Submitted by Keith Puritz, Principal at Avison Young/Industrial Practice Group
The Chicago industrial market continues to exceed 2015 analysts’ predictions. With demand outpacing the peak of 2007 and the market’s inability to keep pace, we are seeing a variety of industry trends. The following should continue to shape the market into year-end:
BTS activity is up.
In order to compete for occupiers seeking build-to-suit opportunities, developers must “control” land. But, finding ready-build sites has become increasingly more difficult. If you control a site, but have wetland or utility issues, you are a stalking horse at best in the occupier world. Spec construction would seem to be the easy answer, and it is in many cases. However, a sub plot to any current development scenario is the long lead-time needed for pre-cast delivery. If you commit to an order today, pre-cast likely won’t arrive on site for six to seven months, resulting in a timing issue for developers to meet delivery dates, and for occupiers to begin set-up, start receiving product, and in certain cases commence production.
In-fill development continues.
You don’t have to be an industry expert to know the frenzy surrounding in-fill development sites and projects, especially in and around O’Hare. The slowest asset class to recover from the 2008 collapse was land. Ironically, today, in-fill land feels like a capital market’s ‘play,” as they aren’t making more of it (land). Offering Memorandums are prepared, bids are due and the competitive environment unfolds.
Sale/Leasebacks are on the rise.
Many of our clients are utilizing it as a vehicle to raise capital, as an alternative to their current line of credit. In “monetizing the asset,” they are using the capital to pay down debt, buy equipment, and acquire companies, among other things. Conversely, a company in the ‘sell mode’ can take advantage of peak property pricing, and simultaneously get the asset off their books, and clean up their balance sheet.
User sales are gaining momentum.
User sales’ activity is markedly higher than Q2 2014. The shelf-life of vacant buildings for sale has decreased by as much as 25 percent year-over-year.
Lastly, lease renewals are increasingly on the rise.
The lack of available/quality product, combined with the rate of spec absorption (occurring over the past 12-15 months) and new construction timing constraints, are all causing occupiers to take a closer look at their footprint and inventory turns, and opting to renew. Many are seeing the advantages in renewing long term. It’s a win-win situation. Landlords are willing to ‘give’ on rents in exchange for lease term, a checkmark for the tenant. Landlords stabilize their building, and in turn have the option to hold, or take advantage of the generationally low cap rates we are experiencing and sell, a checkmark for the landlord.
It’s an opportunistic time for industrial real estate in Chicago, with all signs pointing to the current trends continuing well into 2016.