Vacancy rates continue to decline in the U.S. industrial market spurred by demand for big box distribution centers, with Chicago recording the strongest gains in the first quarter of 2011, according to Jones Lang LaSalle’s Spring Industrial Outlook.
The national industrial property market recorded a drop of 20 basis points in the first quarter to finish at an even 10.0 
vacancy rate. Activity has been most robust on the coasts, with California’s Inland Empire and the Philadelphia experiencing numerous large leases that have depleted their existing supply of quality, big box space. Speculative development could begin in these markets by the end of this year.
While costal markets may have been the strongest performers, many secondary markets are now on the road to recovery. The report cites that secondary distribution hubs such as Atlanta, Dallas, Indianapolis, Phoenix, Miami, Seattle, Denver, and Pittsburgh, all have recorded positive absorption this year.
The economy has not added jobs at a pace sufficient to instill solid confidence in the market, but it is not shedding jobs like it once was, leaving those entrenched in their current positions to feel a little more comfortable with spending money. Consumer confidence has fluctuated recently, but, according to the Conference Board, a business research association, it remains well above its third quarter 2010 lows.
“I think there is more confidence on behalf of the consumer,” says Keith Stauber, regional managing director for Jones Lang LaSalle. “People don’t feel as threatened anymore and they are more willing to go out and partake in discretionary spending.”
While leasing has picked up, investment sales continue to improve as well. The first quarter sales volume was $2.6 billion, a 14.6 percent increase from year ago numbers.
The majority of investment is coming from domestic sources, with pension funds and life insurance companies deploying capital to quality assets, says Stauber.
Chicago has strong first half of 2011
Chicago led the national pack with 7.7 million square feet of absorption in the first quarter of 2011. This has been a huge step forward for a market that experienced more than 15 million square feet of negative absorption in 2009 and 2010 combined, says Stauber.
“It was refreshing to see that performance,” says Stauber. “In a good market, Chicago will do 15 million square feet of (annual) absorption. This bodes well for the stabilization of rental rates.”
Currently, the average asking rent in the Chicago market is $4.17. That should remain stable for the foreseeable future, but, as more big deals take place, landlords could see the market turning in their favor next year.
Stauber says that there are numerous large deals waiting to happen in the Chicago market. His firm is tracking multiple users that are actively seeking a total of 8 million square feet in the I-55 and I-80 markets. These users are all looking for spaces of 250,000 square feet or more.
“I think we are going to see three-to-five of these big deals close within next six-to-nine months,” he says. “That would be a phenomenal turn around.”
With only 10-12 viable options available in this market area, supply will become strained when the majority of these deals are done. Stauber believes that the market could be ready for speculative development as early as the spring of 2012.
Stauber says that he is very optimistic about the long-term viability of the Chicago market, however, as the big distribution firms begin to reposition themselves and continue to gradually recover, smaller firms may be left out in the cold as they can no longer afford to wait for a robust economy.
“I’m concerned about the small-to-medium sized users,” says Stauber. “The economy may not be improving fast enough for them.”
