Industrial N Illinois

Chicago's industrial fundamentals remained strong in the third quarter

Chicago's industrial fundamentals remained strong in the third quarter,ph1
Venture One is developing the largest build-to-suit project of the quarter, Berner Food & Beverage’s 675,270-square-foot space at 5778 Baxter Road in Cherry Valley, in Illinois’ I-39 Corridor.
Chicago's industrial fundamentals remained strong in the third quarter,ph2
Christopher Lydon, SIOR, Avison Young

The Chicago economic landscape continued to improve throughout the third quarter of 2018. According to an Avison Young third quarter 2018 industrial market report, Chicago witnessed—and should continue to see—strong industrial activity.

All major fundamentals in the Chicago industrial market exhibited a continued improvement during the third quarter, with an 80.6 percent increase in construction activity being the most noteworthy. Much of this activity is taking place within the I-80 and I-55 Corridors, where big box, logistics facilities have driven much of the sector’s construction this cycle.

Southern Wisconsin, however, leads the pack in quarter-over-quarter change with an 805 percent increase in new construction by square footage. Part of this is vendors and other companies seeking easy access to the Foxconn plant currently under construction. Venture One Real Estate has commenced construction on Stateline 94 Corporate Park, a five-building, 1.8-million-square-foot speculative development in Pleasant Prairie, Wisconsin.

The tax and political atmosphere within Illinois has stirred up concerns that the state could lose occupiers to more business-friendly states, as evidenced by Japanese manufacturer Daifuku Wynwright moving from Illinois to a new facility in Northwestern Indiana. But according to Christopher Lydon, SIOR, principal in the Avison Young Chicago office, the local market is strong enough to guard against most potential attrition from Illinois to its neighbors.

“Our access to labor certainly helps us retain companies,” Lydon said. “Yes, if a company is doing a regional search, we are going to have a hard time competing because of our tax situation. But if you’re an established Illinois company, typically the access to labor will keep you within the state lines.”

Most submarkets saw vacancy draw down on the back of strong demand. Overall, the Chicago industrial market vacancy rate dropped from 5.9 percent last quarter to 5.7 percent in Q3. The I-90 East Corridor, US-64 Corridor, East DuPage and South Chicago submarkets recorded the most substantial decreases.

Those submarkets experienced strong leasing activity and a slowdown in new development, compared to several other submarkets which have seen vacancy increase due to the substantial amount of new development throughout the last several quarters. In particular, the I-80 Corridor experienced an impressive 7.2 million square feet delivered over the last 12 months, causing vacancy to increase 90 basis points to 11.6 percent.

Lydon believes that the availability of space in the I-80 Corridor should give developers pause. Right now that area boasts approximately 13 options if a user is looking for 600,000 square feet and above. While this massive space increases the submarket’s vacancy, it holds the potential for a quick turnaround if the right buyer or tenant looks to moves in.

“Especially in I-80, we need to see some absorption take place before folks go ahead with new projects,” said Lydon. “The thing that’s interesting about the I-80 market is…one or two deals can move the needle somewhat significantly because of the size of the spaces.”

Manufacturing jobs saw a significant increase year-over-year, up by 10,400 jobs. In fact, the largest lease this quarter was food manufacturer Kellogg’s renewal of 1-million-square-feet at 6225 E. Minooka Drive in Minooka, within the I-80 Corridor. According to Lydon, the Trump administration is owed some of the kudos for this manufacturing activity.

“Like him or not, our current president and his regime have had a positive impact on the manufacturing sector in Illinois,” Lydon said. “With some of these corporate tax breaks, that’s helped out the landscape of the manufacturing sector within our marketplace.”

The unemployment rate through August dropped 100 basis points year-over-year to 4.1 percent, the same as the U.S. average, which is the lowest national unemployment rate since the Vietnam War. However, the state and local political landscape is in limbo until the elections, leading the Avison Young report to predict that future job growth will likely be slower than the record pace of previous quarters.

There was a total of 272 lease transactions signed during the third quarter, according to the Avison Young report, totaling 7.1 million square feet. The average deal size was 26,364 square feet, down 20 percent when compared to last quarter. Aside from the Kellogg’s deal, other notable leases include third-party logistics provider Expeditors International committing to 423,726 square feet at 10 Falcon Court in Streamwood within the I-90 East Corridor submarket. JBS Logistics, a warehousing and fulfillment provider, renewed and expanded their lease at 999 Bilter Road in Aurora, bringing their total footprint at the I-88 Corridor property to 382,430 square feet.

Construction across the market saw an impressive 80.6 percent increase over last quarter with 18.5 million square feet currently in development. The largest project currently under construction is an 879,040-square-foot spec development on Ridgeland Avenue in Monee, scheduled for a mid-2019 completion. Located in the I-39 Corridor, Berner Food & Beverage is behind the largest build-to-suit project now underway, with Venture One developing the 675,270-square-foot project at 5778 Baxter Road in Cherry Valley.

“Chicago continues to attract growing businesses that require modern warehouse and distribution facilities to help them compete on a global scale,” said Lydon. “This ongoing demand for new space should continue to keep developers busy for the foreseeable future.”