REJournals.com - Commercial Real Estate Property News for Chicago and the Midwest

By George Maragos

Senior vice president | Industrial Services – CB Richard Ellis

At the beginning of this year, signs were emerging that the industrial real estate market may have hit bottom. Institutional investors began to show movement from the sidelines to pursue higher quality opportunities, concentrating their efforts primarily on first tier markets, newer product and stabilized occupancies with limited lease rollover.

As interest grows, so too does the available debt for industrial product, especially on class A assets. The market is becoming a bit more aggressive on loan to values (LTV) as well as interest rates. Movement has also been observed in cap rates, which have dropped 100 to 150 basis points in the last two quarters.

To put the Chicago metropolitan industrial market into perspective as it relates to other major markets, please see the following charts.

As the economy continues to slowly stabilize, increased consumer spending will push firms to rebuild inventories. As they do, the demand for industrial space will rebound, confirming that we are finally near, or at the bottom of this downturn.

Anticipated to grow in line with the economic recovery is rail volume. Rail intermodals will continue to increase their share of growing truckload volumes as increases in fuel prices make rail a more attractive option.

This trend is verified as rail served sites are experiencing greater demand on a national level. This illustrates yet another example of the importance of the Chicago industrial market, as Chicago has 50 percent of all U.S. rail freight passing through area yards. As investors weigh their options, the Chicago Industrial Market is well positioned to continue to be a preferred choice.

Manufacturing activity expanded for the 11^th straight month in June, although the rate of growth has slowed. The Institute of Supply Management’s index dropped to 56.2 in June, from 59.7 in May. While posting a decline, the reading is still above 50 which signals growth in the industry. Manufacturing also offered another positive sign by adding 9,000 jobs with transportation companies, and warehouses increasing by nearly 15,000 jobs, signaling continued strength in the goods-producing sector.

The overall Chicago industrial market, which includes southern Wisconsin and northwest Indiana, contains nearly 1.2 billion square feet of inventory and currently reflects an availability rate of 11.6 percent, while the Chicago Metro Area availability rate registered in at 11.7 percent. While both remain unchanged from last quarter, they do reflect a 40 basis point increase from one year ago when the rates registered in at 11.2 and 11.3 percent, respectively.

After Q1 of this year, net absorption posted a negative 1.5 million square feet. That number is in stark contrast to the positive 1.0 million square feet posted a year earlier, illustrating the challenges the Chicago industrial market continues to face.

Year-to-date net absorption posted a negative 2.9 million square feet. While still negative, that number is an improvement from the negative 5.5 million square feet posted one year ago, also signaling that the Chicago industrial market is attempting to move closer to equilibrium.

13.3 million square feet of leasing activity has occurred during the first half of the year. This number reflects a decrease of 22 percent from 2009 and 33 percent from 2 years ago. User sales activity has continued to grow as current sale prices are far below the cost to build. User sales totaled 6.9 million square feet during the first half of 2010, up more than 36 percent from one year ago and 55 percent from 2008 levels.

Construction completions continue to illustrate the dramatic affect of the Great Recession on the Chicago industrial market. Three projects have been completed so far this year, totaling only 426,623 square feet, of which all were build-to-suits. Looking back to one year ago, there were 20 completions – 7 build-to-suit and 13 speculative, which totaled more than 5.4 million square feet. We won’t likely see any volume of speculative activity until availability rates are back in the single digits and rental rates begin to recover. When exactly that will occur, still remains uncertain.

Although there are volatile world events that impact our domestic and local economy, several market indicators give us continued confidence that there are signs of a slow recovery that will likely continue for the next few quarters.

Data referenced was obtained from CB Richard Ellis local and National Market Research.

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