CHICAGO—In the initial phase of the economic recovery, investors began snapping up much of the available class A industrial product. But as the economy has strengthened even further in 2012 and 2013, investors have starting looking, and buying, the smaller and older class B buildings, many in the suburbs, which form the backbone of the Chicago area's industry.

“Two years ago, they weren't even thinking about the B market,” says John Coleman, executive managing principal of Newmark Knight Frank Epic in suburban Rosemont. But several years of growth and strong balance sheets for companies using this building class soothed whatever anxieties investors harbored. Starting around the third quarter of last year, investors “became much more comfortable with the returns and the risk underwriting.”

“And in the first and second quarter [of 2013] we certainly saw an increase in measurable activity.” Since January 1, Coleman's firm has helped complete 21 deals, both leases and sales, in the Chicago area among industrial buildings with between 30,000-square-feet and 90,000-square-feet. “That's something that is pretty positive.” Second quarter transactions handled by NKFE include KTR Property Trust's purchase of a 74,410-square-foot building at 280-290 Gerzevske Lane in suburban Carol Stream, and the purchase of an 81,048-square-foot building at 490 Bonnie in Elk Grove Village by SFP Group, LP.

Many of these buyers have received financing from the Small Business Administration, adds Coleman, which has attempted to goose the economy by providing occupiers with cheap loans to help buy their buildings. And until recently, the SBA loans were significantly cheaper than traditional financing. About 12 months ago, an industrial user could secure a SBA loan with a rate 100 bps below the normal lending rate.

“Now, we're seeing the SBA component becoming a little more expensive,” says Coleman, sometimes 50 bps higher than bank rates. “The rates were so low there was only one way for them to go.” However, even though this makes SBA-financed deals, which typically involve a mix of financing from the SBA and a traditional lender, a bit more expensive, deals continue to close at a solid pace. After all, like everyone else, most lenders have begun to have plenty of confidence in smaller industrial users and no longer need the peace of mind you get with a government-backed loan. “What's happening now is that we're taking two steps forward and maybe only one-half step back.”

According to Real Capital Analytics, the dollar volume of industrial investment activity in Chicago is nearly 10 percent higher than a year ago—$838 million for the first six months of 2013, compared with $763.4 million for the same time period in 2012. The number of transactions increased by 24 percent, from 102 in 2012 to 126 in the first half of 2013.

Coleman estimates that class B constitutes about 30% to 35% of the overall industrial market in the metropolitan area, much of it concentrated in suburban submarkets. And Lake County towns such as Buffalo Grove and Libertyville, in addition to the O'Hare and I-88 Corridor submarkets, have led the way in this year's accelerated leasing and sales activity.

According to Coleman, the overall recovery has been especially notable in several sectors. For example, Newmark recently helped complete four or five deals for companies that provide point-of-purchase and retail displays. Companies that sell used industrial equipment overseas have also seen an increase in business, along with packagers, and perhaps most importantly, laboratory users that deal with things like research and development.

“Those are the things that went away when people stopped spending,” he says. And the return of R & D means companies have enough confidence to expand product lines and grow. “That was absent from the market just two to three years ago.”

Coleman expects that an increasing number of class B owners will decide that now is the time to sell. Early this year, for example, Newmark began working with a client looking to sell their six class B suburban properties with a total of about 250,000-square-feet in single-tenant and multi-tenant buildings. They advised the family owners to wait a bit.

“Like any B portfolio it has a number of small users,” some on short leases, so instead of throwing it out on the market, they spent six months doing a little cleanup and converting short leases to long-term ones. Coleman now feels the portfolio is ready to present to potential investors. “If we had brought it to market in February, we don't feel we could have achieved what we feel we can do now.”