Through the third quarter of 2019, robust demand has continued to drive activity in Chicago’s overall industrial market. In the O’Hare area, the need for logistical, flex, as well as manufacturing space is keeping the submarket active.
According to Cushman & Wakefield’s Q3 2019 Midwest industrial report, new leasing market-wide totaled 25.9 million square feet year-to-date, a 21.1 percent increase year-over-year. While massive, million-square-foot leases can wildly swing the prospects of the I-55 and I-80 corridors, the infill O’Hare submarket has seen a constant thrum of demand.
“We feel that leasing activity should remain strong through the fourth quarter and into next year,” said Al Caruana, senior director, Cushman & Wakefield. “Right now, we’re tracking five large tenants in the market who are actively looking at O’Hare. So we feel confident that activity will continue there.”
Those prospective tenants are seeking approximately 730,000 square feet combined, or an average deal size of about 146,000 square feet. For these types of tenants—those who want access to a diverse, world-class infrastructure but that don’t need big box warehouses—O’Hare is extremely attractive.
“The ideal size in O’Hare is between 20,000 square feet on the low end up to about 200,000 square feet,” Caruana said. “If people are looking for a million square feet, then they tend and move down to the I-55 or I-80 submarkets where there’s more land available and pricing is a little bit more economical versus O’Hare.”
Net asking rents for a variety of O’Hare industrial uses have seen significant increases year over year. Manufacturing is up 2.6 percent, flex space is up about 20 percent and warehouses are up 9.3 percent. Though they tend to be smaller than in other submarkets, O’Hare still has its share of spec development space, which commands the premium rent. Between 2019 deliveries and projects under construction, O’Hare has or will have another 1.65 million square feet of new industrial space. To date, all of the delivered product has been speculative.
Most new construction buildings near O’Hare are in the mid-size range due to lot sizes. The largest building in the O’Hare submarket over last 10 years was 539,000 square feet. The average size to date in 2019 built or under construction is 165,705 square feet. That’s actually trending down as the average new building size was 181,836 square feet between 2008 and 2018.
However, Bridge Development Partners is currently developing the 741,000-square-foot Bridge Point Itasca, at the western edge of the submarket. Located on a 48-acre site at the intersection of Interstate 290 and IL Route 390, the site is a greenfield anomaly for O’Hare as it was formerly occupied by a since-demolished radio transmission tower. That project is slated for delivery mid-2020.
Because of all of these strong fundamentals, interest remains high on the investor side. Sale prices have increased 37 percent over the last five years on a per-square-foot basis, with properties currently trading at an average selling price of around $77 per square foot.
“The limited inventory of available buildings help generate higher prices, and institutional investors are competing with users to purchase buildings in the O’Hare submarket,” said Caruana. “It’s a great location with easy access to the expressways, it’s always in demand and there’s great labor there. With news of the upgrades coming to the O’Hare International Airport, that’s only going to increase passenger and cargo traffic, which will probably bring more demand in the area from freight companies.”
Not all of the O’Hare submarket is equal, of course. The tax situation in Cook County is driving most prospective tenants to either seek a Class 6b tax incentive or locate in DuPage County.
“With the new assessor in position, there might be some increases in taxes, and that definitely plays an effect in the value when you’re looking at a Cook County asset versus a DuPage county asset,” Caruana said. “That continues to be a relevant point when investors are looking in the O’Hare submarket.”
The delta between Cook County taxes and DuPage county taxes could be up to 50 percent different. The flip side, however, is that rents south of Devon Avenue and west of County Line Road tend to be higher than in Cook County. Prospective tenants looking to locate near O’Hare that are sensitive to high operating costs will have to run an analysis and see what location is best for them.
