It’s been good year for industrial real estate, especially in Chicago.
The market has seen a record-breaking year, despite a fair share of economic hurdles still at play. So how did Q1 and Q2 of 2022 shake out? And what about the rest of the year?
Chicago Industrial Properties spoke with Kyle Schott, Director of Real Estate Development, Ryan Companies; Kelly Disser, Executive Vice President, NAI Hiffman; and Brian McKiernan, Senior Vice President, Development, CenterPoint Properties, about Chicagoland’s red-hot demand and the forecast for Q3 and Q4.
The increase in rents is no secret and occupancy is high, but the market is in a different place now than it was at the beginning of the year, and Kyle Schott said a few factors have contributed to the change.
“Interest rates are continuing to climb and we’re still figuring out how that will affect capital and our ability to fund projects,” Schott said. “Cap rates are also starting to rise again after two years, and land pricing is still high. Rents are growing, which helps, but they’re not growing at the pace necessary to combat those issues.”
The fundamentals are still strong, though, and demand will remain as long as companies need space. Demand will remain because people need space, leaving companies to get creative in the ways in which they build.
One strategy being explored to combat the supply/demand imbalance is the building of multilevel facilities, especially near O’Hare. In other words…if you can’t build out, build up.
“We have to build up in certain urban markets because users still want to be in that environment for access to labor, which has been a challenge for a lot of tenants,” Schott said. “Cost per square foot is much higher for vertical building, but if it works for the tenant from both a financial and operational standpoint, then they can be located in an area with labor in a market that would best serve their interests.”
There’s only one multilevel facility in Chicago as of now at 1237 West Division, being built by Logistics Property Company, LLC. And because of the unique challenges associated with multilevel, the concept will take time to gain traction. Even though it’s being explored, Kelly Disser said it remains to be seen whether Chicago will experience a pickup in development of these buildings. It will depend on tenant use, as well as the tenant themself, and cost and location are among many factors standing in the way.
“A lot will hinge upon LPC’s project,” Disser said. “It will be successful, but also very hard to replicate. The space is hard to come by in Chicago, and these buildings require a dense infill location that checks all boxes regarding proximity. It may prove difficult to see too many of these buildings because of land constraint.”
As for the remainder of the year, the forecast seems to be a little uncertain. Disriptions to market financing costs are expected, and as interest rates change, according to Brian McKiernan, people are waiting to see where values reset.
“Looking at the next six months,” McKiernan said, “I’d say the first three will be uncertain. Once people see where the dust settles, we’ll have more reasonable predictability regarding buying and selling.”
That said, CenterPoint has been focused on thinking ahead, ensuring availability of functional facilities despite the problem of limited supply. The company continues to build about two million square feet of new product annually, and is doing so on a speculative basis, focusing less on timing the market and more on long-term core fundamentals. Two new speculative buildings of one million square feet each are currently in progress in the Intermodal Center in Joliet, and McKiernan said, though they’re scheduled to be delivered in 2023, CenterPoint is already seeing competitive leasing interest.
“We’re trying to stay a cycle ahead and invest throughout this period while remaining focused on the fundamentals of tenant demand, logistics and the value of reducing operating costs through logistics-advantaged real estate,” McKiernan said.
Investments in logistics-advantaged properties are believed to lessen construction headwinds in terms of pricing, commodity availability and labor and supply chain issues.
Similarly, Ryan Companies’ focus has been finding land positions for speculative development. While there are build-to-suit users in the market, most are gravitating toward speculative for surety of delivery. Users would rather sign a lease for a building that’s guaranteed to be delivered in reasonable time — even if it doesn’t have every element on their wish list. It’s up to companies to take the up-front risk, as there will continue to be demand for sites.
Despite the market’s lasting strong numbers, there’s a large element of wait-and-see for Chicagoland. The Federal Reserve raised interest rates by 75 basis points as of July 27, the largest single-meeting rate increase since 1994, and the financial implications are still to be seen.