by, Elise Couston, SIOR, Sr. Managing Director at Newmark Grubb Knight Frank
As we head into the final month of 2014, it is significant to note that this has been a strong year for industrial real estate. There has been a continuing increase in demand by users and investors, driven primarily by growth in the GDP, albeit moderate growth. According to recent reports, the actual GDP growth in 2014 (YTD) has been 2.8%, which is up from 1.8% in 2013.
Energy, food and beverage, automotive and manufacturing sectors, as well as the transportation industry have been highlights in the industrial sector. According to a recent NAIOP report, the manufacturing sector alone is projected to require approximately 10.2 billion square feet of industrial space by the year 2020.
Consumer online habits impact real estate decisions One of the fastest growing trends in the industrial real estate sector is the increase of online consumer sales, and expected faster delivery. U.S. online retail sales are anticipated to reach approximately $290 billion in 2014, with an estimated increase to $415 billion by 2018. The impact is that companies must locate their warehouses closer to the customer base to achieve both faster delivery times and cheaper transportation costs. Many retailers have been executing an “omnichannel” strategy to make it easier for customers to get products, whether they are shopping in stores, online or through an app. It is anticipated that this trend will continue going forward.
New construction New “spec” construction has also increased dramatically in 2014 to a six year high. Based on NGKF statistics, at the end of Q3 there were 22 new spec buildings under construction totaling 7.2 million square feet. In comparison, at the end of Q3 of 2013, there were 12 new spec buildings under construction totaling 2.8 million square feet. The majority of new construction this year has occurred in the I-55 and I-80 submarkets with 11 buildings totaling 4.3 million square feet. The balance of buildings were built in the far north market (4), the O’Hare market (3), and the I-88 Corridor (2).
New build-to-suit projects have also increased, as users are demanding more energy efficient facilities that include features that maximize the productivity of their operations, such as higher clear heights for material handling systems and larger bay sizes for future flexibility.
Absorption Net absorption at the end of the third quarter of this year totaled 2.2 million square feet. Average asking Net rental rates increased by $0.15/SF over Q3 2013. We believe that this demand for industrial space will continue, as metro-Chicago is home to the third largest intermodal center in the world and is the largest inland port in the United States. Investment sales The velocity of sale transactions to investors looking for industrial properties has also increased during 2014. The demand for Class A industrial properties has driven cap rates down over the last 12 months, and portfolio sales have increased.
Cap rates are tightening for all industrial segments, and warehouse properties have experienced the largest gains. Warehouse property cap rates have averaged 7.2 percent nationally in the first half of 2014, and the top properties in major markets have traded at yields under 6 percent. Lenders are actively lending on industrial properties, although underwriting remains relatively conservative. Long-term rates on industrial properties have averaged 4.5% to 5.5%, with an average leverage of 70%. Some of the notable transactions that have closed during 2014 include:
• Ikea – 849,691 SF in Minooka – 39 month Lease
• Solo Cup – 820,000 in Chicago – Purchase by Tenant
• Ferrara Pan Candy – 747,152 SF in Bolingbrook – 15 year Lease
• Midwest Warehouse – 650,494 SF in Bolingbrook – 6 year Lease
• Advertising Resources – 446,479 SF in Minooka – 10-1/2 year Lease
• Orbus – 347,400 SF in Woodridge – 10 year Lease and Investment Sale
• Follett – 311,608 SF in Woodridge – 6 year Lease and Investment Sale
• Star Thermoplastics – 293,750 SF in Broadview – Purchase by Tenant
• Iron Mountain – 223,628 in Hanover Park – Purchase
Strong outlook The consensus in the marketplace is that 2015 will continue to be a strong year for industrial real estate, with rental rates and absorption continuing to increase. Many investors are having trouble finding properties to purchase in the Chicago market, a trend which is anticipated to continue going forward into 2015. Investors are seeking relative stability and diversity to enhance existing portfolios, which has increased the demand for industrial assets. All of this bodes well for the industrial market in the Chicago region.
Wishing all of our readers a happy and healthy Holiday Season, and prosperous New Year!