The Elgin I-90 Corridor third quarter vacancy rate measured 10%, with a positive amount of net absorption totaling 386,267 square feet, according to Newmark Grubb Knight Frank’s (NGKF) I-90 Elgin Report.
“We definitely had positive absorption,” said Adam Marshall, managing director at NGKF. “We also had a couple of new speculative projects delivered the first three quarters of this year. We had Conor Commercial’s 340,000 square feet on Galvin Drive, and the Bridge Development building on Alft Lane—that was 225,000 square feet.”
He continued, “Then David Huang, a private investor who owns World Richman Manufacturing Corp., also announced a spec that was completed here, but he ended up pre-leasing 108,000 square feet. So we’ve seen some very good leasing velocity with the new construction that’s coming back from the Elgin market.”
According to Marshall, the interesting thing too is that NGKF has seen a lot of good absorption with the larger spaces in the corridor.
“What really was kind of slow in the market was the smaller spaces, probably under 30,000 square feet, we’re really starting to see some good activity there with that size range too.”
NGKF’s report showed that the velocity of larger building sales over 100,000 square feet increased notably with four of the six sales this year taking place in the third quarter. Additionally, the report noted the pending Plymouth REIT acquisition of two Elgin buildings—within a larger portfolio—from Venture One totaling 216,000 square feet should continue this trend in the fourth quarter.
“The six-building Plymouth REIT acquisition from Venture One in October included two Class B, fully leased assets in Elgin. We are beginning to see a resurgence of these types of investment class assets trade in the market, which are typically defined by lower ceiling height, older buildings.”
Since the recession, according to Marshall, a lot of investors wanted to chase high quality, Class A distribution type product in core markets—which is why NGKF hasn’t seen a lot of investment sale activity in Class B type properties.
“In the last quarter of 2013, DCT Industrial purchased a six-building portfolio in Elgin totaling 1,068,049 square feet from Hamilton Partners with considerable vacancy,” he said. “DCT has invested additional capital into improving these buildings and has achieved success in leasing some of the vacancy over the past 12 months. Both transactions were roughly valued around the $50 psf mark, which is an encouraging sign of investors taking more risk in the market.”
NGKF’s report also noted that the limited supply of Class A distribution space in certain sizes will promote continued speculative development.
“The Elgin area has seen 1,145,100 square feet of new, Class A distribution space delivered to the market since 2012,” Marshall said. “Leasing activity has been strong and with healthy rates. We are now witnessing a few developers putting half-leased speculative facilities on the market for sale, including projects by Bridge Development (225,205 SF) and Conor Commercial (342,620 SF), which were both completed within the past 12 months.”
“It will be interesting to see how the investment market valuates new construction with vacancy,” he continued. “I think these assets will trade successfully in the coming months, and at higher values than most people expected, which should continue the speculative development trend in this market.”
So what are Marshall’s expectations for 2015? “We’re going to see some projects under construction,” he said. “We’re going to see a continuance of new projects being announced. We’ve got a couple of build-to-suits going on in Elgin right now. Opus has a 100,000 square foot that they have under letter of intent.”
“They’re also doing a 50,000 square foot building for King Shaun in their West Dundee Park,” he continued. “So again, with Class A type space, with lower vacancy—particularly in certain size segments—we’re going to see a continuance of new construction, and I think speculative as well.”
“I think the I-90 Corridor is a great institutional market that still has room for growth,” he added. “And I think we’ll continue to see it establishing itself as an institutional market and garnering institutional attention the further it develops.”