Industrial Q Kentucky

Cushman & Wakefield's West: Plenty of hot years left for Midwest's industrial markets

Jason West

Clicking on all cylinders. That’s how Cushman & Wakefield’s Jason West describes the industrial market across the Midwest.

Clicking on all cylinders. That’s how Cushman & Wakefield’s Jason West describes the industrial market across the Midwest.

It’s hard to argue. As West, senior director of industrial brokerage services in Cushman’s Chicago office, says, the major markets across the Midwest are all seeing significant absorption today. Vacancy rates have tumbled during the last several years. Demand for new industrial space is strong.

“The industrial market is performing really well these days,” West said.

A booming market

West is backed up the recently released 2015-2017 industrial real estate forecast released by Cushman & Wakefield. That forecast said that the North American industrial market should continue its current hot streak through 2017.

That's good news for any brokers who work in this sector. When it comes to hot sectors, industrial today is usually second only to multi-family in the Midwest's major cities.

There are plenty of reasons for industrial's strong performance. The Cushman & Wakefield report pointed to the fact that businesses are hiring again, with job growth in the country predicted to top 3 million this year.

That, of course, is key to the industrial market. Consumers are more likely to increase their consumption when they have jobs. When consumption is on the rise, so is the demand for more industrial space.

The Cushman & Wakefield report also pointed to the rise of e-commerce as a factor in the strength of the industrial market. Retailers are now relying on distribution centers across the country to fulfill online orders.

The warehouse sector, then, has now posted 19 consecutive quarters of declining vacancies, with the sector's vacancy rate standing today at 6.7 percent across the country. Cushman & Wakefield predicts that the vacancy rate in the warehouse sector will fall to 6.3 percent nationally by the end of 2015.

You can hear more from Cushman & Wakefield, specifically from John Morris, executive managing director and head of industrial for the Americas at Cushman, during the 12th Annual CIP Industrial Summit held April 7 at the Loews Chicago O'Hare Hotel in Rosemont, Ill. For more information on the summit, click here.

Cheap money

West, too, points to plenty of reasons for the strength of the industrial market. On a macro level, he cites still low interest rates.

“The Fed has been able to maintain rock-bottom interest-rate levels,” West said. “When the cost of money is cheap, it fuels the movement of money into a lot of different investments. Real estate has been one of the recipients of this cheap money. Industrial real estate has been attractive to investors. It has performed well during the last 10 years, even during the down turn. It’s not surprising that much of this money would flow into this sector.”

The low vacancy rates in the industrial sector across the Midwest is now fueling more spec and build-to-suit construction, West said. Many companies simply can’t find the industrial space they need in the major cities of the Midwest.

Because of this they have to build spaces that suit their needs. And developers are watching the low industrial vacancy rates in Midwest cities. They are inspiring them to take on their own spec industrial projects.

Several Midwest markets – places such as Louisville and Indianapolis – have seen a big influx of spec industrial construction today. The good news is that that these spaces have been filling quickly after construction crews finish building them.

“Spec and build-to-suit activity has been fairly robust in the last 12 to 24 months,” West said. “When you compare today to that time period from 2008 through 2012, you can see a big difference. Spec and build-to-suit activity was tempered back then. Starting in 2013 and 2014, it really began accelerating. Part of that is supply and demand. The other part is the over-supply of capital looking for industrial investment opportunities.”

In the metropolitan Chicago area alone, West says, there are is now more than 12 million square feet of new industrial projects that are under construction. And West says that he only expects this figure to rise.

What tenants are looking for

What amenities are coming with this new industrial construction? What features are tenants looking for from newly built industrial space?

West says that 36-foot ceiling heights are now a must-have for most potential clients. This has increasingly been the case in most major markets. The big cities in the Midwest, including Chicago, are now catching up to this trend, West said.

Tenants are also looking for more efficient lighting, with LED lighting, now that the cost of it has dropped, becoming the new standard, West said. A growing number of tenants also expect that new industrial space will be LEED-certified, while others are looking for an increase in parking.

The parking issue is becoming a greater focus thanks in part to the rise of e-commerce, West said.

“The way products are being distributed, packaged and handled means that companies need more labor at a lot of their distribution buildings,” West said. “Because of this, the parking counts that tenants need are getting higher.”