Industrial remains the “it” sector of commercial real estate, and though there has been a pullback in sales activity as demand patterns continue to shift, experts’ concerns stem primarily from overwhelming demand, not a lack of it.
Chicagoland is experiencing a shortage of available product for sale, and the demand for space, especially from distribution-related companies, is high. While there is slightly more product on the leasing side, it’s still limited, particularly taking into account the specific needs of each user.
Brown Commercial Group is witnessing especially high demand in O’Hare and DuPage due to their proximity to transportation routes and comparatively lower taxes, yet this is not new, and Broker Candace Scurto said clients are having to get creative by either compromising on location or finding ways to optimize their current space until a suitable property becomes available.
Small- and medium-sized users in Southeast Wisconsin are facing a similar issue.
In the years leading up to and after the pandemic, space scarcity became prevalent across all submarkets, leading to an increase in spec development, which has continued in recent years. Despite over 10 million square feet of industrial development in the region since 2020, with an additional four million square feet underway, the market has primarily focused on large warehouse spaces, creating a void for smaller users.
DarwinPW Realty/CORFAC International Vice President Dan Prendergast said that buildings under 150,000 square feet are not presently being constructed, leaving those seeking spaces under 50,000 square feet with limited options and/or the inability to enter the market.
Despite the increase in vacancy rates driven by new developments in Southeast Wisconsin, there is still available land for future development, though appropriately-zoned sites along I-94 are becoming scarce. That said, there is enough supply in the market to last well into 2024, and Prendergast said some developers are presently waiting for the current product to be absorbed before going vertical with new spec in the market.
And as far as capital that’s already been deployed, developers are still booked and busy with the 10 spec projects expected to be delivered by the end of the year.
Over the last four to five years, Darwin has developed and sold a 120-acre business park between Hwy 50 and Hwy K in Kenosha, Wisconsin, in a total of five different sales. Old Dominion Freight Lines was the original anchor, having built a 25-acre freight transfer facility. Another company bought a 27-acre piece of land for a 600,000-square-foot manufacturing facility that will break ground this year, and Opus Development Group bought a 15-acre site for a 280,000-square-foot single-load building sold to Pritzker Realty Group, which is being marketed for lease now.
Prendergast also represents a private investment group that purchased an eight-building, 277,000-square-foot portfolio from Zilber Property Group with about 48 tenants, varying from 2,500 to 25,000 square feet. That portfolio is 100% occupied and rents are increasing, further exemplifying the demand for, and subsequent lack of, product—for users of that size range.
The demand for industrial development has also laid the groundwork for other sectors to follow suit as the surrounding regions continue to grow due to the labor needed to operate big-box facilities.
“We’re seeing more multifamily buildings entering the market in the region,” Prendergast said, “and I do believe it is driven by the larger industrial development. Employers in the region are paying desirable wages, and because people prefer the convenience of a ‘live, work, play’ environment, multifamily and retail projects in the region should only grow in demand.”
So what can be expected from the second half of the year?
Interest rates haven’t had a significant effect on buyers close to Chicago, as there’s still a lot of cash deals occurring, and Scurto doesn’t anticipate any major change in market conditions in the next six months. Until there’s more product, the market will continue to face the same supply/demand issues.
As for Southeast Wisconsin, Prendergast said we’ll have to wait and see. The appetite in the region has grown tremendously, but during a slowdown in the economy, markets just outside the “core” are more susceptible to consequences, as developers may opt for “safer” and historically more established markets near Chicago or Milwaukee.