The Chicago industrial market’s second quarter of 2018 was another record-breaker. In fact, Q218 represented the 32nd consecutive quarter of positive net absorption for Chicago industrial space, per CBRE research.
According to Cal Payne, vice president in the agency and occupier brokerage groups at CBRE, a review of the market indicates that this trend should continue for some time.
“The tenant demand that we’re tracking is certainly outpacing the construction supply,” Payne said. “That, combined with continual growth in the economy and attractive financing rates, leads me to believe that businesses will continue to grow and therefore I think absorption will continue.”
The second quarter ended with a 5.2 percent availability rate, a decline of 20 basis points from last quarter and a 110 bps drop year-over-year. It is also the lowest rate recorded since CBRE started tracking the market 22 years ago.
CBRE is currently tracking 49 tenants who are on the hunt for at least 100,000 square feet of space, for a cumulative total of 20.7 million square feet. The existing supply is limited, however, as there are 70 Class A buildings with at least 100,000 square feet currently available, capped at 20.1 million square feet total.
If spec construction can’t keep up with demand, some of these clients may turn to build-to-suit. With the rising costs of leases in both new spec development and some second-generation space, many companies are evaluating the financials of foregoing the ease of leasing and instead building a space to fit their needs.
“The key for a lot of end users is flexibility. That usually comes through leasing and there’s a premium that’s associated with that,” Payne said. “Due to increasing construction costs and land values, there is a premium for leasing new construction. I think more companies are strongly considering or have moved forward with build-to-suits.”
It’s in this climate that construction activity is attempting to keep up with user demand. At 6.6 million square feet, speculative construction starts have skyrocketed in 2018, more than double the historical H1 average of 3.1 million square feet.
There were 18 completions during the quarter totaling 5 million square feet, of which 2.7 million square feet (56 percent) remained available at the time of completion. Two completions in the Joliet Area submarket were over one million square feet each: Ikea’s build-to-suit in Joliet and Venture One Real Estate’s Crossroads 55 spec project in Channahon.
A dearth of land availability near O’Hare isn’t slowing development there as more than 1.2 million square feet of construction began in the infill submarket. The majority of this new construction is being driven by e-commerce, large retail users, third-party logistics and air freight companies. And it’s not just big blocks, as much of the construction is of relatively smaller size.
“With there being so few remaining large, infill redevelopment and land sites, developers and land speculators are getting a little more creative,” said Payne. “We’re seeing a lot of smaller buildings being built on spec. Whereas a couple of years ago it was all 200,000- or 300,000-square-foot spec buildings, now we’re seeing more and more in the 80,000- to 100,000-square-foot range.”
At the end of the second quarter, 32 projects totaling 9.2 million square feet were under construction in the Chicago market. Spec construction dominates this activity with 29 projects, totaling 8.4 million square feet. Of that, 85 percent is currently available.
The downward trend of Chicago’s availability rate can be attributed to the strong transaction activity in 2018. The first half of 2018 posted 16.8 million square feet of lease transactions, a 22 percent increase from 2017 levels. There was an even larger increase in user sales, with the market showing 8.8 million square feet sold through Q2 2018, up 26 percent compared to one year ago.
The top transactions that CBRE tracked for the quarter totaled 8.3 million square feet, 16 percent of which were lease renewals and 53 percent of which was new activity. User sales occupied ten positions in the top transactions list, responsible for 29 percent of the total square footage. Examples include Frain Industries’ 865,000-square-foot facility in West Chicago and Great Lakes Reload’s purchase of a 386,675-square-foot property in Chicago.
Geographically, these transactions were spread across 14 different submarkets. The most popular destinations during the quarter were Lake County, Near West Suburbs, City South and the Far Southwest Suburbs. Transactions in these four submarkets accounted for 49 percent of the top transactions’ total square feet.