The metro Chicago industrial market will likely experience steady improvement in the second half of the year, although rising economic uncertainty suggests caution, according to a second quarter metro Chicago industrial market report by Delta Associates, the research affiliate of Transwestern.
The industrial market experienced a healthy second quarter, with 2.5 million square feet of absorption and overall vacancy declining 30 basis points to 10.1 percent, according to the report by Delta Associates. Year-to-date absorption now stands at 7.6 million square feet. The amount of available sublease space decreased by 567,000 square feet in the second quarter of 2012. There is currently 4.5 million square feet of sublease space on the market – just 0.4 percent of the standing inventory.
“Obviously, anybody in the market right now wants the best building at the lowest price. I think we’re running out of the best buildings,” said Thomas Boyle, principal at Newmark Knight Frank Epic. “I think there’s going to have to be some greater price capitulation on Class B and C buildings in order to encourage those companies to accept inferior buildings. People are now out looking at land again for industrial development. I think that’s something that was probably unforeseen earlier in the year. Basically, we’re running out of Class A industrial product in many of the larger submarkets.”
The overall industrial vacancy rate in metro Chicago declined to 10.1 percent in the second quarter of 2012, from 10.4 percent at Q1 2012 and 11.2 percent a year ago, according to the Delta Associates report. The direct vacancy rate declined to 9.7 percent in the second quarter of 2012, from 9.9 percent at Q1 2012 and 10.8 percent a year ago.
“Class A vacancy rates are dropping in the core submarkets in Chicago, so that’s going to create some interesting dynamics in the fourth quarter,” Boyle said. “If the demand trend continues, we’re going to see a larger amount of speculative development. Right now we’re seeing isolated spec development in specific markets.”
The Delta Associates report notes that industrial projects under construction totaled 2.6 million square feet in the second quarter of 2012, up from 1.1 million in the first quarter. Space under construction at June 2012 is 71 percent pre-leased. As signified by strong pre-leasing activity, build-to-suit spaces are especially popular as larger tenant-specific requirements are not met by current inventory. There is still available inventory for requirements less than 200,000 square feet. Four warehouse/distribution buildings, totaling 473,000 square feet, were delivered in the second quarter of 2012, at 79 percent leased upon delivery.
“Of 100,000 square feet and larger, we’re tracking about 15 million square feet worth of requirements in Chicago,” said Keith Stauber, regional managing director of Jones Lang LaSalle’s Midwest Industrial Services Team. “If the majority of that materializes, I think it’s going to be a very strong second half. It remains to be seen if that’s going to get done or not, but you need to start somewhere. The companies out there investigating opportunities is an encouraging sign that we’re heading in the right direction.”
Meanwhile, asking rents for industrial space have edged up approximately 1 percent in the first half of 2012. Rents likely will gain further traction in the period ahead, as demand continues to outpace supply. The Delta Associates report also recorded industrial investment sales of $246 million in metro Chicago during the second quarter of 2012, compared to $172 million in Q1 2012 and $1.5 billion in all of 2011. Sales prices have averaged $47 per square foot in the first half of 2012, compared to $49 per square foot in 2011.
“One of the areas that we’re encouraged by is the amount of big box vacancy,” Stauber said. “It continues to shrink. There are really just a handful of buildings of 500,000 square feet and larger that are in the marketplace. The others have been absorbed.”
Stauber said one area that has been a little sluggish is leasing volume.
“While the volume of leasing hasn’t been quite what we’d like, it’s kept on pace from a year prior,” he said. “We were hoping to have a little more accelerated leasing volume.”
He noted, however, that increased user activity in the marketplace is an encouraging sign.
“Companies are actually out touring spaces and soliciting RFPs,” he said.
Chicago economy experiences modest growth
The metro Chicago economy expanded at a modest pace during the spring, with employment growth at 35,300 jobs – a 0.8 percent increase – over the 12 months ending April 2012, according to the Delta Associates report. National employment increased 1.3 percent in this period. The professional/business services, leisure and hospitality, and education/health sectors led the way in Chicago, while the construction, trade/transportation and government sectors shed jobs. The metro Chicago unemployment rate decreased to 8.9 percent in April 2012, from 9.4 percent one year prior. The national unemployment rate dropped to 8.1 percent in April 2012, from 9 percent one year prior; it increased to 8.2 percent in May 2012.
According to Delta Associates, the metro Chicago manufacturing sector, the region’s second-largest core industry, added 6,300 jobs – a 1.5 percent increase – over the 12-month period ending April 2012. Furthermore, the Chicago Purchasing Managers Index, an indicator of the economic health of the manufacturing sector, remained in positive territory for the 32nd straight month, at 52.7 in May.
The Delta Associates report predicts market fundamentals will likely continue to improve, with vacancy declining and rents gaining traction. However, if international turmoil and slower growth hold sway, then Chicago’s industrial market will feel the effects, with much slower growth unfolding in the near-term.
“I would like to think that we will continue to see some signs of improvement, but it’s hard to predict anything in this country these days or even globally from a financial perspective,” said Randy Podolsky, managing principal at Podolsky Northstar CORFAC International. “With that said, I think that there is some pent-up demand. There’s capital available, machinery orders are up and most companies pretty much cut all of their excess space. So I think that the activity over the next three to six quarters will continue to show some signs of improvement.”
Stauber said companies need confidence and certainty, adding that the European economic situation has been very unsettling to many corporations.
“More directly here at home, we need to see the consumer have confidence to go out and continue their shopping by making significant purchases,” he said.