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2017 Poised to Be Another Great Year for Chicagoland Industrial

Chicago Market[1]

The Chicagoland industrial market has started 2017 with a full head of steam and doesn’t appear ready to cool down anytime soon. With historically low vacancy rates, high net absorption and strong tenant demand, the outlook is positive for new construction in the pipeline, even with the recent uptick in interest rates.

Net absorption of industrial space topped 19.3 million square feet in 2016, outpacing the 18.2 million square feet of new product delivered, according to CoStar Group. The metro Chicago vacancy rate at the end of the year was 6.5 percent, a drop of about 50 basis points over the previous 12 months.

Jeffrey J. Provenza, Darwin Realty

Jeffrey J. Provenza, Darwin Realty

As for 2017, we see increasing competition for well-located land sites, especially from speculative developers who see opportunity in the rising demand for state-of-the-art facilities equipped for today’s sophisticated users.

The jungle effect

We have seen strong activity from tenants ranging from global logistics providers to regional distributors. However, a large share of the total net absorption in 2016 came from one well-known and much sought-after tenant — Amazon. The retailing giant has been leasing warehouse/distribution space at a rapid pace, and it seems as though every other week we are reading about a new distribution method, business venture or cutting-edge technology that inevitably results in space expansion.

To make all of these concepts a reality, Amazon is signing leases all over the Chicagoland area, from standard distribution space to “last-mile” fulfillment facilities. Amazon’s wave of leasing started in 2013 with a 1.5 million-square-foot deal in Kenosha, Wis. In 2016, Amazon completed Chicago-area deals totaling more than 4.5 million square feet, including:

  • 767,000 square feet in Romeoville, Ill.
  • 856,600 square feet in Monee, Ill.
  • 746,700 square feet in Joliet, Ill.
  • 626,000 square feet in Waukegan, Ill.
  • 400,000 square feet in Aurora, Ill.
  • 954,000 square feet in Aurora, Ill.

Amazon’s space needs are not only growing but also rapidly evolving as it continues to pioneer new concepts such as drone delivery, retail outlets with no checkout required, and floating warehouses (drone-friendly airships). We can expect to see high demand for industrial space that’s equipped for e-commerce users like Amazon.

O’Hare market tightens

Although the industrial market throughout the Chicago area is benefiting from high user demand, one submarket that has seen more than its share of activity is O’Hare. One of the hottest submarkets in the metro area, O’Hare had a vacancy rate of only 4.8 percent at the end of 2016. Lease rates have escalated as strong credit tenants are seeking high-quality, functional buildings.

Undeveloped land sites are hard to come by, so many developers are competing for functionally obsolete buildings in proximity to O’Hare. Well located sites with older buildings could be acquired cheaply in the past, but intense competition has led to large increases in pricing, setting new high-water marks for land in the O’Hare market.

For instance, CoStar reports that Panattoni Development Co. acquired the 28.5-acre site of the former A.M. Castle & Co. building in Franklin Park, Ill., for $16.16 per square foot, not including demolition costs. A 23.6-acre Wood Dale site owned by UBS is reportedly under contract for sale at a cost of more than $20 per square foot, in part because the site lies within DuPage County, which yields a significantly lower real estate tax rate than Cook County.

This submarket has also seen its healthiest amount of new construction since the Great Recession. Seven new buildings, each in excess of 100,000 square feet, are currently available for lease in the submarket. In keeping with current demand trends, these new buildings all have ceiling clearance of 30 feet or higher.

We expect that most of these buildings will find tenants, based on healthy absorption at newly completed buildings in 2016. Leases in excess of 100,000 square feet in the O’Hare and West Cook submarkets over the past year included:

  • Pilot Air Freight’s lease for 182,000 square feet in Northlake
  • Zurn Industries’ lease for 134,000 square feet in Bensenville
  • CH Robinson’s lease for 235,000 square feet in Des Plaines
  • A 244,000-square-foot lease by an undisclosed tenant at O’Hare Airport’s Aeroterm Cargo Center.

Intermodal demand

As companies continue to ship by truck and rail, intermodal facilities will remain attractive to large tenants. The Chicago area is home to the country’s largest master-planned inland port, a 6,400-acre site owned by CenterPoint Properties. Located in Joliet and Elwood, Ill., about 60 miles southwest of the city, the CenterPoint Intermodal Center signed leases totaling more than 3.2 million square feet during 2016, including Mars Wrigley Confectionery’s lease for 1.3 million square feet; Ikea’s lease for 415,000 square feet; Samsung’s lease for 384,000 square feet; and Saddle Creek Logistics’ lease for 1.1 million square feet.

Chicago’s status as the nation’s central transportation hub ensures that intermodal facilities will continue to attract tenants. All six Tier 1 railroads intersect in Chicago, and shipping product by rail results in cost savings. The intermodal center will continue to be successful, especially as fuel prices rise.

Economic outlook steady           

Historically, industrial space demand is strongly tied to economic trends. Thus, the Chicago distribution market’s performance in 2017 will depend on how economic factors play out in light of the changing political environment, the volatility of the global economy and the recent increase in interest rates.

Despite these uncertain factors, the overall outlook for the economy is one of steady growth, in terms of job creation and growth in the gross domestic product (GDP). Even if there is a market correction toward the end of 2017, it is likely to be mild and certainly will be far less severe than what we saw in 2008.

Based on all these factors, we see another great year ahead for industrial real estate developers, investors and brokers. Companies that need large blocks of industrial space in Chicago are advised to act early and keep a pulse on the market to ensure that they can get the right space for their needs at a competitive price.

—By Jeffrey J. Provenza, Vice President, Darwin Realty.

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