Chicago’s O’Hare submarket recorded a rising vacancy rate in Q3 2020, both quarter-over-quarter and year-over-year. However, this is but a momentary blip in a juggernaut submarket—one of the most stable in the nation.
According to Colliers International data, O’Hare’s vacancy rate for the third quarter stood at 4.95 percent, the highest rate recorded in the past five years. That’s a slight uptick from the 4.84 percent of the previous quarter and a 143-basis-point increase over the Q3 2019 vacancy rate of 3.52 percent.
The industrial sector is surging right now as accelerated e-commerce usage has created demand for logistical warehouses. With an inventory of over 140 million square feet—the largest in the Chicago MSA—O’Hare has plenty of space to offer. So what’s behind these underperforming metrics? Namely, new speculative construction deliveries.
In 2017, the O’Hare submarket saw a little over 250,000 square feet of new supply, nearly all of it build to suit. That trend reversed course in 2018 with more than 745,000 square feet coming to market and even further with an additional 1.1 million square feet in 2019. Every last square foot of this new space was speculative.
This development activity has continued this year. So far, 2020 has already eclipsed last year’s deliveries with over 1.6 million square feet of new supply; of that, more than 1.3 million square feet is spec space. Bridge Development Partners completed the largest new delivery of the quarter with Bridge Point Itasca. This three-building spec project totals 741,162 square feet and benefits from DuPage County taxes, as well as access to four interstates within five miles or less.
Among the active construction projects in the O’Hare area, the largest is actually a build-to-suit property—a 317,600-square-foot warehouse on Bryn Mawr Avenue in Wood Dale, Illinois—that Transwestern is developing for logistics firm Nippon Express. Otherwise, all other projects now underway are spec. Seefried Industrial Properties has two adjacent projects under construction at 202 and 222 E. Devon Avenue in Elk Grove Village, Illinois that will bring a combined 162,342 square feet to market. Panattoni is also developing a 164,125-square-foot spec warehouse on Sherwin Avenue in Des Plaines, Illinois.
Despite all this new supply, the submarket’s absorption seems to have turned the corner. The net absorption in Q3 2020 was 548,944 square feet, a massive improvement from the -318,381 square feet of Q2 and coming on the heels of three straight quarters of negative absorption. In fact, this third quarter rebound was the area’s best absorption in the past three years.
Among the recent notable transactions, Duravant, an automation and engineered equipment company, took 241,888 square feet at 700 N. Wood Dale Road, Wood Dale in a new lease. Des Plaines landed two new tenants: Ceva Logistics and Soluble Packaging, which each took 228,603 and 100,306 square feet, respectively. In total, there were 19 new leases and lease expansions this past quarter in O’Hare, amounting to 1.3 million square feet—the largest total new leasing volume since Q4 2014.
Investor activity this quarter has shown that there is still capital available to scoop up small, infill industrial properties of which O’Hare has plenty. Venture One Real Estate purchased three Bensenville, Illinois assets totaling 71,679 square feet as part of a four-property portfolio acquisition. Three Elk Grove Village assets ranging in size from 22,000 to 40,000 square feet were sold by their users in separate deals—some to institutional investors and some to new users.
Looking ahead, an elevating vacancy rate around O’Hare shouldn’t be a cause for concern. It’s still one of the tightest submarkets in the Chicago metro and 4.95 percent is a far cry from the 12.31 percent summit in 2010 that the area has had to climb down from. Just as O’Hare saw the least turbulence and the quickest recovery following the Great Recession, events will likely unfold in much the same way as the markets respond to the 2020 pandemic.