Amazon, Tesla, and Lion Electric: These are just a few of the big players who are gobbling up industrial space across the Chicago area this year, helping push the region to a 20-year record low industrial vacancy rate. But how much space are they taking and how much is currently under construction? A recently released Q2 2021 report from Colliers offers insight into these numbers, and more.
The report indicates what others have already illustrated this year, which is that demand is high for new industrial space and vacancies are low. But the Colliers report specifically looks at big box buildings specifically, or properties that are 200,000 square feet or larger with 28′ clear height or greater. And the Q2 numbers show that the record-setting pace of leasing activity continued into the early summer.
One big takeaway is that 7.1 million square feet of big box industrial space was absorbed in the second quarter of 2021, bringing the total between the first half of the year to 15.3 million square feet of industrial space taken. This means that in the first half of 2021, more space was absorbed than in the entirety of 2020 (which was 15.1 million square feet). The 8.2 million square feet of net absorption from Q1 this year is the record, the report indicates.
The data illustrates the strong demand for industrial real estate at the present moment, yet it’s likely to continue well into the future, says Mike Senner, Executive Vice President at Colliers.
“[It used to be that] when I felt that we were at the end of a cycle, and saw that we had a good run for 24 or 36 months, I’d think that it’s got to taper at some point. But I don’t feel like that now,” Senner says of the current investment climate for industrial real estate in the Chicago area.
“There’s a lot of demand at the moment and because of the fact that there’s more money allocated to buy industrial real estate, there’s been a ton of cap rate compression, and more people entering the industrial development arena, we’ve been in a good environment for a while, but this is like a turbo-charged version of that.”
Currently, 19.5 million square feet of new industrial space is under construction throughout the Chicago area, a significant increase from the 13.6 million square feet was that being built during the first quarter. Completions were big in Q1 however, with 7.8 million square feet of new space being delivered in the first three months of the year while another 1.67 million was completed between April and June.
Competition is fierce as developers seek sites in desirable locations to construct new big box industrial properties, but at some point, the intensely hot (and pricey) market could see some developers or players decide to finally sit it out as the potential for risk increases.
“Land prices continue to grow even though construction costs have risen,” Senner says of the trend. “It’s really competitive, but it’s hard to not make money as an industrial developer at the moment. However, there are some people who will cap out and say, ‘I’m not going to pay 22 bucks a foot for land near O’Hare,’ and then others will pick it up, they’ll build a building to lease it, and they’ll sell it at a four-cap and they’ll be they’ll be in good shape.”
As to the who, what and where, the report also offers a list of the biggest leases and largest active construction projects in the Chicago area by the end of Q2. The biggest lease deal from Q2 2021 was Lion Electric’s commitment to over 900,000 square feet in Joliet. The electric bus company announced its intentions to open a manufacturing facility in May, in which 745 jobs are expected to be created once it is up and running. The second largest lease from last quarter was by Kenco Logistics, which is taking roughly 850,000 square feet in Minooka.
The move by Lion Electric, along with the big lease deal by Tesla in Lockport, could signal that electric vehicle manufacturers are looking to secure good sites in the region as the industrial real estate boom sees more and more demand and competition for the best locations.
“There certainly seems to be a bit of a rush to secure locations in big metropolitan areas, but Rivian, and companies like that, haven’t made any money yet despite their market cap being crazy,” Senner says. “It’s a trend where we ask, is that something that will be here forever, or is it a gold rush and everyone thinks they need a foothold?”
Not to be outdone, Amazon has kept up the pace of its industrial leasing in the region, taking a combined 1.13 million square feet just in the second quarter alone. The leases were for a 629,000-square-foot deal in Huntley and a 501,000-square-foot space in Waukegan. Rounding out the top five lease deals of Q2 is paper and packaging company Veritiv with its 482,000-square-foot transaction in Aurora.
With demand so high and contractors constructing space at a feverish pace, there is still much more to come in the coming quarters. According to the report, the largest under-construction project is a massive 1.29 million square-foot facility for Scott’s Miracle Gro out in Channahon. Wayfair’s 1.2 million square-foot space being built in Romeoville is the second largest facility under construction at the moment.
Other 1+ million square-foot facilities in the works across the region are being built for companies such as Proctor & Gamble, ULINE and Target. Even candy maker Haribo is getting in on the industrial boom by building a facility in Pleasant Prairie to distribute its beloved gummies.
This article also appears in the September 2021 issue of Chicago Industrial Properties.
