Industrial N Illinois

Hurvitz: New industrial spec space won't get snapped up, market absorption will take time

  
New industrial spec space won't get snapped up, absorption will take time,ph01

The industrial market in Chicago continues to deliver a large amount of spec development, and it's clear from Colliers International's third quarter report that the product isn't getting absorbed as quickly as it has in the past.

The vacancy rate has increased for the second quarter in a row, rising by 16 basis points during the third quarter of 2017 to 6.85, according to Colliers. The net absorption was positive, even though vacancy increased, bringing up the total to 3.5 million square feet absorbed. Colliers said this was the smallest net absorption since the end of 2015.

A total of 13 speculative construction projects were delivered during the third quarter of 2017, totaling 4.6 million square feet. And the projects were delivered 96 percent vacant, which added 4.4 million square feet of vacant space to the market.

Craig Hurvitz, vice president of market research for Colliers' Chicago office, told RE Journals in an email that even with these numbers, there still remains plenty of demand for space among industrial users.

"We're seeing a significant amount of requirements in all size ranges. There's runway left during the current cycle, but I expect the vacancy rate to continue to increase over the coming year due to the amount of speculative development activity to be delivered. Eventually this new spec space will be absorbed but it will take time," Hurvitz said.

Looking at new construction this quarter, a total of 41 projects totaling 12 million square feet are currently under construction. Nearly 8.3 million square feet of what's being built is speculative. Some of the largest spec projects under construction this quarter include Opus Group's US 6 and Houbolt Road 1.2 million square foot project, CenterPoint Properties' 1.05 million square foot 3902 Brandon Road and Venture One Real Estate's 1 million square foot Crossroads 55.

Just in this quarter 17 new projects were started and five projects greater than 1 million are under construction, three of which are speculative. The I-80 Joliet Corridor has been the location of choice for many large spec projects, causing the submarket's vacancy rate to rise by 214 basis points to 6.93 percent due to the delivery of speculative projects, according to Colliers. This is one of the highest vacancy rates in the area since 2014.

Hurvitz noted that the reason this could be the tightness seen in the I-55 Corridor, which saw the lion's share of development during the last cycle. Land opportunities are scarce making the I-55 Corridor an infill market essentially, he said.

"This has pushed big box development during the current cycle to the I-80 Joliet Corridor. The submarket still caters to the Chicago metro, but also attracts regional distribution users attracted to the proximity to Interstate 80," Hurvitz said.

Overall, finished construction accounted for 6.3 million square feet spread out through 21 projects during the third quarter.

Examining leasing and sale activity, Colliers' report shows that 5.4 million square feet among 107 leases were arranged this quarter which is a 22 percent decline compared to the previous quarter. The largest new lease was a 388,262 square foot space in Alsip for Richwill Enterprises, Inc. from Berry Plastics. As for sales, the largest completed sale of the third quarter was CBRE Global Investors' purchase of a 1.0-million-square-foot building in Monee from Venture One Real Estate.

Looking ahead, the market's big hurdles in the next couple months include managing the delicate balance between supply and demand.

"We saw a significant vacancy jump during the third quarter of 2017 in multiple high-velocity submarkets where new vacancies and speculative construction deliveries pushed the vacancy rate up a couple hundred basis points or more. There are three spec projects greater than one million square feet under construction in the I-80 Joliet Corridor," Hurvitz said.

"When these and other large spec projects are completed, the vacancy rate will spike again if these buildings deliver vacant. While these increases are expected and not necessarily cause for concern, demand for space will have to keep up with new supply so vacancy doesn’t get out of hand," he added.