Industrial Midwest

Chicago industrial market carrying momentum in 2014

Forecast-feature-photo

Market observers predict the Chicago industrial market will continue to build on the momentum gained in 2013 and that the outlook for industrial fundamentals will remain positive through 2014.

Market observers predict the Chicago industrial market will continue to build on the momentum gained in 2013 and that the outlook for industrial fundamentals will remain positive through 2014.

“The Chicago industrial market performed well in 2013 and has seen steady improvement over the last few quarters,” said Amanda Ortiz, research senior analyst at Cushman & Wakefield, during a recent webinar. “Leasing activity was down slightly year-over-year, but we did see an increase in user sales.”

Ortiz said the overall vacancy rate is currently 7.7 percent, the lowest it has been since early 2008.

“Tightening vacancy, along with stable occupier demand for industrial space in Chicago, should continue to bolster acting rental rates in 2014,” she said. “Landlord confidence has driven acting rents up and construction levels have increased steadily over the last few quarters.”

Ortiz noted that acting net rental rates have appreciated over the last two years. She said weighted average direct net rental rates ended the year at $4.32 per square foot, a growth of 4.1 percent over this time last year.

J.D. Salazar, executive vice president – managing director at Fischer & Company, said he expects rents to increase 2 percent to 3 percent in most submarkets.

Industrial fundamentals

Industrial leasing activity for the Chicago metropolitan area measured 30.9 million square feet in 2013, a 4.1 percent decrease from this time last year, according to Cushman & Wakefield. The highest volume of new lease transactions occurred in the 40,000-square-foot to 75,000-square-foot size range.  Cushman & Wakefield also points out that leasing velocity remains high, although large blocks of available space are scarce in the Chicago metropolitan market.

“We’re still seeing positive occupancy gains in Chicago and we expect leasing activity to pick up in 2014,” Ortiz said.

Jerry Sullivan, principal at Paine/Wetzel TCN Worldwide, said he is highly optimistic about the outlook for Chicago’s industrial market in 2014.

“On the leasing side, vacancy rates continued to fall, and we anticipate that pattern will continue in 2014,” he said. “There may be a slight leveling off as a result of more spec spaces being built, but occupancy should stay the same or return to a slightly higher level in the next two to four quarters.”

Salazar also said he is cautiously optimistic about the growth opportunities for industrial real estate in the Chicago area.

“In spite of the poor financial condition of the State of Illinois and the high tax environment, Chicago continues to be a superior location to distribute products to the Upper Midwest consumption zone,” he said. “If the U.S. economy, at minimum, maintains its pattern of modest growth, I estimate Chicago will experience upwards of 7 million square feet of net absorption.”

Chicago's industrial market experienced its 14th consecutive quarter of positive net absorption during the fourth quarter, as 4.4 million square feet of vacant space was removed from the market through leasing activity and user sales, according to an industrial market report by NAI Hiffman. Net absorption averaged more than 3.9 million square feet per quarter during 2013, bringing the tally for the year to nearly 15.9 million square feet, the highest total since 2007 and a figure 8.3 percent greater than the total for 2012 and 13.8 percent higher than the total for 2011, according to NAI Hiffman’s report.

Pactiv Corporation signed the largest new lease in 2013, fully leasing an 898,560-square-foot newly built warehouse/distribution center in Romeoville, according to Cushman & Wakefield.

Pactiv, a food service and food packaging company, already has another building at 1100 W. Taylor Road and the company will operate out of both buildings in Romeoville, Ortiz said.

A few other significant leases recently signed in Chicago include Peacock Engineering’s 533,000-square-foot lease in the I-55 Corridor. This will be the food packaging company’s largest facility in the Chicago market, Ortiz said.

Owens & Minor, a medical products supplier, also signed for 515,000 square feet in Carol Stream and Packaging Corporation of America signed a 470,000-square-foot lease in Bedford Park, she said.

User sales, meanwhile, totaled 12.5 million square feet in 2013, an increase of 4.8 percent over the previous year, according to Cushman & Wakefield.  Warehouse Specialists Inc. completed the largest user sale in 2013, purchasing a 496,260-square-foot warehouse/distribution facility in Sauk Village for $15.4 million, or $31 per square foot.  Investment transaction volume also increased 25.2 percent over the previous year and measured 26.7 million square feet.

“Demand remains high for Class A assets, although those assets are harder to come by,” Ortiz said. “Compressed cap rates and higher prices caused investors’ interest to shift to new construction.”

Construction completions totaled 6.8 million square feet in the Chicago market in 2013, with 2.7 million square feet being speculative projects, according to Cushman & Wakefield.

“In terms of development, we are starting to see speculative building begin to take place again, and continuing to witness the growth of the build-to-suit market,” Sullivan said. “Of course, commercial lending will be a contributing factor in continued development activity, but we expect lending to stay stable or grow throughout the course of 2014.”

Salazar predicted rent growth and a loosening of lender underwriting criteria will encourage more speculative development in 2014.

According to Cushman & Wakefield, Clarius Partners’ completion of the 1 million-square-foot speculative facility in Joliet was the largest spec project completed in the Chicago market since 2008.  CenterPoint Properties completed the largest build-to-suit development project in 2013, a 1.6 million-square-foot distribution facility for Home Depot.  At the end of the year, an additional 5.6 million square feet remained under construction, according to Cushman & Wakefield, with Amazon.com’s 1 million-square-foot distribution center in Kenosha scheduled to be complete during the third quarter of 2014.

“Construction levels have gradually increased since 2010,” Ortiz said. “At the end of the year, a total of 6.8 million square feet was completed, and we expect that number to be even greater in 2014.”

“The I-80 and I-55 submarkets are still prime areas for growth,” Ortiz added. “Between those two areas, 4.1 million square feet was built and another 3.3 million square feet are under construction in those two markets alone.”

The O'Hare submarket witnessed the greatest net absorption during 2013, as more than 2.7 million square feet was absorbed over the course of the year due to several large new leases being signed and vacant buildings being purchased by users, according to NAI Hiffman. Only three of the 21 industrial submarkets experienced negative net absorption for the year, indicating that demand remains strong throughout the industrial market.

“The greatest amount of activity will continue to occur in the distribution-driven submarkets, such as the I-55 and I-80 corridors, but we’ll also see increasing returns to manufacturing in the Chicago area driving development in infill markets,” Sullivan said.