TUESDAY, JUNE 23, 2009
ChicagoAs anticipated, and in keeping with other commercial real estate sectors, industrial market conditions deteriorated during the first three months of 2009, continuing a slide that began more than one year ago, according to
Colliers Bennett & Kahnweiler.
The first quarter Chicago metropolitan industrial vacancy rate rose to 11.08 percent, according to Colliers Bennett & Kahnweiler, surpassing the previous high that dates back nearly 17 years to Second Quarter 1992 when the rate was 11.0 percent. This increase in vacancy directly correlates to the available industrial supply, which ballooned to 145.1 million sq ft. This figure was almost 11 percent higher than the level from the previous quarter, Fourth Quarter 2008.
Other gauges of industrial market activity that took a beating in the first quarter include leasing and sale activity, which dropped 11.09 percent and 6.51 percent respectively from last quarter. Moreover, cumulative leasing and sale activity totaled 9.6 million square feet of space, the first time quarterly activity failed to reach at least 10.0 million square feet since second quarter 2001 when 9.1 million square feet of activity was recorded. Further, net absorption volume fell to one of the lowest totals ever at negative 8.4 million square feet.
In looking for the silver lining, new construction deliveries have slowed significantly from 6.4 million square feet built last quarter to 3.4 million square feet completed during the first three months of 2009. Of that amount only 1.5 million square feet (or less than half) was in speculative construction. The last time there was less speculative space delivered was first quarter 2003 when the amount totaled 1.4 million square feet.
One of the most common types of transactions occurring in the industrial market is The Blend and Extend Lease Transaction. It is a transaction that both tenants and landlords are embracing. In a blend and extend lease transaction, a tenant with 12 to 24 months remaining before lease expiration looks to complete an early lease renewal of three to five years. In return for committing to a renewal, the tenant secures a new lease rate that is more reflective of current market rates.
For tenants, this represents a flight to security, and an opportunity to put off making a more substantial facility relocation until, they believe, there will be greater certainty in the business climate. For landlords, especially those looking to refinance debt, cash flow to the property is extended, even if that rate initially is lower. In today's economic climate it would be extremely challenging to refinance a property with no cash flow as a result of lease expirations.
Vacancy, SupplyAccording to the CB&K quarterly statistics, the first quarter vacancy rate grew from a fourth quarter total of 10.32 percent to 11.08 percent - an increase of 76 basis points. The increase is more dramatic when compared to the vacancy level of one year ago, climbing 197 basis points from 9.11 percent posted during the first quarter of 2008.
This was the largest year over year increase. The next highest was first quarter 2002 when the vacancy rate reached 8.01 percent, a 193 basis point increase from the first quarter 2001 level of 6.08 percent. On a quarter-to-quarter basis, the largest increase occurred from the third to fourth quarters in 2001 when the vacancy rate increased from 6.94 percent to 7.73 percent.
On a positive note, five markets experienced a decline in their supply of vacant property. The Elgin I-90 Corridor captured the biggest decline dropping just over one full percentage point from the fourth quarter vacancy rate of 12.17 percent to 11.11 percent. The other markets with vacancy declines were Central DuPage, I-55 Corridor, Southeast Wisconsin and the South Suburbs.
The remaining 16 markets were not as fortunate. The worst of the lot was the I-39 Corridor which went from a year-end 2008 vacancy rate of 5.34 percent to the current level of 8.9 percent. The I-290 South market had the second worst results jumping 340 basis points to 10.99 percent vacant.
During the first quarter, 11 of the 21 industrial submarkets had vacancy rates over 10 percent. One year ago, only six of 21 markets had vacancy rates over 10 percent. The I-80 Joliet and I-55 markets had the highest vacancy rates at 21.09 and 16.25 percent, respectively. The lowest vacancies were reported in the DeKalb County and Far South Suburban markets at 4.88 and 6.98 percent, respectively.
The amount of available supply continues to return to the market at a worrisome rate. This quarter's vacant supply reached 145.1 million square feet. This is 10.5 million square feet more than last quarter. Since First Quarter 2008, the supply of vacant product in the market has grown by 27.4 million square feet.
The O'Hare market continues to offer the most available property options accounting for 15.8 million square feet or 10.88 percent of Chicago Industrial's overall vacant supply.
Leasing, Sale ActivityFirst quarter tenant leasing activity registered just 6.1 million square feet, down 11.09 percent from the previous quarter level of 6.8 million square feet. The last time demand was this poor was during the second quarter of 2004 when only 5.7 million square feet was leased. The level of leasing activity is approximately 20 percent below the typical first quarter of 7.5 million square feet. First quarter leasing activity peaked in 2000 at 10 million square feet.
The O'Hare market posted the most leasing activity during the quarter at 1.1 million square feet or roughly 17.51 percent of all leases completed in the Chicago Metropolitan Area during the first three months of 2009. Central DuPage, unexpectedly had the second highest total at 852,000 square feet, followed closely at 803,700 square feet in the I-55 Corridor.
The I-39 Corridor and DeKalb County markets experienced no activity at all.
Sales activity experienced a nominal change (200,000 square feet) from last quarter and one year ago, at a level of 3.7 million square feet of space sold during the first quarter. That total is down approximately 20 percent from the quarterly average of 4.4 million square feet of sales. First quarter sales activity peaked in 2007 at 5.7 million square feet.
One transaction bolstered Southeast Wisconsin claim of most sales captured during the quarter. Affiliated Foods moved into its recently completed 725,600-square-foot build-to-suit sale facility at First Kenosha Commerce Center in Kenosha, WI. Overall sale volume in Southeast Wisconsin reached 925,600 square feet.
No sales activity occurred in the I-39 Corridor this quarter.
It is interesting to note that the slowdown in market activity has hit all size segments. While the number of transaction completed below 50,000 square feet peaked in 2006 with 496, representing 72 percent of all leasing transactions, the percentage of lease transaction in this size range has been 69 percent in four of the last six years. For the last two years, the number of transactions, on a percentage basis, has been larger in the 50-100,000 square foot size range than in the 100,000 square foot and up size.
AbsorptionThe Chicago net absorption figure posted the worst quarterly volume ever. The current rate was negative 8.4 million square feet. Weak user demand coupled with an increase in available industrial supply resulted in the negative results.
This represented the fifth consecutive quarter in which absorption was negative. During this five-quarter period, the cumulative absorption is negative 19.4 million square feet. This is as bad a stretch as the five-quarter period from the fourth quarter 2004 to fourth quarter 2005 was good. During that five-quarter period, when the market was clicking on all cylinders, absorption was 25.8 million square feet.
More than 70 percent of the submarkets-15 of 21-experienced negative absorption for the quarter. The markets in Cook County experiencing the poorest results included the Chicago South, I-290 North and I-290 South where net absorption figures were negative 1.7 million square feet, 1.4 million square feet and 1.0 million square feet respectively.
Six markets produced positive gains. The Southeast Wisconsin market achieved the highest levels during the quarter, totaling 973,200 square feet. The South Suburbs tally of 9,125 square feet of positive absorption erased four quarters of negative results. The other markets realizing positive results were Elgin I-90 Corridor, Central DuPage, I-55 Corridor and Northwest Suburbs.
Construction ActivityNew development activity-speculative construction and build-to-suit development-was down dramatically in the first quarter, declining to the current total of 3.4 million square feet from 6.4 million square feet last quarter. This represents a decline of nearly 50 percent. From the same period one year ago, in first quarter 2008, the level was 5.0 million square feet.
In addition to the overall decline in construction activity, build-to-suit activity, once again surpassed speculative completions, accounting for 1.9 million square feet (55 percent) of the total activity for the quarter. This is a similar trend observed during the last economic downturn (end of 2001) when build-to-suit deliveries out gained speculative development in seven of the eight quarters starting in 2002.
Southeast Wisconsin, for the second consecutive quarter comprised the most deliveries at 975,600 square feet. The I-55 Corridor posted the next highest level at 553,300 square feet. Within the 21 industrial submarkets, 11 had no construction activity at all, four others had construction activity of less than 100,000 square feet.
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