Over the past year, investors spent $55 billion on U.S. industrial warehouse and distribution space in 46 key markets. Perhaps not surprising, Chicago was the beneficiary of the largest sum of investment volume, raking in more than $6 billion.
According to Avison Young’s Spring 2019 Global Industrial Market Report, the nationwide activity through Q1 2019 represents an 8.9 percent rise year-over-year from $50.5 billion. With online shopping fueling the growth of the sector, access to quality transportation is a determining factor for investors seeking markets in which to sink their capital.
“The sustained growth in the industrial sector continues to attract investors, both domestic and foreign, who are seeking the stability and growth potential this sector offers,” said Erik Foster, Avison Young principal and leader of the firm’s national industrial capital markets group. “This is particularly apparent in markets with proximity to major transportation infrastructure and large urban population bases that are seeing rapid growth in e-commerce and last mile delivery.”
Some investors are targeting secondary markets like Greenville, Charleston, Memphis and Savannah that have lower land and labor costs and high potential for growth. But the largest influxes of cash were to large, established metros. Chicago led the way, followed by San Francisco ($4.5 billion), Los Angeles ($4 billion), the Inland Empire ($3.4 billion) and Atlanta ($3.2 billion).
There were 80 investment sale transactions in Chicago during Q1 2019 alone, with a volume of $661.5 million and a 12-month average price per square foot of $70. Among the notable sales, Dream Industrial acquired four Chicago-area buildings totaling 1.26 million square feet, part of a 21-building, 3.5-million-square-foot portfolio in multiple markets. The Toronto-based REIT bought the portfolio from Transwestern Investment Group in February for $179 million.
In North Chicago, Illinois, EMCO Chemical Distributors bought 3601 N. Skokie Highway—a 512,713-square-foot property that was built in 1950 and renovated in 1992—from CenterPoint Properties for $16,650,000. Alpha Industrial Properties purchased a new, 81,212-square-foot building at 845 N. Larch in Elmhurst, Illinois from Venture One Real Estate for $12.1 million; at $149 per square foot, this transaction suggests the value of modern buildings near transportation hubs.
Just over the border, STAG Industrial conducted a $16 million sale-leaseback at 10411 80th Avenue in Pleasant Prairie, Wisconsin, which was built in 2017. Doheny’s, a swimming pool supply business, will continue to lease the 195,415-square-foot property on a long-term basis from STAG, a Boston-based REIT.
According to the report, construction continues to drive the U.S. industrial sector and feed the pipeline for investors. There were 272 million square feet of construction completed in the 46 markets during the 12 months ending with Q1 2019. With developers seeking to slake the thirst for modern e-commerce, logistics and corporate distribution space, there is another 274 million square feet in the construction pipeline.
Chicago’s overall industrial inventory stands at 1.1 billion square feet, the largest in North America, according to Avison Young statistics. The market’s vacancy rate stayed relatively stable at 5.9 percent, year-over-year, though the 15 million square feet of total net absorption in that time period was down. The Chicago metro added 14.8 million square feet over the last 12 months and has another 19.3 million square feet now under construction—26.9 percent of which is pre-leased.
There are concerns that the nation’s 274-million-square-foot development pipeline could drive up vacancy in the coming months as the space is only partially pre-leased. Despite this chance of rising vacancy, nearly all industrial markets remain significantly supply-constrained, and all U.S. markets monitored by Avison Young reported single-digit vacancy rates.
As e-commerce companies drive demand for fully automated build-to-suit distribution centers, the 12-billion-square-foot U.S. industrial market continues to record exponential supply growth as it adapts to the modern requirements of technology-reliant occupiers. With capital available and investor appetite strong, Avison Young expects investment to increase throughout 2019.