Industrial in Chicagoland continues to break records. That’s the bottom line. And the boom is not expected to halt any time soon. Despite challenging economic factors that continue to rock the boat, market professionals remain optimistic as increasing demand spurs continued construction.
Infill demand, especially near major population hubs, seems to be leading the way. Intercity infill is believed to continue, and experts are expecting robust growth in submarkets along I-55 and I-80, which has languished in past years, and in those toward Chicago along I-290 like Bellwood and Bridgeview.
One submarket, though, seems to be the best barometer of market health—and it shouldn’t come as a surprise: O’Hare. It’s also the most attractive for users, and therefore, where many companies continue to focus their efforts. But O’Hare is land constrained and development sites are hard to come by, partly due to the rapid growth of e-commerce.
E-commerce is not only driving infill, but it’s often dictating building configuration, as well. Multistory industrial is beginning to crop up in both dense and less dense areas because of efficiency, and most of these uses are e-commerce related.
But not all current users are related to e-commerce. Amazon has remained a big name in warehousing for the past few years, but Cook County maintains a diverse mix of tenants, according to Nick Siegel, Partner, Acquisitions at Bridge Industrial. In fact, Bridge in Chicago completed more than 10 leases in 2021—Amazon was just one of the 10.
“Amazon is still providing a boom to the industry,” Siegel explains, “and there are many indirect benefits of the growth of e-commerce, but not every one of our tenants is e-commerce related. We’ve worked with Visual Pak that specializes in food and chemical packaging; Duravant is a manufacturing company we did a lease with near O’Hare. There is a lot of e-commerce happening, but it’s a diverse market in terms of tenant use.”
And Chicagoland is particularly attractive to end users. To start, O’Hare is one of the biggest airports in the U.S., and one of the most active submarkets. There is also an extensive base of manufacturing companies and skilled blue-collar labor around Chicago that is hard to replicate.
“Users will always be in Chicago because of the workforces,” Siegel explains. “Chicago is a hub. Young people want to live in the city, and there’s a lot of business to be done across the market.”
This begs the question. What kind of business? What types of properties are most in demand? Industrial buildings serve almost like a blank slate, and the shell of the building can be catered to any type of user. These buildings are adaptable to the rest of the market.
And build-to-suit versus spec? Not lot of build-to-suits are being built. Because of the low vacancy rate, spec buildings are preleasing.
“When you build infill buildings in great locations, you end up preleasing them,” Siegel said. “You’re almost doing a ‘spec-to-suit’ where users can partner with us early on to modify the spec building to suit their needs.”
Erik Foster, Capital Markets Leader at Avison Young, will tell you the same thing.
“Build-to-suit and spec are almost one in the same now,” Foster says. “Developers are trying to build as much as they can, and as they begin their spec projects, tenants come by and lease the building before it’s completed. We’re seeing that in Chicago and across the country.”
Optimism, though, is not met without uncertainty. Effects of COVID-19 are still being felt, and labor shortages, rising inflation and supply chain backlogs are sparking a slew of questions that remain largely unanswered.
Supply chain issues are especially concerning, as is inflation, which affects commodity and materials pricing. Buildings cost more to build, and therefore are priced at a higher rental rate. But new creative strategies are being implemented in an attempt to overcome these economic obstacles. This comes with a mindset shift.
“Most industrial space users have been operating under a ‘just in time’ inventory mindset,” Foster explains. “This strategy typically keeps the inventory levels of goods within industrial buildings low in order to mitigate unnecessary space usage and cost, but many are re-thinking that approach. Users are now considering a ‘just in case’ strategy in order to combat any unforeseen product inventory shortages as were experienced during the pandemic. This can cause the levels of inventory of product within industrial buildings to rise, and therefore, so will space requirements by users as they will need to store greater amounts of product.”
The market is demanding construction, and it’s unlikely that the continued global macro uncertainties will mitigate or accelerate the pace of industrial construction pricing of commodities or assets to be built for industrial buildings.
Vacancy rates are low, infill product is in high demand, and companies like Bridge Industrial and Avison Young are continuing to see rent growth and tenant activity. Market leaders will continue to keep a watchful eye, but the second half of this year looks just as bright for Chicagoland.
