Too many tenants, too little space.
The unprecedented demand for Chicago’s Class-A space has sparked a frenzy. Space is being leased as fast as it’s advertised, causing a trickle-down effect to Class-B and C, according to Marcus & Millichap.
Why? Increased needs of e-commerce companies and other businesses looking to expand their space to store and ship supply, mostly.
While the issue isn’t specific to the Midwest, Chicagoland seems to be feeling a brunt of it for many reasons. We spoke with Senior Associate Tyler Sharp about the metro’s booming demand.
What are some of the reasons behind the demand for new warehouses?
Tyler Sharp: What we’ve seen is due to the shift in e-commerce and companies needing to be in larger metros. If you look around Greater Chicago, you see a lot of growth around I-55 and I-88 near Aurora. As Baby Boomers continue to get older, you’re seeing more and more of our generation buy things online, and you need warehousing for that.
The second reason has to do with the supply chain. We’ve seen people look at leasing shorter term space to bring in more inventory because it’s hard to get. The lead times are extremely long. If they have enough cash on hand to bring in more inventory, they can do it at a lower cost and cut down on lead times.
Is the Midwest in demand because of its central location?
Sharp: That would be my reasoning. It has to do with transportation. Chicago is No. 1 in the U.S. in rail tonnage, which has been a very desirable alternative to OTR shipping. With transportation and gas costs rising, shipping by rail has become an option for companies. You see a lot of that growth in the Midwest because of its good access, central location, and alternative modes of transportation—air, rail and water. In cities not quite as large as Chicago, like St. Louis and Kansas City, we’re seeing a lot of growth for similar reasons.
When tenants are looking at new warehouse space, what kind of amenities are they looking for?
Sharp: Clear height is a big one. Class-A is typically going to be 28-foot clear heights and up. Class-B is in the low-20s. That’s a big drawback for some tenants because they don’t have the ability to stack. Others are ease of access, location, turnaround radius and extra acreage for parking. Outside storage is in very high demand as well, and that comes with the shift of trying to bring in more inventory.
Do you think the boost in e-commerce that occurred during the pandemic, and which gave yet another boost to the industrial market, will continue as COVID-19 cases continue to fall and life returns to a more normal state?
Sharp: It will. I think you’ll see a steady increase. The older generations used to go grocery shopping, but during the pandemic they bought online, and a lot of times, they’re still buying online for ease of purchase. And that’s what the younger generation has come to know. You’ll have experiential buying, but for the most part, your large, bulk product will still be supplied and purchased through e-commerce, and you see that continue the demand for industrial.
Is this increased demand for warehouse space causing any challenges for companies looking for warehouse space?
Sharp: Yes. If you’re looking at building a new development in a colder climate city, you must have insulated concrete panels to build, but there are supply shortages. There are three main producers of these panels in Chicago, and they’re all backlogged by what developers have been quoted 16 months. A lot of tenants can’t wait that long to move into buildings, so we’ve seen an uptick in Class-B and C product.
On the investment and sales side, a lot of our investors are willing to now move away from Class-A product and invest in Class-B and C because they’re seeing rent growth in those properties. Maybe not quite as much as you would in a Class-A, but still significant rent growth. That’s a trend you’ll continue to see until the economics of supply and demand works itself out. There’s probably a two-to-three-year window until there’s enough supply of industrial space to meet the demand. That’s also led to rent increase. If tenants wanted to leave right now, there’s nowhere for them to go. It’s really a landlord’s market.
Are we seeing a lot of speculative warehouse construction today across the country?
Sharp: Yes. You’re seeing it in not only major primary markets across the country, but even secondary markets. And there’s so much new capital in the market chasing that. The demand for investment properties is way outweighing the supply, and in industrial specifically, we’ve seen that come from various sources. A lot of people are trying to get into the industry, and a lot of the deals we’ve sold have been a mix of traditional industrial investors, new capital sources and other non-industrial groups new to the industry. As you continue to see that, the demand for industrial will continue up. The demand is outpacing inflation, and you’ll continue to see that, not only from tenants, but also from investors.
