By Brad Weiner
CHICAGO — Over the past few years, market analysts, brokers and investors have been anxious to see the industrial real estate market rally in the wake of an unsteady economy. Unstable conditions have led to a significant slowdown in the buying and selling of buildings and delayed tenant expansions and renewals. The volume of construction projects, including build-to-suit properties and speculative developments, also slipped dramatically in recent years.
Fortunately, it seems that this period is coming to a close. For the first time in five years, the Chicago industrial market has seen four consecutive quarters of positive absorption. The third quarter saw 2.6 million square feet of positive absorption, with 4.9 million leased in the Chicago industrial market.
Despite this positive trend, the market has still been bumpy, considering the second quarter showed 7 million square feet of positive absorption with 4 million square feet leased. Overall, the numbers suggest the market is moving in the right direction.
Bright spots
Specifically, Chicago's O'Hare market and the I-55 corridor were incredibly active in the third quarter. Our findings indicate that a generous portion of this activity was made up of existing tenant expansions and renewals. Noteworthy deals included Lennox, which leased 312,000 square feet in Romeoville; Reviva Logistics, which leased 354,000 square feet in Bolingbrook; and Main Steel, which took 240,000 square feet in Elk Grove Village.
Additionally, the north market (North Cook County, Lake County and Kenosha/Racine County) also remained relatively active with 482,093 square feet of positive absorption in the third quarter. There is a major shortage of newer Class A product available over 100,000 square feet north of the city through southeast Wisconsin, resulting in developers, investors, and users starting to look for land sites to build.
Growing bolder
There is even talk about speculative development. For example, Majestic Realty Co. recently purchased an 88-acre site and is considering building a speculative development spanning 700,000 square feet to 1.2 million square feet in Pleasant Prairie, Wis. If this project breaks ground, it would be the largest speculative construction ever built in this submarket.
Speculative construction has begun to resume along I-55 and I-80 again as well. DCT Industrial Trust recently completed a 604,100-square-foot speculative development in Romeoville, and Clarius Partners has started a 1 million-square-foot speculative project in Joliet.
It's important to note that the market hasn't experienced significant speculative construction at this level in several years. We feel that this rise in activity indicates increasing confidence by developers that there is enough tenant demand in the market to drive new speculative development.
Build-to-suit projects have also increased throughout the market. Currently, Edward Don Co. has a 362,500-square-foot build-to-suit project in Woodridge and Yusen Logistics has a 229,841-square-foot build-to-suit project in Elk Grove Village. The uptick in construction activity stems from a renewed confidence in the market, plus a general perception that there is a lack of quality product in the core markets.
Rents grow incrementally
As a result of this shift, asking rents are slowly rising. Developers and institutional landlords are starting to achieve rents closer to their target asking rates rather than tolerating lower returns in order to maintain decent occupancy levels. That's a sure sign that economic prosperity is on the rise once again.
Overall, we predict that the market is headed in a positive direction and should continue along this path through 2013. In the months ahead, we predict industrial occupiers will refocus on planning for their future needs and will continue to drive demand.
— Brad Weiner, vice president of Paine/Wetzel/TCN Worldwide, is based in Chicago.