Are tenants hungry for bog box industrial spaces? Though 2020 may not have been the year for gambling, you can bet that they are.
The economic ramifications of COVID-19 continued into the third quarter. In spite of this, large, modern industrial warehouses across Chicagoland attracted users, according to data compiled by Colliers International. Though many figures may not align with pre-pandemic projections, the sector is in far better shape than other asset classes, given current affairs.
Vacancy and absorption
Net absorption among big box warehouses (generally defined as those with at least 200,000 square feet and clear heights of 28 feet) totaled 1.2 million square feet during the Q3 2020. That brought the year-to-date net absorption tally to 10.1 million square feet, a dip from the 13.3 million square feet recorded during the first three quarters of the previous year.
The vacancy rate rose to 8.77 percent during the third quarter, the highest tally since late 2018. The largest increase was in the Far South Suburbs submarket, largely as a result of Kmart shedding its 1.5-million-square-foot distribution facility at 333 S. Spruce Street in Manteno, Illinois. This move-out resulted in the submarket’s vacancy rate shooting up from 9.1 to 19.9 percent.
O’Hare’s vacancy nearly doubled quarter over quarter, rising from 6.18 to 11.95 percent from Q2 to Q3. The I-55 and Elgin I-90 corridors also had rising vacancy rates, increasing by 335 and 385 basis points to 14.69 and 13.98 percent, respectively.
Many submarkets saw their fortunes go in the other direction, however. The I-80 corridor tightened up from 7.98 to 5.66 percent and the Northwest Suburbs decreased from 10.55 to 8.49 percent. The greatest quarter-over-quarter improvement was in the I-290 South submarket, which recorded a 1.41 percent vacancy rate in Q3, compared to the 9.16 percent of Q2.
The positive net absorption of the third quarter is particularly notable given the numerous new deliveries. In total, there were 10 big box developments that came to market in the third quarter, totaling 3.9 million square feet of space. Of these, eight buildings—totaling 2.9 million square feet—were built on spec and delivered with 93 percent vacancy.
And there’s more on the way. Currently, there are 22 big box projects under construction, totaling 16.7 million square feet—the most of this product type in the market’s history. However, the speculative craze of the past few years may have slowed, as the majority of these projects—14 buildings comprising 11.7 million square feet—are build-to-suit projects. There is currently only one spec project under construction greater than 1 million square feet.
Leasing and sale activity
The leasing volume among big box properties during Q3 2020 amounted to 4.2 million square feet, per Colliers data, across 19 transactions. That figure is lower than those recorded during the previous two quarters, though it hovers just below the average quarterly new leasing volume of 4.4 million square feet since 2017.
More than half of the space leased during the quarter was by pandemic-resistant tenants such as logistics providers, e-commerce companies, food users, freight forwarders and packaging companies. General Motors inked the largest lease of the quarter, leasing the entirety Core5 Industrial Partners’ 1,026,000-square-foot 1023 E. Laraway Road in Joliet, Illinois. Core5 developed the spec building in 2017.
E-commerce giant Amazon was part of the next-largest deal, leasing 546,182 square feet at BridgePoint 290, 1400 S. Laramie Avenue in Cicero, Illinois. Cabot Properties bought the 33-acre site in 2018 from Bridge Development Partners, which managed the development and construction of the two-building asset, completed at the end of 2019.
Other large transactions saw Expeditors take 424,000 square feet at 1200 Cherry Hill Road in Joliet in a new lease and Cheese Merchants of America, which had pre-leased 300,780 square feet at 2595 Enterprise Circle in West Chicago, Illinois. Tru Vue completed a sale-leaseback of its 299,200-square-foot space at 9400 W. 55th Street in McCook, Illinois—a trend that may grow as more businesses look to raise capital within a more restrictive lending environment.
There were seven big box buildings sold during the third quarter of 2020. The largest of these saw Prologis acquire 901 and 1001 W. Bluff Road in Romeoville, Illinois. The seller, CT Realty Investors, developed the combined 1.3-million-square-foot property in 2019.
Other investment sales included KKR’s purchase of the 1,220,140-square-foot 3300 Channahon Road in Joliet, Exeter Property Group’s acquisition of the 648,960-square-foot 160 Southcreek Parkway in Romeoville and MetLife Real Estate’s purchase of 122nd Street & 120th Avenue, a 590,525-square-foot asset it Pleasant Prairie, Wisconsin.
Despite the chaos of 2020, Chicago’s industrial market is proving formidable. The surge in online shopping that the pandemic has created means that users and investors are both betting on centrally located big box warehouses.