Industrial Midwest

Following an impressive 2015 for Chicago industrial, experts anticipate another robust year

Panattoni Development Co. recently completed two spec buildings at it's business park, 355 Corporate Center in Lockport, Illinois. One building consists of 273,640 square feet, and the other is 228,690 square feet.

The strength of the Chicago industrial market isn’t weakening anytime soon. After experiencing such a strong 2015, experts now weigh in on what’s to come in 2016. What new trends will we see? What do they expect will continue and what will change? Find out.

The Chicagoland industrial market continues to retain its grand reputation quarter after quarter. After having had such a successful 2015, it’s still evident that companies continue to choose this Midwest market as their home.

The overall industrial market closed 2015 with a 6.9 percent in average vacancy across the market—a record low since the recession, according to Transwestern’s Q4 2015 Industrial Outlook report.

The market, as we speak, is experiencing its highest tenant occupancy and largest speculative development in more than eight years.

A total of 37 industrial/flex properties are under construction, according to the report. Once completed, more than 10 million square feet will be joining the Chicagoland area’s industrial inventory. Companies are jumping in quick, as more than 50 percent of that is already preleased.

It’s no surprise that developers have an appetite for construction—the marketplace is currently seeing more than 360 proposed buildings. Transwestern’s report shows that less than 1/10th of these buildings are expected to break ground over the next few years, as developers remain optimistic but restrained.

The firm sees this as a way of “catching up” with the latest technologies. According to the report, as technology amongst logistics operations increases and the “internet of things” continues to increase, pressure on the developer to maximize efficiencies in the building are ever present.

Trending today are also the larger buildings of 1 million square feet with 36’ clear height, which offer energy efficient lighting and expensive exhaust to increase the quality worker environments.

Demand in the fourth quarter saw approximately 4 million square feet of absorption. This is great news –the industrial leasing market continues to remain consistent, marking positive absorption for 18 straight quarters since Q2 2011. This quarter, specifically, marks the highest activity since end of 2013.

The submarkets that saw the majority of the absorption in Q4 were the I-55/I-80 Southwest Corridors, North DuPage, O’Hare and South Chicago.

OHL had the largest lease transaction in the fourth quarter, leasing 672,080 square feet of new space in the I-55/I-80 Southwest Corridors, at 790 Taylor Road in Romeoville.

Transwestern reports that North DuPage, with a large drop of vacancy from 4 percent to 6.8 percent last quarter, is now the tightest market along with Kenosha, which stands at 4.1 percent.

Those with the highest vacancies continue to be the submarkets competing with counties across the Wisconsin border—Lake County North, McHenry County, and Upper Northwest submarkets.

But will the market keep up? Experts nod and agree that it’s looking like another positive year for industrial.

Bruce McConnell, senior managing director at Savills-Studley, believes strong interest in Chicago from occupiers and investors will continue.

“I think as economy gets stronger, emerging consumer goods companies will start small and have a large presence here in Chicago,” he said. “Occupiers are now able to more accurately predict inventories and project what their space needs will be long term.”

McConnell also said that more companies will be considering Joliet and some lagging submarkets due to I-55’s lack of available space. O’Hare is another submarket he believes occupiers will expand their search areas, as well as DuPage and North Cook because people want to stay closer to the airport and the regional market.

“I think it’s going to be an expansion of search areas in that market,” McConnell said.

Mike Antonelli, vice president with Brown Commercial Group, said Chicago’s industrial market is one of the strongest in the country and continues to attract companies that want access to Midwest distribution channels. He also agrees that there will be an increase in mid-sized users expanding in the market and moving here from other markets.

“We are seeing small to mid-sized manufacturing companies expanding and choosing to buy their facilities instead of leasing,” he added. “As larger ‘big box’ deals continue in the market, we’re seeing a domino effect fueling secondary and tertiary business growth. These trends should continue as well.”

Antonelli agrees with McConnell on the tightness of the O’Hare market for leasing and investment sales and does see this pushing activity to nearby areas like the Elgin Corridor. The DuPage market remains highly desirable with its lower tax rates and strong business climate.

“We expect to see rent and sales pricing continue to climb due to lack of options there,” he said. “Landlord concessions also continue to decrease along with inventory.”

Another thing about the DuPage and Cook markets is that quality investment opportunities for national and local investors are scarce. Antonelli said he has seen buyers willing to accept lower yields for the right deal.

When it comes to construction, McConnell predicts more selectivity in spec development, although not a stop. He said this is because most of the good Class A spec sites have been taken and others are controlled for build-to-suits. But construction will continue, he said, because of the strong investor interest.

Overall, there will be a rightsizing of facilities, McConnell said, because companies are able to project inventories due to the stabilizing the economy. He believes there’s going to be increased demand to reduce speed of products to consumers. There will be a real evaluation this year of whether there should be more small facilities or fewer large facilities occupied by larger tenants.

“Also, a real evaluation of the value of automation in the facility—the use of conveyers and robotics,” he added. “The ability for things to be picked and moved with less labor travel time and a closer look at value of automation for different warehouse uses.”

Antonelli said tenants in the 50,000-square-foot and under category will be seeing some options, as that segment of the market is growing steadily.

He also expects to see additional new construction—likely in the 50,000-square-foot and up range—to meet the need for modern space and higher power capabilities that the older buildings can’t provide.

“We’ve experienced an unusually high level of interest in smaller build-to-suit projects that are typically cost prohibitive,” Antonelli explained. “This is a direct result of the lack of desirable product in the marketplace.”

He has seen entrepreneurial investors getting back into the industrial market in force in the last 18 months, which he said is drawn by the stability of the industrial market and the strong growth in the distribution and light manufacturing sectors.

David Prioletti, senior vice president of industrial at CBRE, noted that since the market is tight, there isn’t a lot of new industrial land in the East-West Corridor until you go much further west, past the Fox River Valley River and past Route 31.

Build-to-suits, he said, are active in that submarket because vacancy is low. Meanwhile, 3PL is still driving the market and although there hasn’t been much manufacturing activity lately, there has been good distribution activity and parking ratios are up for truck and car parking.

When asked about what his biggest market concerns were, Prioletti said that while money is still in great supply for the market and not an immediate issue, he’s concerned about rising interest rates to a degree; and rising construction costs.

Prioletti anticipates 2016 to be a good year as there’s been a long stretch of positive absorption for the market. He also believes that 2017 will be a waning year, where the market will start to see declining activity.

“We’ve had a long stretch of positive absorption and typical ups are a lot quicker,” he said. “2017 is when we’re going to start seeing some declining activity.”

Meanwhile, e-commerce is one thing that will be sticking around for a while. Prioletti said it’s a big driver on what’s been happening the past four years and it’s expected to continue. What once used to be a catalog business is now a popular system for all major retailers such as IKEA, Target, and Bob’s Furniture.

2016 will be a great year for industrial in Chicago, nonetheless, and McConnell assures that everyone will benefit, including developers who are seeing lower vacancy and fair rates; occupiers, who are experiencing new Class A space coming online; and investor interest, which is keeping values of buildings high for developers and rates reasonable for occupiers.

“Vacancy has been tight and at times it's been difficult to find space for companies and corporations but spec space is coming online and there are options where there weren’t before,” he said. “We’re going into a normalized market where it’s strong for developers, investors and landlords, but with good, solid options for occupiers.  And then 2017 will see a good, healthy industrial market, too.”

The strong market demand will continue into 2016, Antonelli said, pushing rental rates higher on the more desirable buildings.

“We expect business growth to continue at a moderate to strong rate depending on the sector,” he added. “We’ll continue to see strong leasing and sale activity for the 50,000-square-foot and under users.”