Observers anticipate 2012 will continue to be a tenants’ market in the I-80 corridor as the result of a relatively high vacancy rate and low net effective rental rates.
According to J.D. Salazar, managing principal at Champion Realty Advisors LLC, there will be about 4 million square feet of gross absorption in the I-80 corridor this year, which is slightly more than last year’s total of 3.7 million square feet.
A year-end market report by Champion stated the class A vacancy rate in the I-80 corridor began 2011 at 20.07 percent and finished up 49 basis points at 20.59 percent. Although there was a decent amount of gross absorption in 2011, a substantial amount of existing space returned to the market, which caused the slight increase in vacancy. Salazar estimated the class A market size to be approximately 46 million square feet.
Jim Planey, principal with Lee and Associates, said the I-80 market should be measurably stronger than last year.
“We think the vacancy rate is going to fall because we’re seeing minimal if negligible new construction,” Planey said. “If the weather is good and a site is completely engineered and ready to go, it still takes seven or eight months to build a building.
“We don’t feel there’s going to be any noticeable new construction along I-80 and I-55 that will impact the vacancy rate. Therefore, whatever you lease is going to pull that vacancy down. We also don’t sense that there is an above average amount of tenants looking to vacate.”
Despite the slight increase in vacancy last year, Salazar said the future looks bright for the corridor this year.
“On the positive side, I’m tracking 3.5 million square feet of users in the I-80 corridor, which breaks down to an average space size of just a shade under 400,000 square feet,” he said. “If we only get half of those users, it’s going make a huge dent in the vacancy.”
Salazar said so far in the first quarter of this year there have been two significant transactions totaling 758,000 square feet. One of the transactions was a lease at a spec building owned by ING Clarion at 21288 Frontage Road in Shorewood. Wilton Industries of Woodridge leased the remaining vacant space in the building, which was 492,869 square feet.
The largest spec lease of 2011 was the 495,454-square-foot lease between Electrolux and Opus North at 801 Minooka Road in Minooka, according to Champion. The largest lease of the year occurred in University Park where Georgia Pacific leased the entire 696,540 square feet at 702 Commerce Center Drive.
Meanwhile, the largest building to sell was the 1,022,544-square-foot building at 21705 Mississippi St. in Elwood, according to Champion’s report. The building, located in the Deer Run Business Park (adjacent to the BNSF Intermodal) was purchased by Liberty Property Trust from MIRVAC for a reported $44,755,465 or $43.77 per square foot. Northern Builders sold two buildings (the 860,100-square-foot Navistar building and the 355,363-square-foot Smurfit building) in the Cherry Hill Business Park (New Lenox) to Heitman for a reported $67,500,000.
Leasing volume in the I-80 corridor peaked in the third quarter with 1.1 million square feet or 59 percent of the 1.9 million square feet leased in 2011, according to an industrial market overview by Colliers International. This is 2.1 million square feet less than the 2010 year-end total of four million square feet.
The report noted that two sizeable renewals were signed in 2011— Toys R Us extended its lease of 653,000 square feet at 2695 Plainfield Road in Joliet while DSC Logistics renewed 355,300 square feet at the CenterPoint Intermodal Center at 21705 Mississippi Road in Elwood. The third party logistics provider also expanded within the building and now occupies 566,800 square feet.
Sale activity in the I-80/Joliet corridor totaled only 243,048 square feet, far below 803,900 square feet sold in the market in 2010, according to the Colliers report. However, strong third quarter leasing volume contributed significantly to the year-end net absorption of positive 1.2 million square feet. This was slightly behind the 1.7 million square feet posted in 2010.
The I-80/Joliet corridor has achieved positive absorption for 11 consecutive years, the only submarket to make that claim in the same time period.
The Colliers report added that as they did in 2011, developers will continue to focus their efforts on pursuing build-to-suit projects rather than speculative development. The I-80/Joliet corridor will not see new big box speculative development for at least eight months. There will be a steady decrease in vacant big box supply and moderate upward pressure on rents for the I-80/Joliet corridor.
However, Salazar predicted that rent growth will be minimal in the I-80 corridor.
“The rents are still relatively depressed and there’s still enough competition that I don’t think you’re going to see much rent growth this year,” Salazar said. “For a 400,000-square-foot user, you’re still looking at a very aggressive, very pro-tenant market.”