CRE Midwest

Chicago's industrial market: Incredibly robust & highly competitive

Grady Hamilton

Trammell Crow Company’s business unit based here in Chicago covers the Midwest, and according to Grady Hamilton, Principal at Trammell Crow, the company has had industrial success in other Midwest markets but are looking to do the same here in Chicago.

Dynamic. Strong fundamental activity. Support for new development. A highly competitive market. Those are a few key phrases used to describe Chicago’s industrial market according to Grady Hamilton, Principal at Trammell Crow Company—and points that will be further discussed at Chicago Industrial Properties 12th Annual CIP Summit April 7 at the Loews Chicago O’ Hare Hotel in Rosemont, IL.

Trammell Crow Company’s business unit based here in Chicago covers the Midwest, and although the company has had industrial success in other Midwest markets, Hamilton noted they are looking to do the same here in Chicago.

“Chicago's industrial market is an increasingly positive story, and there are a few reasons as to why,” Hamilton said. “The activity levels from the space requirements that users entering the marketplace are looking for additional space capacity, is really back to 2007 levels. I think the other piece of the story, that is important to developers, is that there is an incredible amount of attraction of capital, both debt and equity, to industrial and in particular to Chicago.”

Due to all of the support, activity levels, and influx of capital, Hamilton said that it has created an incredibly robust and hotly competitive environment in Chicago’s market.

“Rents and sales prices are not quite where they were in 2007, but they certainly are increasing,” he said. “Whether or not they get back to pre-recession levels, what we want to see is good stability of the rents. If you look at 2013, I think most people would say that it was about an eight percent increase in rents from 2012. In 2014, it was a little more than six percent. I don’t know if we’re going to continue measuring that kind of increase in the years ahead, but I do think it will continue to trend positively.”

Hamilton also pointed out that if you look at the entire year of 2014, absorption was a really good story in just about every sub-market—leading to an even better story in vacancy rates. “I think all but two recognized sub-markets in the metro and Chicago area had declining vacancy in 2014, and quite a bit of activity occurred during the fourth quarter. So that speaks to where we are in trajectory of the industrial market, and its health and success.”

With much success, there is a downside, as Hamilton noted that two of the biggest challenges has been land availability, and the pricing of land.

“Chicago is a marketplace that has an incredible number of very sophisticated and capable development companies,” said Hamilton. “Those companies are all really competing against one another—really to do the same thing—and many do it with different formats. Yet as I stated earlier, capital is plentiful for the product type, and the confluence of that capital availability and the activity levels, has created a tremendous amount of activity on the development side.”

Another challenge, according to Hamilton, is that the cost of construction has increased fairly precipitously across all product types, including industrial.

“It’s making the more desirable outcomes to capitalize on the opportunity that may exist with a site in a given sub-market to execute a given outcome more difficult. What’s enabled it to continue despite the increase in construction costs, is the availability of capital has allowed the yield requirements to compress. So people are accepting a lower return to execute and invest in industrial real estate today than they were two years ago.”

“That has made up for some of it,” Hamilton added. “Clearly the activity levels for space requirements, increasing as they have been, has helped tighten the vacancy figures and functional obsolescence is also a big story for that. I think some of that vacancy is a function of properties being no longer equipped to support tenants the way tenants need industrial space today. Whether it be clear height, loading, sprinklers, or car parking for some of these e-commerce requirements that are in the marketplace, as they have extraordinarily large car parking requirements for what would be traditionally big box warehouse buildings.”

Therefore, Hamilton said that it’s creating almost a new genre of industrial, and in particular, warehouse development. “I think that’s going to continue because the existing stock of space isn’t always going to be able to accommodate the specific needs of those e-commerce requirements.”

Hamilton’s projections for the next few years ahead are also pretty rich and robust. But keeping it current for 2015, Hamilton’s sense for completions in the industrial market is that it will be more than 15 million square feet.

“I think that’s going to be a function of certain sub-markets. Yet it’s certainly not all going to be speculative development. There is a lot of build-to-suit activity because the changing requirements that users have aren’t always met by what speculative developers are providing.”

Hamilton pointed out that it’s going to continue being a great story in 2015 for industrial real estate. Especially for those who made investments in land in the early stages of this cycle, as they are going to be rewarded for the land pricing they have in key locations.

“There has been obviously a great deal of activity in the I-55 sub-market, and southwest part of the metropolitan area,” Hamilton said. “There’s also been great deal activity in the O’ Hare sub-market. I think those markets are proving that there is a strong investment thesis for ground up development, and that’s going to start finding its way into other sub-markets that haven’t been quite as active.”