A steady recovery continued in the Chicago industrial market during the second quarter as vacancy dipped 20 basis points on the strength of numerous big deals. But as medium-sized firms still struggle and vacancy remains elevated from historical norms, the market is still far from healthy, reports NAI Hiffman’s second quarter analysis.
Industrial market vacancy stands at 10.9 percent at the end of the second quarter 2011, down slightly from the first quarter as several large leases hit the I-88 and I-80 submarkets. Corporate users continue to consolidate nationally, which has benefited the Chicago area.
Large leases were a storyline of the past three months, with several firms taking 200,000 square feet or more. Samsung took a reported 650,000 square feet from Pizzuti at 160 Southcreek Parkway Romeoville and Electrolux recently signed a 495,000-square-foot lease at 801 Midpoint Road in Minooka from Opus North.
“Larger users are using the current doldrums to capitalize on Class B rates in Class A space,” says Joe Bronson, vice president with NAI Hiffman. “If you took a look at an area like Aurora, you would think that we are in a strong economy.”
The I-88 corridor recorded 326,586 square feet of positive absorption in the second quarter and attracted several large leases. Follett Higher Education took 549,588 square feet at 2805 Duke Parkway in Aurora from Duke Realty, and Cat Logistics took 251,151 square feet at 900 Bilter Road in Aurora from Liberty Property Trust, to name a few.
Despite the big deals that have padded the market, the undertone is still one of caution, as small and medium-sized firms continue to struggle and are not expanding. Typically, a recovery will demonstrate incremental improvement at all user sizes, but in this case, only the large users are making moves.
“On the periphery, it’s strong and looks great with all these big deals,” says Bronson. “On the inside there’s nothing there, nothing going on with the mid-range and small users. We’ll take what we can get at this point, but in order to have a true recovery we need to see growth and strength from the small and mid-sized companies.”
The markets that have fared the best year-to-date are the prime industrial areas of the I-55 corridor and O’Hare, recording 2,979,389 and 1,081,583 square feet of positive absorption respectively.
Large scale floor plates are becoming scarce in these markets as big firms take advantage of the market by expanding. It is becoming so tight, that it is not unreasonable to expect new development within the next year. “I can safely predict that there will be speculative development in I-55 and I-88 corridors,” says Bronson.
Bronson says that the market still needs to surpass the hurdle of an average $3.25 per square foot rent, which is yet to achieve. It is still in the high $2 per square foot net range.
The increasing rents have been good for landlords as concessions are beginning to recede.
“We have seen the transition over the last 12 months from basement bottom prices to more reasonable comps coming through,” he says. “We are seeing a lot less of the zero-net-rent for the first two years of a 10-year deal.”
While some of the big markets have attracted some large deals, high vacancies still exist in the I-80 corridor, which sits at 14.6 percent vacant, and the I-90 Northwest and I-39 corridors, currently at 11.8 percent and 19.4 percent respectively.
“The past four quarters have witnessed positive net absorption, totaling more than 10.8 million square feet,” says Craig Hurvitz, director of statistics for NAI Hiffman. “While recent trends have been encouraging, this absorption represents only about a third of the 29.5 million square feet of vacant space introduced to the market during the recession. Nearly 130 million square feet still sits vacant in the market, a reminder that there is still a long way to go until the market returns to healthy levels.”