Following a record positive absorption in 2016, about 2.72 million square feet of industrial space was positively absorbed in 2017, according to a report from Transwestern.
The Chicago industrial market expands as construction completions have delivered over 18.4 million square feet to the market in 2016 alone. An additional 10.8 million square feet has been delivered in the first half of 2017. Currently in Q2, there is over 17.5 million square feet of inventory under construction,
So far, market fundamentals can support this expansion as vacancy remains tight at 6.2 percent. according to Transwestern. Total net absorption was positive in Q2 with over 2.7 million square feet occupied. Vacancy did tip up from 6.1 percent last quarter due to new constructions that delivered with the majority of buildings not reaching full occupancy.
Rental rates average at the highest ever recorded in the market at $5.55 per square foot and even with this, activity remains high, the report said. The Chicago area still benefits from the e-commerce business model and the surge of distribution centers, intermodal transportation companies and all other supportive business wanting to have a presence in the marketplace.
The expansion isn’t expected to go on forever, but the trend won’t start decreasing until after 2017, according to Transwestern. Rental rates will continue to increase slowly as developers are delivering Class A warehouses which keeps averages higher.
As for the economy, the US Bureau of Labor Statistics adjusted its figures so Chicago area unemployment was at 4.1 percent in May 2017, down from 5.1 percent in February 2017. In reality, the numbers have not been that dramatic, according to the Transwestern report. Illinois state and local taxes rise while budget constraints continue to be a hold over the average tax payer and business owner in Illinois. However, improvements on the city’s transportation hub and city amenities have made the region a top place to do business particularly for industrial distribution.
Overall, the industrial sector continues to grow with activity and investment fundamentals. Leasing may only see a slowdown in 2018 when a significant number of new constructions will complete and hit the market. If coupled with the cost of capital increasing, it may slow down any new construction expansion in the region as land prices continue to increase. This could further tighten the vacancy in the industrial market which would be good for existing building owners.
The only discouraging aspect would be a major tech or economic disruption, according the report.. Since Chicago has benefited from the Amazon influence, the only downturn would be a complete reshuffling of how consumers shop. Since all retail reports project at least an 8 percent growth in online sales, its highly unlikely demand will decrease. As Chicago improves transportation and retailers expand their online distribution footprint, the area’s industrial market will grow despite any economic factors.