It may seem as if spec industrial properties have been going up in the Chicago market with reckless abandon. But in fact—especially over the past three years—this breakneck rate of development has barely been able to keep up with the demand for modern warehouse and logistics space. There’s a fresh worry, however, as many wonder if the COVID-19 pandemic will slow or even stop this activity.
In the first quarter of 2020, according to research from Colliers International | Chicago, 16 more spec projects were completed. These additions, along with other development since 2013, bring the market’s stock of Class A industrial space to 73.6 million square feet, spread over 275 buildings.
All this new square footage hasn’t been sitting idle. Every quarter since the beginning of 2017, high leasing velocity has put tenants in much of this space, driving down vacancy despite the rapid pace of development.
As of the close of the first quarter, nearly 75 percent of all spec warehouse space delivered since 2013 has leased up. That’s an improvement from the previous quarter, which had a 29.3 percent vacancy rate, and year-over-year, which fell from a the 33.0 percent vacancy rate in the first quarter of 2019.
The market’s two speculative big dogs, the I-55 and I-80 corridors, together accounted for nearly half of spec development over the past seven years, with a combined 32.8 million square feet. Vacancy rates in those two submarkets remain healthy. Colliers reports that 80 percent of the I-55 corridor’s total spec development since 2013 is currently leased; 71 percent of similar space in the I-80 corridor is now occupied.
Other submarkets are performing even better, albeit with only a fraction of the total building stock. In Lake County, 87 percent of the current cycle’s spec product has leased. The Northwest Suburbs and Central DuPage submarkets are even tighter, with 91 and 97 percent occupancy, respectively, of their spec developments delivered since 2013.
While the largest industrial development now under construction in the market is being built to suit—Harbor Freight’s 1.6-million-square-foot project at CenterPoint’s Joliet intermodal—there are another 38 speculative projects underway, totaling 9.3 million square feet.
It is still unclear what the economic consequences will be from the ongoing COVID-19 pandemic—for commercial real estate as a whole as well as for the industrial sector. As people shelter in place and the economy stalls, all segments should feel the pinch to one degree or another. On the other hand, e-commerce is the only way to get certain goods at the moment, so logistics activities might see a temporary spike.
It’s worth noting that Chicago’s industrial market sees a longer lease-up time than other markets. The 31.7 million square feet of spec product that came online between 2013 and 2016 is 96 percent leased, compared to the 57 percent occupancy of the 41.8 million square feet delivered since 2017. Unfortunately, the pandemic will most likely lead to an extension of this leasing lag. Overall, our countermeasures to the pandemic may result in a longer time to lease for these speculative buildings. Once the situation improves, however, there is no reason to believe that the demand for modern warehouse and logistics space won’t pick up where it left off.