It has now been two full quarters since the onset of COVID-19 in Chicago. The MSA’s unemployment topped out at more than 17 percent earlier this year but improved to 12.3 percent in the third quarter. But how are other metrics tracking, and what do they suggest about the area’s industrial market?
Digging into new data from Cushman & Wakefield, it is apparent that COVID-19 is having an effect on tenant needs and activity. The Chicago area’s vacant available sublease space rose by 50.8 percent year over year as users contract their footprints or, unfortunately, close shop. However, many of those businesses still operating during the pandemic are opting for stability as lease renewals saw an increase of 26.1 percent compared to this time last year.
So far this year, new leasing has totaled nearly 29 million square feet—a 6.4 percent increase from 2019. Most of this activity (13 million square feet) was in the first quarter, as last year’s bull market carried into the beginning of 2020. There were 9.4 million square feet of new leasing in the second quarter and 6.5 million square feet in Q3.
Just as they have in markets around the country, e-commerce users shored up demand for Chicago industrial space. In fact, the ever-growing prevalence of online shopping directly led to 34.8 percent of new industrial leasing through the third quarter, according to Cushman & Wakefield.
Though the Chicago vacancy rate hit a record low in 2019, it rose 50 basis points year-over-year in the third quarter to 5.6 percent. Net absorption also trended in the wrong direction, falling by 6.4 percent year-over-year to 9.4 million square feet.
Reduced demand due to COVID-19 can account for some of this vacancy, but supply is also a factor as spec projects wrap construction and several large, second-generation spaces hit the market. Activity varied submarket to submarket, however. The I-80 corridor, Southern DuPage and Western Cook County all recorded vacancy figures that dropped more than 100 basis points year over year.
The I-80 corridor led the quarter with three of the five largest leases. These include General Motors’ 1-million-square-foot deal at 1023 E. Laraway Road in Joliet, Illinois, Kenco Logistics’ 381,880-square-foot lease at 21530-21540 Frontage Road in Shorewood, Illinois and Expeditors International’s 251,598-square-foot deal, also in Joliet at 1200 Cherry Hill Road.
For industrial occupiers on the hunt for new space, an ever-growing need for customized space has led to an uptick in build-to-suit construction. More than 80 percent of the 6.2 million square feet of product now under construction in the I-80 corridor, for example, is build to suit.
In fact, build-to-suit development is climbing throughout the market. While overall completions were down in the third quarter year over year by 6.3 percent, the build-to-suit segment of that rose by 47.1 percent. Bespoke spaces have accounted for over 20 percent of all completions thus far this year and for 63.3 percent of spaces now under construction.
Overall, the pipeline for industrial space in the Chicago metro is outpacing last year. The inventory currently under construction stand at 20 million square feet, 13.8 percent higher than during Q3 2019. The average size of new buildings has also swelled, with under-construction projects averaging 466,114 square feet—a 52.2 percent year-over-year increase.
Investment activity is proving cautious as we get deeper into the year. In the third quarter of 2020, investors acquired 4.9 million square feet of Chicago-area industrial space; this is down 43.9 percent year over year and it’s more than 80 percent lower than the prior quarter.
The largest investment sale of the third quarter was CT Realty’s $98 million disposition of Interchange 55 Logistics Park in Romeoville, Illinois. Prologis purchased the two-building, 1,341,860-square-foot development for $73 per square foot.
Despite marketplace uncertainty, Chicago’s robust and stable industrial market should continue to be a draw for opportunistic investors. The events of this year have created prime buying conditions for some investors and for some assets, leading Cushman & Wakefield to forecast that user sales will increase over the coming quarters.
There are several large tenants still active in the market, therefore Cushman & Wakefield expects leasing activity to remain steady through the end of the year, with e-commerce, food and healthcare-related users driving demand.