Industrial N Illinois

Chicago's industrial market may be tested by new spec construction

Chicago's industrial market may be tested by new spec construction,ph01

The Chicago industrial market is experiencing a “one step forward, two steps back” trend. The fourth quarter 2017 absorption rate was the lowest it’s been in six years as new spec construction came online, offsetting new leases.

A report by Newmark Knight Frank shows that the 615,000-square-foot absorption last quarter was significantly lower than average. In fact, this was the first quarter since 2011 where absorption didn’t hit one million square feet.

This slowdown is also reflected in leasing activity and new construction. The largest leases in the area were all either extensions or renewals, including Greencore’s five-year extension onto 440,000 square feet in Bolingbrook and Del Monte Foods’ renewal of its 312,000-square-foot Rochelle distribution center.

There is currently over 11 million square feet of industrial space under construction, the least amount since the middle of 2015. The latest and largest completed development was the 1-million-square-foot Crossroads 55 building in Channahon, currently unleased. In the I-55 Corridor, 700,000 square feet recently came online. That space, along with the other 1.3 million square feet that were delivered to the submarket during the year is also not under contract.

New, spec construction is sitting fallow in other submarkets as well. The I-80 Corridor saw 6.6 million new square feet for the year, of which only 600,000 square feet is leased. At the close of 2016, this submarket had a 5.2 percent vacancy; one year later, that has more than doubled to 12 percent, the highest since 2014.

One issue that is not unique to the Chicago market but plaguing most of the nation is a skilled labor shortage. Companies can’t expand and move jobs into these markets without a dependable pool of potential employees. Accoriding to Newmark Knight Frank’s research, the national manufacturing industry could add 3 million job openings, but two-thirds of those could go unfilled because of labor shortages.

Looking ahead, industrial remains the strongest asset class, driven by e-commerce and food distribution. The Chicago market has been able to absorb a lot of the new construction prior to this year, but indications are that this may be about to change. As spec construction outpaces build-to-suit, the vacancy rate in the Chicago area can be expected to rise.