While we haven’t turned our calendars over just yet, it’s clear that 2021 was a banner year for the Chicago industrial real estate market. We witnessed a 20-year record low vacancy rate, record leasing activity, big absorption numbers, and in the meantime, there remains a tremendous amount of new product still on the way. It’s a great time to be a landlord in industrial real estate.
The Chicago market — like many other major metros across the nation — is in the midst of what could be considered a once-in-a-generation industrial boom and it seems as if there’s an unlimited pipeline of institutional money being pumped into the asset class to capitalize on the moment. And with this pace of new spec development and leasing demand, we can almost guarantee that 2022 will be another big year, granted there are no other major economic calamities.
Through the course of this year, we have spoken with some of the region’s biggest industrial players for various issues of Chicago Industrial Properties, so we felt it was as good a time as ever to reconnect and get a recap on this year and predictions for industrial in 2022. Spoiler alert: confidence remains high among industrial developers going into the new year despite supply chain snags and long lead times.
We asked everyone the same two questions: What was your biggest success (or surprise) in the Chicago area industrial real estate market in 2021? And what do you predict for the first quarter of 2022 in Chicago area industrial? Here’s what Chicago’s biggest industrial players had to say.
Nick Siegel, Chicago Region Partner with BRIDGE Industrial:
The market has continued to maintain its positive momentum despite the setbacks with the supply chain and commodity pricing. A series of factors led to spiking construction prices and extended lead times throughout 2021, and this caused a lot of questions about the ability to maintain leasing velocity, cap rates and yields. However, the combination of voracious tenant demand and limited supply of industrial product has led to continued momentum in the form of rent increases and cap rate compression.
[For Q1 2022, I expect] more of the same. What little space is available is getting leased quickly at record rents. There is not a huge construction pipeline of spec product in the Chicagoland area right now and I think that the product that does deliver in 2022 will continue to lease well.
Jeff Folkmann, SVP and Chicago Market Officer at Prologis:
The global pandemic and subsequent supply chain crisis have accelerated the demand for logistics real estate. While e-commerce penetration was rising prior to COVID, the pandemic has permanently moved many of us to online shopping. Combined with companies shifting from “just-in-time” to “just-in-case” supply chain models and requiring higher inventory levels, warehouse availability in the US stands at record lows. In short, we can’t build new properties fast enough.
Chicago is a good example of this surge in demand. For Prologis, a historic wave of activity has resulted in 113 transactions this year, totaling 12.1 million square feet of leasing activity. We have grown our portfolio to 64 MSF and currently stand at 95.5% occupied. We are seeing significant interest in all types of industrial properties, from larger, multi-market regional properties in submarkets such as I-55 and O’Hare to last-mile facilities in urban areas.
Looking ahead, we expect warehouse space will continue to be scarce. The combination of intense competition for few availabilities and limited new construction will lead to more urgency in leasing, and rental rates should rise even further.
Susan Bergdoll, Susan Bergdoll, SVP and regional leader for Duke Realty’s Chicago, Minneapolis and Indianapolis markets:
Like many in the Chicago industrial market, Duke Realty experienced a record breaking year. We landed two large build-to-suit developments in the first 60 days of the year, started construction on two speculative buildings, one leased prior to completion and the other is currently under negotiation. Additionally, we achieved a less than one percent vacancy rate in our 17.7 million-square-foot portfolio of existing properties.
The first quarter of 2022 will look very similar to 2021. We will be in the middle of the winter season in Chicago, so we expect demand to continue at current levels and supply will shrink, in turn maintaining rents at the current elevated levels, keeping landlords happy. Who knows what will happen in Q2?
The Duke Realty team has worked hard and it’s been fun to be a part of so much success. Here’s to more in 2022!
Shawn Clark, President of CRG:
The biggest surprise for 2021 was that I thought the capital markets for industrial real estate had recovered strongly from that pandemic and had normalized by the end of Q1 2021. What was unexpected, was the impact of the additional flood of capital from increased allocations and new investors for core industrial properties. We thought the record cap rates experienced in Q1 would become the norm, but we saw cap rates compress another 50 to 100bp over the second and third quarters of the year.
I predict more of the same in Q1 2022. Specifically, 2022 will be a year of continued rent growth fueled by a supply and demand imbalance along with rising land and construction costs.
Adam Moore, Senior Regional Director with First Industrial Realty Trust:
2021 has been an unprecedented year in the Chicago Industrial Market. The early part of the year started with a level of broad-based demand not seen in 25 years. This strong activity accelerated in the third quarter with CBRE reporting more than 14 million square feet of absorption, bringing the year-to-date total to 22 million square feet – and this level of activity is continuing well into the fourth quarter. As a result, rents are rising further, many spaces are re-leasing shortly after becoming available and some tenants are clamoring to be chosen as backups in case deals fall through.
Rents in certain submarkets have risen 10% since the beginning of the year, mainly driven by demand, but also impacted by rising construction costs that are driving replacement costs higher. Construction costs have been rising on a monthly basis as developers constantly try to anticipate the next material that will be in short supply. First it was steel, then precast panels and, most recently, roof insulation has been added to that list.
In this fast-paced market, relationships with landlords are more important than ever for tenants and brokers. Successful landlords are using the current market conditions to maximize the value of their portfolios, while remembering long-term relationships are important in this business. If and when the pendulum swings, tenants and brokers will remember who treated them fairly.
Near term, given elevated building materials and construction costs and delays in component deliveries, the market is experiencing some constraints in the timing of new supply. This supports further rent growth, which is begetting plans for new supply from developers – and rightfully so. With year-end approaching, it’s a great time to reconnect with our business community and celebrate the success within our industry while we prepare for additional opportunities for growth and serving customers’ needs in the year ahead.
Mike Yungerman, SVP and General Manager at Opus Development Company:
The biggest success for The Opus Group in Chicago is our 650,000-square-foot North Aurora speculative development, Tollway Corporate Center, which is currently under construction. It includes two industrial buildings suitable for warehouse distribution operations or light manufacturing. The buildings, which will be available in June 2022, are in a rapidly expanding industrial submarket and near the intersection of Route 31 and I-88.
We have had no delays and no major cost issues on this project, which is unusual given where supply chains stand. Our construction team was ahead of potential supply chain bottlenecks and has been able to keep the project on schedule. At Opus, our vertical integration — with in-house teams responsible for development, design and construction — allows us to effectively manage through these supply chain challenges.
We see continued strength in the industrial sector in 2022. We expect to see leasing activity continue early in the project cycle for industrial. Usually, you see leasing activity for industrial buildings closer to project completion or once the shell is complete. Today, with markets so tight, tenants are willing to make leasing commitments much earlier. We also expect to see lengthened build timelines in 2022 due to the state of supply chains for materials.
This article also appears in the November 2021 issue of Chicago Industrial Properties.