Activity is generally improving in Chicago’s industrial real estate market, but the recovery is expected to be gradual, according to a recent survey by the Association of Industrial Real Estate Brokers (AIRE). The periodic survey of the associations’ 500 plus members showed that seven out of 10 thought improvement in activity by the end of the year would be only lackluster.
“We should see more absorption, but only nominal price increases,” said Terry O’Hara, a senior vice president with Lee & Associates.
Many tenants are no longer paralyzed by the market, which should spur more deals to be completed in 2011, said Adam Tarantur, a vice president with Podolsky Northstar CORFAC International.
Market activity has improved significantly in the last year, but “there’s a huge difference between interest and signing on the dotted line,” said Joe Bronson, a vice president with NAI Hiffman Associates. “It’s not going to be a breakthrough year.”
The critical component to any sustainable recovery is jobs, according to John Girsch, president of John F. Girsch & Company. “Job creation is critical to any market improvements,” he said.
According to the survey, the increase in demand likely will be driven by users that require 100,000 square feet of space or less. Survey results were almost evenly split between the 29.9 percent who think activity will center on users leasing less than 25,000 square feet and the 35.6 percent who think demand will stem from those who want between 25,000 and 100,000 square feet. Overall, pent up demand and companies needing to make a decision should help stabilize the market.
When asked about rental rates, 79.5 percent said rates will be flat or increase nominally by the end of the year. The vast majority – 46.2 percent – see rent growth as being flat. The other 33.3 percent expect rents to increase nominally, by as much as five percent.
“The activity will pick up, but the rates will remain flat as landlords continue to aggressively compete for the deals,” said Jeanne Rogers, an executive vice president and principal of Arthur J. Rogers & Co.
While rental rates are expected to improve by year end, they are contingent on occupancy rates getting above 92 percent. “It should take until at least the end of 2011 if not through most of 2012 to reach that level,” Bronson said.
According to published reports, first quarter vacancies in the suburban marketplace are more than 11.5 percent. A vacancy rate decline to between eight and nine percent will require absorption ranging from almost 35 million square feet to more than 47 million square feet.
On the sales side, 74.3 percent of the survey respondents think sales prices will remain flat or increase by as much as 5 percent. Of those, 34.6 percent say the increase will be nominal and up to 5 percent and 33.3 percent say sales prices will remain flat. The remaining 6.4 percent see prices increasing by more than 5 percent.
“Many companies still are not ready to commit to a purchase unless they are sure that it’s a great deal,” said Rogers. “They would rather lease than leave any money on the table.”
According to Rick Anesi with New London Associates, buyers need to know the stock market will hold and sellers need to continue to “get realistic” on their pricing.
The other respondents expect sales prices to decrease, with 20.6 percent saying the amount will be nominal and as much as 5 percent and 5.1 percent saying the decrease would be more than 5 percent.
Survey respondents also noted that the lackluster economy and the difficulty obtaining financing are continued obstacles to market growth. “For smaller users, incentives such as SBA financing programs will be valuable tools as we move forward,” said Thomas M. Boyle, a principal with Newmark Knight Frank Epic.
As the second quarter of 2011 gets underway, there are many signs of optimism. “An increase in leasing activity combined with an increase in showings, requests for proposals and letters of intent all lead me to think that 2011 is headed in the right direction,” said Rick Delisle, a principal with Lee & Associates.
Other observations from the survey included:
- “The Midwest has been negatively impacted more than other U.S. regions because of declines in the manufacturing sector. Many local companies cannot grow in the Chicago area,” said John Joyce, Newmark Knight Frank Epic.
- “Many small businesses will remain in their spaces on a short term basis and wait it out, avoiding a significant move until the economy stabilizes,” said Adam Tarantur, Podolsky Northstar CORFAC International.
- “There is still a dichotomy, with large deals in good submarkets significantly improving and continued malaise in the Class B and C sectors,” said Chris Gary, NAI Hiffman.