CRE Midwest

JLL’s Gray: Lack of Class A big-box product driving spec development

Kelly Gray

Kelly Gray, vice president at Jones Lang LaSalle, recently spoke to Chicago Industrial Properties about the Chicago industrial real estate sector’s performance in 2013 and what to expect in the year ahead.

Kelly Gray, vice president at Jones Lang LaSalle, recently spoke to Chicago Industrial Properties about the Chicago industrial real estate sector’s performance in 2013 and what to expect in the year ahead.

Here is some of what she had to say:

Chicago Industrial Properties: How has market activity been in 2013 compared to the previous year?

Kelly Gray: In 2013, especially in big-box activity, which are leases over 250,000 square feet for Class A industrial product, we definitely saw improvement in the market velocity. What essentially has happened is that the excess product we were left holding when the market crashed in 2008 has essentially been absorbed. Now we’re in a position where Class A big-box product is becoming scarce. We’re now starting to see spec development come back. Right now, there are about 9 million square feet of spec projects going on across the greater Chicago area. That’s something that I have not seen since 2008. So for the first time in almost six years, spec is finally back in a big way, which is great. Some of these big-box projects ended up doing a lot of renewals because there wasn’t any quality product out there. There are only two buildings in Chicago over 750,000 square feet.

CIP: Are you anticipating more development going into 2014?

Gray: I think that people are going to wait strategically until the first round of spec gets absorbed in each individual market before rolling with the next project. So for instance, Clarius Partners has their 1 million square feet in Joliet. People are going to watch to see when that gets absorbed and at what price. After that it’s going to be a sprint to see who puts up the next 1 million square footer.

CIP: Has the return of spec development been the biggest storyline of 2013?

Gray: I would definitely say that’s the biggest storyline because we haven’t seen it since before the crash in September of 2008.

CIP: What has driven the market in 2013?

Gray: The larger users always make the headlines and it’s a little bit splashier, but there has been good activity among the smaller format users as well. Multi-tenant spec development is also on the rise, particularly in I-55 where there are two large multi-tenant spec projects going on – HSA Commercial Real Estate’s Park 355 and Panattoni’s park off of Territorial Drive. Those are both for the smaller format users. So there are good dynamics across the board. I think that those dynamics are not so much the result of a really big jump in the velocity of absorption but more of a slow chipping away of that excess product we were left holding in 2008.

CIP: What are you seeing in terms of vacancy?

Gray: The vacancy numbers are back down to pre-recession lows, which is great. That’s what’s fueling the whole spec boom. I think that market-wide, it’s a little bit below 9 percent. In certain markets like North DuPage and I-55, those numbers are in the sixes.

CIP: What do you foresee going into 2014?

Gray: Everybody wants to talk about rent growth and whether or not that’s real and is actually going to happen. I always say that I’m cautiously pessimistic because I don’t see it happening anytime soon. I feel that there is enough development lined up at any point in time to increase the supply. Real rent growth just doesn’t happen in the Chicago market. I would say there’s going to be light to moderate rent growth for certain markets, particularly I-55, North DuPage and O’Hare.

CIP: What are some of the reasons to be optimistic going into 2014?

Gray: We’ve had decreased unemployment. On a macroeconomic scale, there are signs that we may be going into a recovery. Some of the trends that I’m excited about are things that people have been talking about for years, such as near-shoring and bringing manufacturing back to North America and the United States. I'm also excited about the auto industry. Tesla Motors is a great domestically manufactured auto that is doing well, and when auto is doing well, that ripples across the whole industrial sector. I don’t see a big growth in imports or a huge growth in GDP, so I’m not seeing boom times around the corner, but a healthy, stable market is what we can look forward to.

CIP: Will the appetite for industrial product continue into 2014?

Gray: I think we’ll see velocity that is similar to what we’ve seen over the last six years, which is a handful of deals over 500,000 square feet and about a dozen from 250,000 to 500,000 square feet and then pretty steady velocity for deals below that. I don’t see a huge uptick in velocity. A lot of these projects also are going to go over the border and still be in the Chicago market. We’re seeing a big increase in demand from our clients who want to know about Southeast Wisconsin and Northwest Indiana because of a fear of what’s going on in Illinois. I think that there still will be velocity in the greater Chicago market because people want to be in this area to service that population base and take advantage of the transportation infrastructure that is here. But they’re going to try to get as close to Chicago as possible without being in Illinois.