As 2017 passes its midpoint, there’s plenty of good news for the industrial market, both locally in Chicago and across the country.
With the possible exception of multifamily, industrial heads into the second half of the year as the strongest commercial sector.
The reason? Plenty of credit goes to the continuing rise of online sales. Consumers want to order products online and see them at their doorstops in just a few days. Because of this, companies have increased the number of distribution centers they’re opening, locating many of these as close as they can to urban areas.
LaSalle Investment Management, in the company’s mid-year investment strategy report, said the industrial real estate had an impressively low availability rate of 8 percent. That’s the lowest this level has been in 16 years. LaSalle predicted that industrial real estate will generate the strongest rent growth of all property types during the next several years.
Vacancy rates in this sector, though, might rise a bit. LaSalle Investment Management predicts that industrial construction is soaring. This might cause availability rates to rise during the second half of 2017 and the first half of next year.
Bill Maher, head of Americas research and strategy for LaSalle, said that the commercial real estate market, and especially industrial, has displayed impressive resiliency considering the political unrest now gripping the nation.
“In an environment of political change that has caused increased political and regulatory uncertainty, the financial and economic sectors, including real estate, in North America have remained remarkably steady,” Maher said.
Maher said that the biggest surprise now is the lack of meaningful legislative changes passed by the Republican-controlled Congress. He said that two key initiatives – tax reform and trade policy – could have a significant impact on commercial real estate. But so far, it doesn’t look like any significant tax reforms or new trade policies will be enacted during 2017.
Rich Kleinman, managing director of research and strategy in the United States for LaSalle, said that the country’s commercial real estate markets remain steady, but that investors shouldn’t expect any booming returns.
“Our base case economic scenario calls for several more years of moderate growth and real estate returns consistent with long-term trends, 4 percent to 5 percent in real terms,” Kleinman said.
A construction slowdown?
Companies have been building warehouse and distribution space at such a rapid pace as of late, it stands to reason that there will be a bit of a slowdown in the coming year.
The AIA Consensus Construction Forecast backs that up. According to the forecast, construction activity in the industrial sector across the country will rise in 2018, but only by a modest 1.1 percent.
That’s lower than the forecasted overall growth of 4 percent for all commercial real estate sectors.
But even that higher 4 percent projected growth isn’t overly impressive. According to the AIA report, the commercial/industrial market will see more sluggish growth in the second half of 2017 and throughout 2018.
Officials with the American Institute of Architects point to a national economy that, while growing, isn’t expanding at a rate that excites anyone. According to the institute, the U.S. economy will grow in the 2 percent to 2.5 percent range through the end of 2018. That’s fairly sluggish growth.
The institute points, too, to the Federal Reserve Board, which is in the middle of an interest-rate tightening cycle, something that will continue to limit economic growth.
At the same time, construction companies face rising materials costs, which will also slow construction. Oil-related products have been rising at a 20 percent pace, the institute said. Metals have been rising at a 10 percent clip, while other basic building commodities – including cement, lumber, plywood and gypsum board – have been rising at a high single-digit pace.
Construction companies also face labor shortages. This, too, is slowing construction in all commercial sectors, including the industrial one.
“Despite billings at architecture firms performing quite well this year, the larger construction industry is facing a range of issues,” said Kermit Baker, chief economist with the American Institute of Architects. “The somewhat weaker outlook is driven by several factors, some dealing with the broader U.S. economy, some dealing with general construction industry fundamentals and some dealing with weakness in specific construction sectors.”
Still, the institute’s report had some brighter news for the industrial sector. It cites the rise of e-commerce as a boon to the industrial sector, as rising Web sales force companies to order the construction of distribution centers that are closer to customers.
The local view
Locally, the Chicago industrial market remained strong as the second half of the year began. Cushman & Wakefield reported that the overall vacancy rate in the Chicago-area industrial sector stood at 6.3 percent at the end of the second quarter of the year, the same rate as one year earlier.
Construction crews, though, are busy here. Cushman & Wakefield reported that 18.4 million square feet of industrial projects were under construction in the second quarter of 2017, up from 16.7 million during the same quarter one year earlier.
Asking rents per square foot were on the rise, too. Cushman & Wakefield said that average asking rents for industrial real estate in the second quarter of the year in the Chicago market were $4.98 a square foot. That’s up slightly from an average of $4.88 a square foot during the second quarter of 2016.
Cushman & Wakefield did have one question, though: The company did expect tenant activity to increase during the last two quarters of 2017. But the company wasn’t sure if this activity would be strong enough to fill the 9.2 million square feet of speculative construction set to the market by the end of the year.
Colliers International, in its second quarter Chicago industrial report, said that the industrial vacancy rate in the market, though still low, rose by 10 basis points between April and June of this year. Even with this increase, though, the vacancy rate is still 22 basis points lower than the rate recorded during the second quarter of 2016.
The main contributors to the vacancy rate in the Chicago industrial sector? Colliers International pointed to vacant speculative completions and the space left behind after Motorola moved out of its 1-million-square-foot facility in Schaumburg.