2019 Set To Be A Strong Year for Chicago Industrial

All signs point to a robust year ahead for the Chicago industrial market according to Cushman & Wakefield’s Head of Midwest Industrial David Freidland. Vacancy rates have decreased from 6.8% this time last year to 5.5% at the end of Q4 2018. With the lack of space comes increased rental rates. In Q4 2017 rental rates averaged $5.08 per square foot, while Q4 2018 rental rates increased to $5.45 per square foot. Add to this a low unemployment rate – 4% in Chicago – and the ever increasing ecommerce sector, and Chicago industrial is set for another banner year.

GloebSt.com caught up with Freidland to get his thoughts on the market, the headwinds to watch, and his thoughts on speculative development.

GlobeSt.com: What’s your view of the overall Chicago industrial market as we enter 2019?

Freidland: We think 2019 is going to remain strong and be somewhat the same blueprint as 2018, which was a fantastic year. Our radar is up for 2020. The industrial pipeline is incredibly strong and we have not seen anything to slow that down.

The industrial market throughout the country and in Chicago, specifically, remains very robust; with all indicators still pointing in a positive direction. The vacancy rate in Chicago is the lowest it has been since 2000. Unemployment is at one of its lowest points in the history of the United States, and in Chicago it dropped from 5% down to 4%.

Construction activity in industrial is going at a robust pace as well. Based on the institutional investors appetite for industrial, need to place money, the availability of money, and the desirability of industrial, due to the perspective that ecommerce is sort of the driving force of commercial real estate right now, we are seeing developers trying to acquire land parcels and put new spec buildings into play.

All those factors would lead you to believe, and are evidence that. the industrial market is still really strong.

GlobeSt.com: What can we expect from developers, spec buildings and new construction projects this year?

One of the trends that we are seeing is the developers put into play, especially in the I-80 corridor, all these big box distribution centers. The developers built some large spec buildings – 800,000 square feet and larger – and if there was any softness in the industrial market it was in those big boxes. What they found is the activity in Chicago has been more in the 200,000-square-foot to 400,000-square-foot range, so the developers have picked up on that and are staying focused on that range as opposed to the million square foot. The spec construction is strong but you aren’t seeing developers build these million square footers now because there is an oversupply of those.

There are some major (upcoming) projects – multi-million square foot projects. I don’t mean one building of that size, I’m talking multiple building projects on 50 acres or more, in several locations, not the least of which is I-55, I-80, and southeast Wisconsin in the Kenosha and Racine area. Those projects are in high demand and they are being chased by developers and there will be big announcements on new developments in the 2019 calendar year.

GlobeSt.com: What headwinds are you watching closely that could have an impact on the industrial market this year and beyond?

One: What’s the impact of the trade wars? Is that going to force occupiers or manufacturers to sit tight, watch what’s going to happen, and not spend money? Is it also going to have a resulting control on inflation, which means cost of goods are going to go up and be passed on to the consumer? That’s definitely a headwind that anyone who is looking at 2019 and 2020 is looking into. I can saw without equivocation that there are certain segments of the manufacturing space that are more impacted than others and those that are impacted are going to be cautious.

Two: Labor shortages. Every manufacturer or tenant that is looking to do a relocation right now is focused on labor because it is hard to find labor. We at Cushman & Wakefield have our own labor analytics, and we provide that service for our clients to help them pick locations and site selection in areas where there is labor available and there isn’t too much competition from other employers that might impact what kind of wages they would have to pay. The labor shortage exists across all markets, not just Chicago, and it is very relevant in terms of site selection and location that companies choose to go to.

Three: truck driver shortages. There is more and more demand for trucks based on ecommerce and based on goods that are being shipped because the consumers are buying their stuff online and when they do that you need more truck drivers to get your stuff from point a to point b. The truck driver shortages are impacting all the industrial sectors across the country, which means you have to pay the truck drivers more to attract more truck drivers into the space. It also impacts the cost of goods sold. The consumer is going to end up paying for it, so it gets back to the same impact you have on the tariffs and the trade wars.

Those are headwinds we are all watching carefully, but we have not seen that impact yet on user demand.