It’s well-trod ground but worth repeating: the pandemic led to an uptick in online shopping, which in turn led to demand for large, Class A warehouses. The Chicago market has a strong supply of speculative spaces that fit that very need. The question is, do spec leasing and development activity track with this new demand?
“We’ve seen a decent amount of growth, just in 2020, and a general appetite for well-located sites to put up spec industrial buildings,” said Jack Brennan, vice president – industrial services, NAI Hiffman. “It’s interesting to see where the demand is for a lot of those sites.”
There’s still a heavy push for infill sites in and around the city of Chicago. The metro’s largest infill industrial submarket, O’Hare, recorded 826,576 square feet of net absorption in the fourth quarter, according to NAI Hiffman data—though that was picking up lost ground as the total absorption for all of 2020 in O’Hare was less than half of that at 405,687 square feet.
The large, speculative-heavy submarkets on the edge of the Chicago metro were the real winners. Southeast Wisconsin and the I-80 corridor each recorded 616,639 and 1,744,279 square feet, respectively, in the fourth quarter. Those two submarkets absorbed the most square footage on the year, with Southeast Wisconsin recording 2.17 million square feet in 2020 and I-80 securing 5.12 million square feet.
Oddly, Chicago’s other major spec submarket, the I-55 corridor, performed miserably last year. According to NAI Hiffman data, the area suffered the loss of -1,289,121 square feet in the fourth quarter, recording -918,804 square feet of negative absorption on the year.
“The I-55 corridor has historically been one of the top submarkets, not only in Chicagoland but in the region,” said Brennan. “I think that pricing there has gone up, both for pad sites and leases, as we are starting to see a scarcity of land.”
In I-80, there are still large chunks of land that developers have acquired and continue to acquire for big box projects. All else being equal—a healthy labor force, interstate access, distance to Chicago—the I-80 corridor is simply pricing out I-55 due to availability.
The I-55 corridor had the area’s highest vacancy rate at the end of the year, according to NAI Hiffman figures, with 10.14 percent—far ahead of the 5.46 percent average for the market. Southwest Cook County, Northwest Indiana, South Cook County and Southeast Wisconsin proved to be the tightest submarkets with vacancies of 1.48, 3.53, 3.60 and 3.69 percent, respectively.
NAI Hiffman tracked 286 spec industrial developments that have gone up in the Chicago market between 2015 and the third quarter of 2020. These projects accounted for nearly 83 million square feet of new space, three-quarters of which were developed by 20 development firms. Three companies—Bridge Development Partners, Panattoni and CenterPoint Properties—were responsible for a quarter of all new spec space during that span.
So how are these spec specialists reacting to the new world that COVID-19 had brought upon us? They, like everyone, took a pause last April and into May. But it was a brief one, as the e-commerce-fueled demand for logistics space had never been hotter.
“The institutional desire to take well-located sites has only gone up,” said Brennan. “I think there’s a lot of new capital coming in on the capital markets side as well which is driving the appetite for a lot of these developers to build and flip or even build and be long-term holders.”
Despite these demand drivers, Brennan feels that many developers are still haunted by the crash of 2008-09. While this is a much different scenario—one that in fact has been a boon to the industrial sector—he feels that new developments will tilt up on a case-by-case basis where location, labor and other fundamentals are aligned for success. Everyone wants to strike during a profitable climate, but no one wants to bring an imbalance to what has proven to be a healthy supply and demand pace.
Amazon has been one of the few winners during the pandemic, what with the renewed fervor for online shopping, and in turn they have been a major player in spec industrial space. But they are by no means responsible for all spec absorption. The Chicago marketplace has proven to be very diversified, with omnichannel retailers like Target snapping up industrial space, as well as companies like GM and Abbott Labs.