Entering the new year, the Chicago industrial market was following a tremendous trajectory, continuously rising despite a record-long cycle. While COVID-19 has introduced enough uncertainty to possibly knock it off course, the asset class is proving to be sturdy despite new challenges.
First quarter research compiled by Avison Young shows the market humming along until mid-March, when the effects of the pandemic were first felt in the Chicago area. However, several indicators suggest that the robust development, leasing and capital markets activity that we saw at the end of 2019 aren’t that far out of reach.
For example, as much damage as the outbreak has caused the overall economy, logistics-related assets are proving to be even more indispensable than ever. E-commerce has shifted from a convenience to a necessity as so many brick-and-mortar shops adhere to shelter-in-place orders.
Grocery stores benefited from consumers stocking up on supplies, but they too were forced to quickly adapt their inventories and evaluate their logistics and supply chain operations as they pivot to accommodate a surge in online sales.
According to the Avison Young report, investment sales in the first quarter followed the track of escalating prices that previous quarters had laid down. The top sale last quarter was Amazon’s $50.5 million acquisition of 200 Old Chicago Drive in Bolingbrook, Illinois, equating to $267 per square foot. The online retail giant plans to construct a new facility on the 119-acre site.
“Investors are taking a close look at their portfolios and reevaluating short and long-term strategies to try to maximize their market positions and minimize their exposure,” said Erik Foster, principal and practice leader, industrial capital markets, Avison Young. “We expect to see a renewed focus on core markets as well as growth markets that have proven themselves over time. We’re also seeing investors look more closely at the tenant makeup to ensure that the underlying business fundamentals are solid.”
Data compiles by Real Capital Analytics shows the Chicago market tallying nearly $2 billion in industrial sales in Q1 2020, toeing the line of the previous two quarters—$2 billion in Q4 2019 and and $2.1 billion in Q3 2019. More than 560 properties changed hands across the metro over the last four quarters, totaling $6.8 billion in sales volume.
The pandemic has also created renewed demand for medical supplies and protective equipment. In light of the mass shortages of these essential supplies, a number of Chicago-area companies have adjusted their operations to produce fabric masks, hand sanitizer, protective shields and other medical supply and safety equipment.
Other industrial users, however, will have some hard realities to face in the coming months as an expected slowdown in the economy affects their businesses. Tenants, landlords and investors alike are going to have to carefully chart a course to navigate this challenging and complex situation.
“Tenants are facing many important decisions right now as they evaluate their operations, growth plans and ability to sustain their business during a slowdown,” said Steven Kohn, principal in Avison Young’s industrial services group. “Many tenants with upcoming lease expirations can benefit from ‘blend-and extend’ transactions that will allow them to remain in place during this time of uncertainty. Some landlords might be resistant to short-term extensions or terms that might leave a landlord with space to fill during an inopportune time in the market.”
Industrial vacancy remained fairly stable in the first quarter, inching up 70 bps from the previous quarter’s 6.6 percent rate. The I-55 corridor’s 8.7 percent rate was a 140-bps decrease, while at the other end of the spectrum, the I-88 corridor vacancy rate grew to 10.2 percent, a 330-bps increase.
The I-80 and I-55 corridors—the leaders in big box development among Chicago’s submarkets—had higher vacancy rates than most other areas, with 10.0 and 8.7 percent, respectively. This is well off the high-water mark that those submarkets experienced during the last market downturn when I-80 peaked at 21.8 percent in Q1 of 2009 and I-55 topped out at 15.3 percent in Q3 2009.
“It’s important to remember that this is not the same as 2008. Unlike the Great Recession, the industrial market was strong going into the pandemic and banks have exhibited significant discipline with lending,” said Adam Haefner, principal, industrial services. “We have a solid foundation and are hopeful that once we get past this initial jolt to the market, we can climb out of this and return to a more stable flow of business.”