Industrial N Illinois

A potential market slowdown hasn’t dampened Chicago’s industrial sector yet

A potential market slowdown hasn’t dampened Chicago's industrial,ph1
Hillwood’s Joliet Logistics Park, a 992,640-square-foot speculative facility recently purchased by New Jersey-based third-party logistics firm NFI.

With over 14,000 buildings and more than 1.1 billion square feet of real estate, Chicago has been one of the nation’s brightest spots for industrial activity during this cycle. The same held true last quarter, though the market may experience a slower pace as the year goes on.

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According to Newmark Knight Frank (NKF) research, vacancy in the Chicago metro industrial market declined to 7.1 percent in the first quarter of 2019, a 60-basis-point drop that is largely due to fewer new deliveries, high leasing activity and strong absorption. The lower vacancy contributed to higher rental rates, ending the quarter at $5.64 per square foot, up $0.16 from last quarter—a growth rate of 6.2 percent year-over-year and 22.0 percent over the last five years.

The most significant contributor to the absorption rate was NFI, a New Jersey-based third-party logistics firm that purchased a 992,640-square-foot speculative facility in Joliet recently developed by Hillwood Development Corporation. The property, located at 100 E. Millsdale Road, is part of a 240-acre master planned business park with proximity to both BNSF and Union Pacific intermodal facilities. The purchase of the building, which had been vacant since it was completed in 2017, removes a large block of vacancy from the 1-55 submarket.

First quarter leasing volume remained steady with 14 leases completed over 100,000 square feet. These include Novo Buildings Products taking 250,000 square feet in Channahon at the Route 6 Business Center and UPS planning a move into 170,000 square feet at 18700 S. Ridgeland Avenue in Tinley Park. According to NKF, these two transactions accounted for more than half of the spec development that was completed last year.

Elsewhere, RM Material leased all 1,540,000 square feet of Lemont’s Waterfall Glen Business Center Building 2 while secondhand e-commerce company Swap.com signed a five-and-a-half-year, 132,000-square-foot lease at 2501 Internationale Parkway in Woodridge. Renewals included 148,000 square feet for Benjamin Moore in Carol Stream and logistics firm Geodis Wilson agreeing to stay at its 100,000-square-foot Elk Grove Village space.

Despite the rising cost of construction—a 5.86 percent annual increase, per Turner Construction’s Building Cost Index—development carried on at normal pace. The market delivered nearly 2.5 million square feet of new space during the first quarter, the largest delivery being the first building in a two-building, 1.34-million-square-foot spec development in Romeoville.

The entire building, which is part of CT’s $125 million development, Interchange 55 Logistics Park, is still searching for a tenant, as are seven other new construction properties over 500,000 square feet in the southwest suburbs. Other properties delivered this quarter were more modest in size, such as the 300,000-square-foot Building 3 at Bridge Point Downers Grove and a 190,000-square-foot building at 220 N. York Road in Bensenville.

If past performance is any indication, vacancy would hold steady or even tick up following the delivery of significant square footage. But NKF reports that almost half of the properties completed this quarter were build-to-suits.

IDI Logistics completed Handi-foil’s 558,000-square-foot build-to-suit in the Antioch Corporate Center this quarter and Rexnord Corporation completed its bespoke, 250,000-square-foot facility at 2390 Curtiss Street in Downers Grove. Americold Logistics, Sam’s Club, School Health and The Suter Company all completed build-to-suits as well.

Mounting construction costs and the potential of a looming economic slowdown may alter the course of industrial development. The Chicago metro currently has more than a million square feet across 20 planned projects in its pipeline. A quarter of these are build-to-suits, but if all of these projects were to come to fruition, there would be an additional 26 million square feet (just constituting blocks over one million square feet) added to the metro—an amount of space that the market likely could not bear.

The one bright spot, looking forward, is Chicago’s ability—via location and existing infrastructure—to serve the changing consumer taste for on-demand fresh, organic and at-home delivered food. Within the city limits, Pullman has emerged as a front-runner for drawing these tenants.

For example, Whole Foods bucked the trend of many companies, moving its regional distribution center last year from Munster, Indiana into a new, 140,000 square-foot building in Pullman. Ryan Companies recently announced plans to develop a 400,000-square-foot speculative industrial project, Pullman Crossings. The 50+ acre project, planned with Chicago Neighborhood Initiatives, is designed to attract the growing food service industry with modern space close to the masses, something often difficult to find within city boundaries where the inventory is older.

As food is virtually recession-proof and the online grocery sector is expected to more than triple in volume over the next five years, the Chicago metro is in strong shape. The area’s food and beverage industry, which generates over $30 billion in sales and employs more than 130,000 people, has seen over 6 million square feet in leasing activity around food manufacturing, packaging and distribution in the last 24 months. This activity will result in the increased need for processing, distribution and other industrial space.