The metro Chicago industrial market’s vacancy rate continued its descent during the second quarter as leasing demand remained strong.
The industrial vacancy rate in the Chicago market area decreased to 9.1 percent at the end of the second quarter 2013, according to a mid-year industrial report by CoStar. The drop continued a string of recent vacancy decreases. The vacancy rate was 9.5 percent at the end of the first quarter 2013, 9.7 percent at the end of the fourth quarter 2012 and 10.1 percent at the end of the third quarter 2012, according to the CoStar report.
“That’s a pretty dramatic improvement and it was really the result of stronger leasing demand coupled with a nominal amount of space returning to the market,” said John Abuja, vice president, investments at Marcus & Millichap Real Estate Investment Services. “We’re not overbuilt as are other areas of the country right now.”
Abuja noted that first quarter leasing volume was more than 10 million square feet, which is a 39 percent increase over the 7.4 million square feet during the fourth quarter of 2012.
According to CoStar, the largest lease signings occurring in 2013 included: the 643,617-square-foot renewal signed by Sharp Electronics Corporation at 1300 Naperville Drive in the I-55 Corridor market; the 515,497-square-foot deal signed by Owens & Minor at Carol Stream Distribution Center in the West Suburban market; and the 458,884-square-foot lease signed by DHL at 10601 Seymour Ave. – Building A in the West Cook market.
Net absorption for the overall Chicago industrial market was positive 3,759,381 square feet in the second quarter 2013, according to the CoStar report. That compares to positive 1,037,162 square feet in the first quarter 2013, positive 4,133,542 square feet in the fourth quarter 2012, and positive 3,049,831 square feet in the third quarter 2012.
“The activity level started off pretty strong during the first quarter,” said Tim Thompson, executive vice president and managing director of HSA Commercial Real Estate’s Industrial Brokerage Division. “It got a little choppy around spring break and now the activity level seems as if it has been picking up again.”
CoStar noted that tenants moving out of large blocks of space in 2013 include: Reviva Logistics moving out of (295,000) square feet at Aurora Distribution Center – Building I, Expeditors moving out of (260,338) square feet at Bensenville Industrial Park #4, and Chelsea & Scott Ltd. moving out of (240,503) square feet at 45 Albrecht Drive.
Tenants moving into large blocks of space in 2013 include: Midwest Warehouse moving into 250,000 square feet at 1717 W. Harvester Road, DIY Group moving into 239,700 square feet at 25975 S Cleveland Ave., and Johnstone Supply moving into 236,273 square feet at 3300 Corporate Drive.
Steve Trapp, senior vice president at Jones Lang LaSalle, said recent deal flow has been impressive.
“As a company, we track activity in the market on a 90-day basis and I think we saw somewhere between 6 to 6.1 million square feet of activity out there in the last 90 days going into the second quarter,” he said.
Thompson added that his firm is witnessing activity from users of all sizes.
“I’ve started to see activity pick up across the board, from under 10,000 square feet all the way up to 300,000 or 400,000 square feet,” he said. “I think we’re starting to see the vacancy rate decrease to a point where we’re getting into a healthier market.”
Thompson attributed the increase in market activity to pent-up demand at the beginning of the year.
“You have manufacturers who are back in the marketplace, which we haven’t seen in a few years,” he said. “I do a lot of business with third-party logistics companies. I know their warehouses are full and inventories are building a little bit.”
In fact, warehouse projects reported a vacancy rate of 8.8 percent at the end of the second quarter 2013, compared to 9.2 percent at the end of first quarter 2013, 9.4 percent at the end of the fourth quarter 2012, and 9.9 percent at the end of the third quarter 2012, according to CoStar.
Abuja said he believes there currently is a greater demand for industrial than any other product type.
“We have much more demand than we do supply right now for industrial investments,” he said. “Everybody wants some industrial in their portfolio right now and there’s just not enough to go around.
“A lot of the institutions that were out after the A-Class product can’t find anymore,” Abuja added. “It just doesn’t exist. People who have it don’t want to sell it. So there’s a trend now more toward pursuing some of the B-Class assets as well. As a result of that, we’re starting to see some cap rate compression in the B-Class assets.”
Meanwhile, the average quoted asking rental rate for available Industrial space was $5.06 per square foot per year at the end of the second quarter 2013 in the Chicago market area, according to the CoStar report. This represented a 1.8 percent increase in quoted rental rates from the end of the first quarter 2013, when rents were reported at $4.97 per square foot.
“There’s less supply out there,” Trapp said. “Obviously, you had a spike in demand and a drop in supply and that’s the paradigm for the landlord. So the pendulum swung back toward the landlord side on landlords having more strength in certain markets.”
“The pipeline of product wasn’t there, so the absorption has put pressure on rents,” Trapp added. “Rents have gone up because of that.”