Chicago’s big box vacancy rate ratcheted down for the second consecutive quarter in Q218, according to Colliers International research. While global instability may affect e-commerce-driven real estate in the future, the product class remains strong for now.
Colliers defines “big box” properties as those that are 200,000 square feet or larger, made of precast construction and with 28-foot clear ceilings or higher. The Chicago metro has 565 such structures, amounting to over 250 million square feet.
The 9.04 percent vacancy rate is 60 basis points below the 9.64 percent rate recorded at the end of 2017, but significantly above the 7.71 percent rate recorded one year ago. Nevertheless, 19 new big box leases were signed last quarter—accounting for 4.1 million square feet and the greatest quarterly new leasing volume since 2016.
While the reduced big box vacancy rate is a positive sign, it is well above the 6.44 percent vacancy rate for the overall market. And size matters, too; the vacancy rate is the highest among big box buildings 200,000 to 499,999 square feet, at 10.56 percent. Buildings 500,000 to 749,999 square feet have a 6.09 percent vacancy rate and those greater than 750,000 square feet are at 8.41 percent.
Net absorption was steady from the previous quarter, totaling 3.5 million square feet between April and June. Significant new leasing activity, combined with the completion of two build-to-suit projects and one big box user sale outpaced the effects of four vacant speculative construction projects totaling 2.1 million square feet being delivered during the quarter.
The I-80 Joliet Corridor saw the largest quarter-over-quarter increase, rising by 323 basis points to 13.60 percent due to the completion of two vacant speculative projects. The largest was the 1.22-million-square-foot Rock Creek Logistics Center, developed by The Opus Group in Joliet. Second quarter net absorption was strongest in the I-88 Corridor, where two new big box leases totaling 881,909 square feet were signed.
Construction starts increased with 11 new big box projects beginning construction in the second quarter, bringing the total under construction to 19 projects totaling 7.3 million square feet—the most in three quarters. More than half are infill projects, the greatest amount of infill development the big box market has witnessed during the current cycle. The largest project to start construction during the second quarter of 2018 is 55 Logistics Park in Romeoville, a 1.3-million-square-foot, two-building spec development from CT Realty Investors.
New leasing activity totaled 4.1 million square feet during the second quarter of 2018, bringing the total for the first half of the year to 7.9 million square feet, the greatest six-month tally since 2016.
The largest new lease involved Home Depot leasing the 588,233-square-foot building recently developed on the old Dominick’s distribution center site in Northlake. TA Realty had the largest sale as the Boston-based REIT purchased three buildings totaling 1.1 million square feet in Joliet’s Rock Run Business Park from TIAA for $73 million. All three big box buildings were fully-leased at the time of sale.
Though the U.S. economy continues to expand—with 2018 likely ending up as the strongest year of economic growth in several years—there are some concerns on the horizon. Moderate interest rate hikes will curb economic growth and rising trade tensions, notably a burgeoning trade war with China, may also impact the overall economy. For the moment, however, both consumer and business leader sentiment remains high.