Demand for modern e-commerce, distribution and manufacturing space continues to fuel a building boom in the U.S. industrial sector. In Chicago, this demand is also encouraging heightened transaction velocity as the second city was second in the nation for most active sales by market.
According to a new report by Avison Young’s national industrial capital markets group, based in Chicago, investors have focused considerable attention on modern, Class A industrial assets, spending $11.6 billion on 130 million square feet of newly constructed buildings in the past year, ending with Q3 2018.
“There is considerable demand for modern industrial facilities and, in some markets, developers can’t build them fast enough,” said Erik Foster, Avison Young principal and leader of the firm’s national industrial capital markets group. “Given the growth in e-commerce and general corporate distribution needs, we expect market activity to remain strong for the foreseeable future.”
According to the report, investors are eager to access the strong industrial market in Chicago and other areas. Chicago ranked second for industrial investment sales—of properties greater than 100,000 square feet and built since 2010—with $675 million in sales from Q1 to Q3 of 2018. Chicago pulled ahead of Dallas, with $627 million; San Francisco, with $476 million and Columbus, with $418 million. The Los Angeles metro area topped the list with $1.22 billion spent during the same time period.
Most investors are looking for buildings with a strong corporate tenant signed to a long-term lease. Well-located properties along major distribution corridors with high ceilings, efficient docking/loading layouts and large truck bays remain in demand from the tenant, and thus investor, standpoint. With the construction-to-investment-cycle typically running 12 to 18 months, many investors remain on the hunt in certain markets as supply lags demand.
Pricing is also at record levels—reaching $100 to $150 per square foot in some primary markets and $70 to $90 per square foot in many secondary markets. Avison Young’s national industrial capital markets group expects investment pricing to continue increasing by three to five percent in most areas over the next year, or higher in some land-constrained and gateway markets.
According to the Avison Young report, industrial construction deliveries totaled 237.7 million square feet nationally through the third quarter of 2018, down from the 243.9 million square feet this time last year. The construction pipeline, however, shows promise as an additional 337.3 million square feet are under construction nationally.
The Chicago market saw a much steeper decline, with Q3 2018 deliveries less than half of what the area saw at this stage of 2017. Following several years of strong growth, activity declined to 10 million square feet in 2018, down from 22.6 million square feet at Q3 2017, one of the strongest years for the market.
Long term, the situation is a bit rosier for Chicago. The construction pipeline contains 18.5 million square feet at Q3 of 2018, an 80.6 percent jump in industrial buildings under construction from the 10.2 million square feet in the previous quarter. Further, most of the new construction is speculative, a strong indication of developer bullishness for the Chicago market.
“The Chicago activity reflects the natural construction and leasing cycle, as the market absorbs the significant amount of space already added,” Foster said.
Among the key factors driving overall industrial activity in Chicago and nationally are e-commerce growth (projected to rise 15 percent annually) and high levels of capital allocation from a variety of investment sources looking for stability and long-term growth. There also remains strong tenant demand for a variety of other asset types, including light manufacturing, 3PL distribution and general corporate distribution.