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Chicago Industrial Market Q2 2018 - Current Conditions, Trends, and Shortages

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The State of the Chicago Industrial Market

The Chicago industrial market remained very strong through the first half of 2018. Even though vacancy increased slightly and the market’s absorption was lower than usual (according to Newmark Knight Frank research), the asset class is still performing well. There are signs that the Industrial Market is nearing an end to its record-breaking pace. But Chicago is still on track for another record-breaking year.

Current Conditions for the Chicago Industrial Market

The modest rise in vacancy during this period can be attributed in part to the delivery of 2M of vacant spec space. But despite the slight increase in vacancy and significant drop in net absorption, availability is significantly lower which means some of the newly delivered space is being taken. As a result, rent rates have reached a new record high.

  • Rental rates continued to increase to a new record of $5.38/SF
  • Vacancy increased slightly with 10 basis points to 8.1%
  • Availability dropped by 4.8M SF indicates the newly delivered space is being taken
  • Net absorption dropped significantly to 4.1M SF from 7.1M this time last year

New Development

The I-80 Corridor continued to deliver for the Chicago Industrial Market the first half of 2018. Over 4.5 million SF of new construction was delivered including 3M SF in build-to-suit properties and 1.5M in vacant spec buildings.

The build-to-suit space was completed by:

  1. IKEA
  2. Costco and
  3. General Mills in Wilmington - the largest one at 1.5 million square feet

Two new spec properties were also delivered and remained vacant through the end of Q2: 

  1. A 1.2M SF logistics center in Joliet delivered by Ketone Partners The building features 118 exterior docks, 367 trailer positions, and 36-foot clear height
  2. In Tinley Park, Hillwood completed a 300,000-square-foot spec project this quarter at the Tinley Park Corporate Center.

This was a significant amount of space delivered for the I-80 Corridor. The inventory in this area went up by almost 20M SF in the last 5 years. Unless tenants commit to these spaces, the vacancy rate will continue to rise through the end of the year.

Space Shortage

There remains a shortage of cold storage facilities, mostly because the construction costs for these properties can be up to 4 times higher than for general industrial space.

There are about 5M SF of cold storage space available in the area with a vacancy rate of 5.3% which is significantly lower than the average. The rent rates range from $9.75 to $14 per square foot and current demand is for more than 850,000 SF of cold storage space.

Researchers at Newmark Knight Frank believe that tenants seeking cold storage facility space need to set aside enough time for what could be a lengthy search.

Major Transactions and Investment Sales

The Chicago industrial investment sales market showed no signs of decelerating through the first half of 2018. At the end of Q2 2018, the Chicago metro area has completed over  1.6 Billion in investment sales - a 27.6% increase from the same time last year.

Investment sales completed by end of Q2 amount to 1.6 billion which represents a 27% increase from this time last year. 

Duke Realty registered one of the largest individual property sales during this period. Yusen Logistics purchased 212,000 square feet for $24 million or $117 per square foot.

Also final during this period was Blackstone's acquisition of he Canyon Industrial Portfolio. This portfolio consists of 146 buildings - last-mile, warehouses, and distribution centers. Tenants in the portfolio include Amazon, FedEx, Coca-Cola, and Fiat. The transaction completed at $1.8 Billion and included 4.1M SF in Chicago.

Other select sales during this period of 2018 include:

Most notable lease transactions during this quarter:

  • In the largest lease of the quarter Kellogg's company renewed its lease for more than 1M SF in Minooka for 10 years. The food manufacturer will also expand into an additional 500,000-square-foot building that Prologis is building across the street.
  • Home Depot agreed to lease all 588,000 SF in Northlake.
  • Glanbia signed a lease for 452,000 SF in Aurora.
  • DART signed for 429,000 SF in North Aurora

Skilled Labor Shortage Becomes An Issue For The Chicago Industrial Market

Unemployment rates continue to fall, causing a shortage in skilled labor. In May, Chicago's unemployment rate fell to 3.3% from 5.6% in January. According to the Bureau of Labor Statistics, almost 25% of manufacturing industry employees are close to retirement. As a result, finding people with the right professional and technical skills is challenging.

While this shortage is a serious issue, it hasn't stopped economic growth. This quarter, Wieland Metals Inc. announced a $25 million expansion in Wheeling. a move that would create 65 new manufacturing jobs. If approved, the new facility will create 65 new manufacturing jobs.

Chicago's High Income Population Is On Growth Trajectory

Although Chicago's population is declining, there is one demographic set on a growth trajectory - the high-income population.

  • The number of households that earn more than $100,000 a year and are headed by a person under 45 grew by 26,000 - more than any city in the U.S. with the exception of New York
  • The number of households making at least $200,000 a year grew to 75,000. However this growth lagged behind that of other cities, including Denver, Houston, and San Francisco

These factors indicate a talented, educated workforce. For the industrial sector, this means increased demand for last-mile facilities in the Chicago area.

Economic Conditions

Chicago has one of the largest, best-performing, and most diversified economies in the world.

  • home to 400+ major corporate HQs, including 31 Fortune 500 companies
  • unemployment rate dropped significantly since Jan 2018
  • continues to attract top talend and that draws in employers
  • growth in professional and business services, and information sector

Looking Forward

With the investment sales market outperforming were it was this time last year, Chicago could have another record-breaking year. The skilled labor shortage will remain an issue for certain industries, such as manufacturing and distribution. Nevertheless, the Chicago Industrial Market will continue to see demand for high-quality, well-located space.

  • Industrial market nearing an end to record-breaking pace
  • Vacancy will remain slightly elevated
  • There still is 10.5M SF of construction left to deliver
  • Investment sales going strong; possibly another record-breaking year
  • Need for last-mile fulfillment centers, warehouses, and distribution centers
  • Sustained demand for high-quality, well-located space