Class A industrial buildings remain the golden child of the sector, yet middle-tier buildings are also capitalizing on today’s uncertain economy. While this may bring a momentary sense of relief to these buildings’ owners and landlords, it presents challenges for potential users.
Simply, the industrial real estate market in Chicagoland is currently experiencing a shortage of available space—particularly that of Class B and C, which among other consequences, is driving up rents and making it harder for tenants to find affordable options.
This is the case across the board, but it’s especially tight in infill markets like O’Hare, I-55, Central DuPage, I-88 West and Lake County, to name a few.
In fact, across Chicagoland, 96% of all Class B and Class C buildings are currently occupied, forcing potential tenants to consider more alternatives, like paying more for Class A or expanding their geographic parameters outside of the region to better accommodate their search.
Additionally, NAI Hiffman Executive Vice President Joe Bronson said there are very few Class C options that are functional, only limiting the options further.
“When I give clients a report of spaces available, they often ask why I sent them a report of only ‘new’ buildings,” Bronson said. “The tendency to renew leases is even stronger than usual because of this.”
Even in terms of new development, companies like NAI Hiffman and Core Industrial Realty have seen shifts in patterns of that of spec. Bronson said current interest for spec development lies with a much smaller group of buyers—and sells at a lower cost.
“We as a market have to decide if the exurbs are going to finally become just the next ring of suburbs,” Bronson said. “And if the answer is yes, will there be enough labor to support the tenants in those buildings?”
That’s just another rung on this year’s ladder of unknows and how things will play out, but it’s not necessarily a “new” issue.
Core Industrial Realty Managing Broker/Founder Noel Liston agreed it’s true that there is limited availability in lower-tier asset classes, for purchase in particular, and business owners that prefer to own versus lease are having a difficult time finding product to buy.
That said, Liston said we might start to see supply grow a bit in these asset classes in the latter half of the year, and like Joe Bronson said, geography is also something to be considered.
“In the secondary markets, we started to see some product emerge for sale, which is typically an indication that you’ll start to see other product for sale in more established submarkets,” Liston said. “We currently see some vacancy in the periphery markets, and I predict a bit more will be added to the market later this year, creating more opportunity for those that have not been able to find a building to purchase.”
The outlook for the near future revolves around the positioning of capital costs, as there remains a significant level of inactivity while people await the stabilization of rates. Investors hope for a scenario where there are no rate increases in the second half of the year and a downward adjustment to the Fed funds rate beginning in early 2024, however, whether this becomes a reality, along with many other uncertainties of the year, remains a “wait and see” situation. The encouraging news is that supply and demand are relatively well-balanced at the moment, and the limited availability of land and fewer land purchases will result in a lower inventory of new product next year, sustaining the equilibrium between supply and demand.
“It remains a landlord’s market, but there might be equilibrium toward the end of the year where the market neither favors tenant nor landlord,” Liston said. “As for vacancy rates in the second half of this year, I don’t anticipate much change, but I remain bullish on the near future of the market overall.”