The vacancy rate for manufacturing facilities and warehouses rose from 11.91% in the third quarter and 10.32% in the fourth quarter of 2008, according to a report by Colliers Bennett & Kahnweiler Inc., which began tracking the local industrial market in 1990. The vacancy rate has been climbing since the third quarter of 2006, when it stood at 8.39%. "We are likely to continue to bump along in 2010," says David Bercu, a principal with the Rosemont, IL-based real estate firm. "It's like pushing rocks up hills." Demand for space worsened during the fourth quarter, declining by nearly 3.8 million square feet, compared to a third-quarter drop of 3.1 million square feet.
Market activity also remains low. In 2009, activity fell 15%, to 38.6 million square feet, compared to 45.5 million square feet in 2008. Activity is down 35% from the peak in 2005, when 59.5 million square feet was leased or sold. "People are in clamp-down mode," says John Pagliari, a senior vice-president in the local office of Sacramento, CA-based industrial developer Panattoni Development Co. Activity will pick up slightly in 2010, he forecasts, but rents and sale prices will be more than 30% less than their peaks in 2007.
There are modest signs that the local economy is improving. Last month, a group of Chicago purchasing managers said their measure of economic activity rose for the third straight month. The Business Barometer shot up to 60 in December, compared to 56.1 in November, according to the local affiliate of the Institute of Supply Management. Any number above 50 signals expansion.
Economists at the University of Illinois predict only slight improvement in the region's economy. The Chicago Business Activity Index is expected to rise to 84.9 by November 2010, compared to 80 in November 2009, the university's Regional Economics Applications Laboratory reported recently. The measure bottomed out below 30 in early 2008.
"Companies that have facilities to relinquish, or to put on the market, have generally done that by now," Bercu says. "We're anticipating the first six to nine months of 2010 will be pretty much the same." And tenants will continue to have the upper hand during 2010, according to the Colliers report. Companies looking to sign leases are increasingly taking a hard look at the financial ability of developers and landlords to complete promised improvements, the report says.
But there's brighter news on the horizon. The Chicago-area industrial real estate market is expected to stabilize this year, with the vacancy rate holding steady at 11.7% while rents edge down slightly after two years of steeper declines, according to a new forecast by Cushman & Wakefield Inc.
C&W points to the uptick in manufacturing-related activity in recent months, along with Chicago's central role in the nation's transportation and distribution network and the lack of new supply--as development here has all but halted. "Construction is at a standstill," says Sally Macoicz, a senior director with the firm¹s Chicago office. "There are more tenants in the market looking. Things are poised to improve."
Macoicz says leasing activity was down 16% through the third quarter compared with 2008, but that trend will show improvement in the fourth quarter and into 2010. She says many companies that had shelved plans due to the recession are now gearing up to make moves. A recovery, though, will be slow in coming for industrial landlords and developers.
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