Nationwide, a number of forces have pushed industrial vacancy down to record levels. According to the Marcus & Millichap 2018 North American Investment Forecast, these forces are creating an exciting outlook for industrial investments in the year ahead.
“The convergence of a variety of positive factors has invigorated the outlook for industrial investments to a level unseen in past years,” the report’s authors wrote. “The prospects of accelerated economic growth and increased corporate investment under the new tax law will likely bolster demand, while the ongoing e-commerce inspired structural shift benefiting the sector remains on course for expansion.”
The Chicago market rocketed into the top 10 in Marcus & Millichap’s forward-looking ranking of 30 major industrial markets. New construction replacing outdated inventory and net absorption of more than 19 million square feet lifted Chicago six places to the ninth spot in the 2018 National Industrial Property Index. Only Tampa-St. Petersburg saw a bigger leap in the charts.
There are signs of economic stability in the Chicago metro after the area initially struggled to find its footing coming out of the Great Recession. Last year, payrolls finished nearly 3 percent above the pre-recession peak, an encouraging sign as the metro took longer than most to recoup its losses. And the area’s largest user of industrial space—the trade, transportation and utilities sector—is slightly above the previous high-water mark at less than 1 percent, suggesting even further upside potential for industrial.
“Chicago’s 1 billion-plus square-foot inventory, meanwhile, is reinventing itself,” the authors wrote. “While more than 30 million square feet of new space is slated for completion between 2017 and 2018, older stock is being converted.”
The Marcus & Millichap report highlights the site of the former Chicago Tribune distribution center along the river that is being transitioned to 1.2 million square feet of office space with nearby apartments. Not far from that location, R2 Companies is repurposing Morton Salt’s old warehouse into an apartment, office and entertainment destination. Overall, the late recovery is providing Chicago an above-average year in operational improvement.
Out-of-state investors are turning to Chicago for upside potential, higher yields and appreciation that has already been realized in most other markets. Warehouses accounted for a greater number of sales for each of the past two years and buyers are showing their confidence in the market by acquiring larger warehouse buildings. Last-mile distribution assets near the Tri-State Tollway should also draw investor focus.
Developers have approximately 13 million square feet of industrial space in the pipeline for construction this year, all of it warehouse. After a flat 2017, vacancy is predicted fall to 5.8 percent this year while asking rents should rise by 5.5 percent to $5.74 per square foot.
International exports, which make up 10 percent of Chicago’s economy, have been growing at a slower pace than most other major metros. Amazon, which is positioning itself to compete with the major delivery companies, signed the second largest lease last year, cementing itself in the market. Overall, cap rates for smaller buildings were above 8 percent last year, more than 250 basis points higher than many coastal metros.
In Chicago and across the country, uncertainty surrounding last year’s federal tax rewrite has begun to abate, and investors are well positioned to continue their strategies as key provisions such as the 1031 tax-deferred exchange, mortgage interest deductibility and real estate depreciation will see little change.
“The conjunction of these positive forces could revitalize investor sentiment, strengthen decision making and increase market liquidity,” the authors wrote.