Growth in distribution and e-commerce continue to fuel Chicago’s industrial market, which saw vacancy rates decline in Q1 of 2016 for the fifth consecutive quarter, surpassing pre-recession levels.
According to research from Avison Young‘s Chicago office, the industrial sector had a strong quarter, following a substantial boost in both leasing activity and net absorption at the end of 2015.
Overall, rental rates remained competitive, rising consistently over the course of 2015 and causing a slight shift in market conditions favoring landlords over users. Construction of both speculative and build-to-suit projects remained strong across the market.
Infill development continued to attract investor/developer interest, especially within submarkets in urban areas inundated with older buildings and short on available land. This follows the trend of users wanting locations closer to workforce and transportation hubs.
Among the active markets to watch in Q2 and beyond are: I-80 East Corridor, I-55 Corridor and O’Hare. The top market drivers are: e-commerce, third-party logistics and professional and business services.
Vacancy Rates Drop
Vacancy rates dropped 30 basis points (bps) to 6.5 percent during the first quarter. Submarkets with the largest year-over-year decreases were:
- the I-80 East Corridor —down 220 bps to 7.0 percent
- the I-55 Corridor —down 150 bps to 6.0 percent
Demand remained strong within the O’Hare submarket which saw vacancy decrease 80 bps year-over-year, currently recorded at 5.2 percent. The Lake County and Southern Wisconsin submarkets finished 2015 with strong momentum which carried over into 2016 with moderate drops in vacancy during the first quarter.
During the first quarter, net absorption was 3.1 msf—up 82 percent from the first quarter of 2015. The O’Hare submarket remained attractive to users, with 758,000 square feet of space being absorbed—up from 431,000 square feet during the first quarter of 2015.
A breakdown of key submarkets shows:
- Lake County saw a resurgence in leasing activity, with 229,000 square feet being absorbed.
- While most submarkets recorded upticks in absorption, both the Southern Wisconsin and the I-90 West/ Elgin Corridor submarkets experienced little change during the first quarter.
- The West Cook submarket recorded increased activity during the first three months of 2016, driving net absorption to rise dramatically to 344,000 square feet, the highest it’s been in two years.
Among the significant lease transactions during the quarter were:
- Reviva Logistics, which signed 781,000 sf of space within the I-80 East Corridor that is soon to be vacated by Michelin Tire, which will move into a recently completed 1.7- million-square-foot build-to-suit.
- RJW Transport leased 512,000 square feet, bringing 150 jobs to the I-55 Corridor submarket.
- GFX Corporation leased 427,000 square feet within the White Oak Business Park in the I-88 Corridor.
- Whole Foods announced plans to build a 140,000-square-foot distribution facility within the Pullman area of the South Chicago submarket, an important win for the city of Chicago in its effort to revitalize the distressed area.
Rental Rates Update
Improving fundamentals across the market have caused average asking rental rates to trend upward over the past several years. Averaging $4.67 per-square-foot in the first quarter of 2016, rental rates are up 1.9 percent from the same point in 2015.
Prominent submarkets such as Lake County, the I-55 Corridor, and O’Hare have witnessed an average of 9 percent rent growth over the last year due to strong leasing activity.
- Bridge Development Partners sold 525 Northwest Ave. to Prudential Investment Management, Inc. for $48.75 million.
- Molto Capital sold 3451 S. Chicago St. to Midwest Warehouse & Distribution System, Inc. for $27.46 million.
- Reyes Holdings LLC sold 251 Central Ave. to Dot Foods, Inc. for $17.25 million.
- Northern Builders, Inc. sold 910 Carlow Dr. to Universal Laminating and Converting for $10.04 million.