With the overall industrial vacancy rate in metropolitan Chicago continuing to decline, many industry experts are forecasting the industrial market to remain strong in 2012.
The industrial market turned in one of its best performances in years during 2011, with 9.8 million square feet of absorption, vacancy declining 70 basis points to 10.8 percent, and rents up 1 percent over the year, according to a year-end metro Chicago industrial market report by Delta Associates, the research affiliate of Transwestern. The overall industrial vacancy rate in metro Chicago declined to 10.8 percent at year-end 2011, from 10.9 percent in the third quarter and 11.5 percent a year ago. The direct vacancy rate declined to 10.3 percent at year-end, from 10.4 percent in the third quarter and 11.0 percent a year ago.
“I think for the first time in a long time, we seem to be definitely going in the right direction,” said Steve Schnur, senior vice president of Duke Realty’s Chicago operations. “I think in the industrial side of our business, manufacturing has continued to be strong and probably more importantly, it seems like the consumer side is healthier than it was in the last few years. That consumption is what leads to more and more product being needed in the warehouses. As we see the consumer become more and more prevalent, that just bodes well for the industrial side of our business.”
The warehouse and distribution sector in metropolitan Chicago also remained sturdy, according to the Delta Associates report. The warehouse/distribution sector experienced 3.5 million square feet of net absorption in the fourth quarter of 2011 and 8.6 million square feet for the entire year. The delivery of 2.2 million square feet of fully leased space drove absorption in the fourth quarter.
“I think there’s going to be a continued positive trend in 2012,” McShane Construction Co. Vice President and Market Officer Dan Fogarty said. “We saw significant positive absorption in 2011, and I think we’ll continue with further absorption.
“A lot of the real estate fundamentals that we’ve seen will continue. The economy seems solid. Corporate balance sheets and private companies seem to have preserved cash well. Due to the fact that a significant amount of space was absorbed last year, there is less quality inventory to choose from. Not only will that lead to more positive absorption of existing space, but further new development and redevelopment for build-to-suit.”
Others, however, are more cautiously optimistic about their forecast for the future of the industrial market.
“I think that the market for industrial space will continue to be soft,” said Corey Chase, principal at Podolsky Northstar CORFAC International. “I think 2012 will be a very similar market to 2011. However, we are all seeing signs of absorption and positive things happening in the marketplace, but I think that it’s probably going to be another year or so before things really get much better.”
Chicago economic growth slows
As for economic conditions, the metropolitan Chicago economy continued to expand, though at a slower pace through the fall, with employment growth at 16,200 jobs – a 0.4 percent increase – over the 12 months ending October 2011, according to the Delta Associates report. National employment increased 1.2 percent in this period. Professional/business services and trade/transportation led the way in Chicago over the past 12 months, while the public sector continued to shed jobs.
The metro Chicago unemployment rate increased to 9.6 percent in October 2011, from 8.9 percent one year ago, the report noted. The national unemployment rate dipped to 9.0 percent in October 2011, down from 9.7 percent one year prior. National unemployment dropped to 8.6 percent in November 2011.
In addition, the metro Chicago manufacturing sector, the region’s second-largest core industry, added 800 jobs – a 0.2 percent increase – over the 12-month period ending October 2011. Furthermore, the Chicago Purchasing Managers Index, an indicator of the economic health of the manufacturing sector, remained in positive territory for the 26th straight month, at 62.6 in November.
Chase said that while there has been more absorption in the industrial market from 2010 to 2011, economic conditions need to continue to improve for there to be real progress.
“I think at the end of the day, companies have to feel better about hiring and adding new jobs to their companies, and obviously that will make them reach out and grab new space or feel better about signing longer term leases or buying buildings,” he said. “I just think that it’s going to be a while before more jobs are created, in essence, so that industrial will get hot again.”
Fogarty agreed that the continuing health of the economy and an uptick in employment and manufacturing will go a long way to determining the success of the industrial sector in 2012.
“I don’t think anybody is predicting an upward spike in the economy and job growth, but I think everybody remains optimistic. The stock market is continuing to hold its own. It seems like all signs are that things will continue to trend at a moderately positive pace,” he said.
Submarkets to watch for
Whatever the state of the local or national economy, some submarkets in the Chicago area seem poised to weather any economic storm, observers say.
One such market may be the I-88 corridor, according to Chase.
“It really depends on the type of user, but I see a lot more companies considering the I-88 corridor going west, and we’re seeing more of a surge there,” he said. “I really look at I-88 as the market that sees probably the brightest future in my opinion. I think there’s the least amount of large blocks of space available there.”
In addition to I-88, two other areas that have absorbed a great deal of space in the last year are the I-55 corridor and the area near O’Hare Airport.
“The O’Hare area is starting to come back pretty strongly as well, and that’s a good sign because it’s such a big market here in Chicago and it’s diverse,” Schnur said. “It’s sort of a mirror of the overall general economy because you have manufacturers, suppliers and all kinds of industries represented there. Because it’s such a big base, it’s great to see it come back.”