IDI Gazeley recently started this 749,500-square-foot spec at 23700 West Bluff Rd. in the Channahon Corporate Center.
CHICAGO—The Chicago industrial market has been putting up a lot of historic number recently, but 2016 is shaping up to be the best year yet. After falling to its lowest rate in 15 years during the second quarter, the vacancy rate declined another 16 bps in the third, and now sits at just 6.75%, according to Colliers International. Furthermore, even though developers completed another 16 projects totaling 4.6 million square feet, fewer new vacancies were introduced between July and September than during any quarter in the past 15 years.
“This is the golden age of industrial real estate, and by that I mean not only the tremendous expansion of inventory all across the US, especially in the major distribution markets like Chicago, but also that demand is keeping up with new supply in a way I have not seen in 35 years,” Jack Rosenberg, Chicago-based national director, logistics and transportation solutions for Colliers, tells GlobeSt.com.
Not so long ago, he adds, when developers were building out portions of the I-55 submarket, vacancy rates typically would hover around 15%, as many building would sit vacant for considerable periods of time, even during healthy periods.
Today, however, in submarkets that see a lot of new development, the vacancy rate just keeps plunging. In the I-80/Joliet Corridor, for example, where developers have completed millions of square feet of space, the rate fell from 20.5% six years ago to just 5.2% today. CenterPoint Properties currently has a 751,769-square-foot speculative building at 3900 Brandon Rd. in Joliet underway, and IDI Gazeley has started a 749,500-square-foot spec at 23700 West Bluff Rd. in the Channahon Corporate Center.
Net absorption in the Chicago region totaled 5.2 million square feet during the third quarter, and reached 19.6 million square feet for the year. “Unless net absorption turns negative during the fourth quarter, the total is likely to exceed 20.0 million square feet for the year,” Colliers says, “the greatest net absorption tally since a four quarter period in 2005-2006 totaled 23 million square feet.”
And it's not just a great time for landlords and investors. The construction boom has resulted in millions of square feet in new, modern distribution space, Rosenberg points out, allowing many tenants to occupy the most efficient buildings in their history. Rents may have increased significantly, about 40% in five years, but even at that level, it still makes up only about 5% of the cost of operating a class A distribution center.
Trying to find any clouds on the horizon is not easy, Rosenberg says. And developers are being more careful these days than they were ten years ago. Most seem content to buy land only when needed for a new project, rather than gobbling up huge tracts that could end up as a burden if a downturn does appear.
Still, “you can see little spots where it may be getting too frothy.” Developers have nearly one million square feet of spec projects underway in the Elgin/I-90 area, for example, one of the smallest submarkets in the region, and that may be too much.
“The music's going to stop at some point,” he concludes, “but I don't know when.”
The industrial sector has become the hottest segment in commercial real estate. How will logistics companies keep up with the market forces of omnichannel commerce? When will new supply finally catch up with demand? Who's putting investment capital into industrial and what does the future hold? Join us at RealShare Industrial on November 16 and 17 for answers to these and other questions. Learn more.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
