructed without a tenant, but that does not necessarily mean it is risky, said Adam Stone, an area financial consultant who works with cities and towns in Johnson County.
“The term speculative is maybe, in some cases, a mischaracterization of what’s actually going on,” Stone said.
Developers looking to build in the county usually have pristine reputations and connections to companies such as Amazon, Cooper Tire, Energizer and FedEx — all major companies that have moved into speculative buildings in recent years, he said.
Site developers also invest millions into constructing the buildings, so most of the time, they have an idea about what types of businesses they plan to attract or pursue before construction is completed, Stone said.
“Nobody is investing $100 million without some sort of idea. What they do is they procure and they assemble the land, they invest in their own developer capital. They start to market the actual space to those household names,” he said.
There is significant demand in Indiana for industrial development, with many companies looking to locate or relocate in the state. But most say they don’t have time to start from scratch, so an inventory of speculative buildings is necessary to keep up with what that demand.
“Every time we talk about how we can make northern Johnson County more attractive, how can we grow the job base, this is the option. This is the tool. You’ve got to have the space available,” Stone said.
Buildings take time to develop. Going through the process — from annexations, rezones and takes abatements — takes months before construction can even begin.
Companies don’t have time to wait around, Rubadue said.
Then, construction takes a year or two. That is why developers put in the work to construct buildings that are ready to go when companies come calling.
“We’re seeing growth and decisions made at a faster pace than we did years ago,” Rubadue said.
Almost all of the large corporations that have moved into the county within the last year are renting facilities that were developed as speculative buildings a couple years ago, including Milwaukee Tool in Greenwood, Energizer in Franklin and Amazon in Whiteland.
In Johnson County, once a speculative building is complete, it either already has a tenant attached, or if it does sit empty, it is typically for less than a year, Rubadue said.
Key to a modern economy
Locally, the City of Greenwood has approved speculative buildings more often than other cities and towns.
The idea of working with developers on speculative buildings for distribution, logistics and manufacturing purposes dates back to about 2012, when the city was trying to meet a demand for warehouses.
“Economic development professionals, they started coming out and saying if your community wants to grow in industrial uses … (businesses) are making site selection decisions based on these buildings already being available,” Stone said.
Development started booming in Greenwood in about 2014, when the first large company, Ulta Beauty, located in the city, Mayor Mark Myers said.
It has picked up since then. Greenwood has approved tax abatements for 11 speculative buildings in the last two years.
Abatements are a form of incentive now commonly used that relieve a pre-determined percentage of property taxes on the actual property and the equipment inside it for a specified period of time — usually 10 years.
The Greenwood City Council has already considered abatements for four more similar projects between January and April, some of which are still making their way through the approval process.
Prioritizing this type of development is the key to a diverse tax base, and ultimately, what is considered by economic development experts as “a modern economy,” Stone said.
“We have to have a growing tax base to have a modern economy. We want to have a growing tax base in residential; we want to have a growing tax base in commercial; and we want to have a growing tax base in industrial,” he said.
Due to the ever-increasing demand for industrial development, a piece of land’s assessed value increases significantly when it is developed for industrial use.
For example, on a recently approved speculative building for Shear Property Group, the assessed value of the farmland the facility will be built on was about $60,000. The assessed value once it is developed for industrial use will be about $6 million.
Shear received a $900,000 tax break, but will still pay the city about $1.4 million in property taxes over the next 10 years.
A higher assessed value means the city or town will receive more money in property taxes from that development.
“That’s a whole lot of police officers, firefighters, teachers. My guess is you’re going to be able to provide a lot more budgetary resources,” Stone said.
A common complaint among residents throughout the county, particularly in Greenwood, is that industrial development is not what the city needs. One resident pointed out at a recent city council meeting that Greenwood should focus on attracting more high-paying office jobs.
But this is what the demand is, Myers said.
“A lot of people complain because they don’t understand. They say, ‘Oh you need to bring office jobs, or high-paying executive jobs. Well, there’s not a demand for professional (office) space right now,” he said.
Payoff outweighs the cost
A common practice to attracting industrial development in the county — including speculative buildings — is offering incentives, usually through controversial tax breaks.
Franklin, Greenwood and Whiteland have approved millions of dollars worth of tax breaks for developers to build speculative buildings over the years. And doing that is necessary to compete because the demand is so high, Rubadue said.
Most companies won’t even consider buildings on which taxes aren’t already abated, because that usually means rent would be higher, she said.
“If everyone got together and said, ‘We’re not going to do this anymore, we’re not going to give incentives.’ Then the playing field would be level,” Rubadue said. “But you have to give incentives to compete.”
The payoff outweighs the cost, she said. The city gets millions in tax revenue that it wouldn’t otherwise get.
If the developer doesn’t have a lease in hand, they are responsible for the expenses.
“It’s not like they’re just getting a free lunch,” Stone said.
More recently, the Town of Whiteland has started booming with industrial development, including several speculative buildings. The Whiteland Town Council approved rezones and tax abatements for several industrial parks with speculative buildings in the past two years.
This year alone, the town council has approved tax breaks for the last building in the Whiteland Exchange — an industrial park in which Amazon is the flagship — and Cooper Tire, which is moving from nearby Franklin. It has also approved a rezone for another industrial park on Paul Hand Boulevard, and another for the Mohr Logistics Park.
Whiteland Town Manager Kevin McGinnis recognizes that the town is developing its remaining land faster than usual, which several residents have expressed concerns about. So he plans to take a deeper look at the town’s comprehensive plan, last updated in 2011, to decide what to do moving forward.
“There’s going to be a dividing line between when to stop. Where that is, I’m not sure,” McGinnis said.
Whiteland is moving in that direction for the same reason its neighbors to the north and south have — pent-up demand for industrial development in Indiana’s economy, he said. Manufacturing is one of the top industries in the state, employing more than 17% of the workforce, according to the U.S. Bureau of Labor Statistics.
“Indiana is kind of on fire right now with industrial demand. The reason Whiteland is on fire right now is of course the connectivity to I-65,” McGinnis said.
The main reason Johnson County has become a hub for industrial development is simply location.
Four major interstates connect in nearby Indianapolis, and companies that specialize in distribution, logistics and manufacturing look at central Indiana as a prime location for their businesses, Stone said.
“You can’t move a city,” Stone said. “What we’re told in these meetings when site collectors and developers come in is that Indiana is the Crossroads of America.
That’s kind of an overused term, but that’s the truth.”