IllinoisIndustrial Chicago industrial in 2020: Solid gains to continue (mostly) Geoffrey Kasselman, SIOR, LEED AP January 10, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email Having paused ever so briefly to celebrate a successful 2019 for the Chicagoland industrial market, we now turn our attention to 2020. Spoiler alert: expect mostly more of the same, especially in the first half of the year where pending deal activity is well underway. Slower absorption is expected later in the year while the next presidential election takes center stage, although it may take the form of a temporary pause rather than a longer-term phenomenon. Chicago’s industrial fundamentals remain strong. It’s central location and strong multi-modal transportation network underpins the market’s status as the largest inland port in North America, serving local, regional and even national audiences. Total costs of occupancy are a relative thing, and those who come to Chicago from other regions, such as the coasts, enjoy the “bargain” pricing. Quality of life attributes remain favorable and with approximately 10 million consumers in the Chicago metropolitan statistical area, there tends to be something and some place for everyone. Further, with no natural land constraints to the north, west and south, there is plenty of affordable land to support even more new construction. Stir in the general availability of low-cost capital and the recipe is in place for another respectable year of industrial activity. Statistically, most indicators support continued industrial gains. Vacancy rates remain historically low at +/- 6.5 percent. Per Colliers International and NAI Hiffman research data, annual absorption continues to be sturdy, if not resilient, clocking in at almost 40 million square feet in 2019, the best such tally in this extended cycle since 2016 and second best during that span of time. Net rents are up yet again, now averaging $4.80 per square foot. There’s been positive absorption for a record 40 straight quarters. And new inventory construction starts are in sync with demand. Colliers reports that the vacancy rate in new spec (inventory) buildings has decreased for the eleventh straight quarter, indicating that new construction might not even be keeping up with steady tenant demand. Other notable market drivers include: supply chain retrenchment which is an outgrowth of robust e-commerce activity and enhanced mobility, retail reinvention and significant advances in technology; last-mile focus from retailers like Amazon, Target and others (note that per Colliers, almost 44 percent of 2019 new inventory leasing was in infill or city of Chicago locations) and legalized cannabis which is on pace to hit nearly $1 billion in sales in 2020 and $2 to $4 billion per year as that market matures, thereby exerting additional demand pressure at a time of record low vacancy. Particular bright spots in 2020 are anticipated to include: food and beverage plays, particularly for cold storage; additional infill/city of Chicago distribution deals as last-mile challenges and inefficiencies are high priority for well-capitalized operators; low interest rates and low cost of capital with respectable cap rate spreads versus 10-year treasuries, resulting in additional bulk portfolio sales to institutional buyers and even more spec starts across various submarkets including I-80/I-55, Lake County/Southern Wisconsin and I-90/Elgin, amongst others. We will almost certainly see Amazon and its peers announce significant additional space absorption throughout the year, with such users moving ever closer to the CBD periphery. All that said, the market balance is delicate and not immune to any number of “X” factors that are lurking. Cook County tax changes are of real concern and could mute net rent increases and limit corresponding capital market activity. Labor shortages are increasingly significant and widespread, creating challenges for most operations—including construction and truck drivers. Likewise, construction costs continue to rise, and the trucking industry is adjusting to new regulations which are driving up their costs as well. Consumer confidence, a key economic indicator, remains high but is recently showing signs of a retreat in 2020. Impactful geopolitical events can spring up suddenly, especially in the present environment which is highly unpredictable and appears to include shifting alliances. The long-anticipated Brexit will finally occur in 1Q-2020 and will likely impact the entire European Union, while tariffs and a potential trade-deal with China, whose own economy is slowing, remain uncertain. These are significant events to watch as nearly two-thirds of the U.S. import/export activity is conducted with these key regional trading partners. And in November we will have a highly polarized presidential election, which could be the perfect excuse for large industrial space users to move to the sidelines on a wait-and-see basis. However temporary this might be, it could easily result in a slower second half in 2020. One year from now expect the numbers to tell the tale of another solid year for Chicago industrial, although the road by which we get there will feature different speeds, a view to remember and perhaps a few speed bumps along the way. Enjoy the ride! About the author Geoff oversees national accounts for CRG and leads all client-related initiatives for the company’s expanding industrial, office and data center project delivery platform. He is also known for his volunteer role as the 2017 Global President of the Society of Industrial and Office Realtors (SIOR), the largest non-profit trade organization of its kind, and for his keen business-futurist persona.