Are developers bringing too much industrial space to the market?

mid year industrial photo -- lakeview corporate park

by Dan Rafter

Craig Hurvitz, vice president of market research with the Chicago office of Colliers International, said that the local numbers tell the tale of an industrial market that is particularly strong in Chicago and its suburbs.

In the first half of 2016, developers added 14.3 million square feet of new industrial space to the Chicago-area market, Hurvitz said. Developers added about 5.3 million square feet in the second quarter and about 9 million square feet in the first.

Hurvitz said that these numbers haven’t been this high in the first half of a year since 2006.

At the same time, the industrial vacancy rate in the Chicago area has fallen below 7 percent for the first time in 15 years.

“All the numbers show that we are really at an impressive level of activity when it comes to industrial real estate,” Hurvitz said.

What’s behind this activity? Hurvitz says that ecommerce is playing a major role in today’s industrial boom. As companies expand their online presence, they need new industrial space that allows them to ship their products to as many customers as possible in as short a time as they can muster.

Amazon, of course, is a leader in this trend, and the online retailer is making an impact in the Chicago area. The company in the second quarter leased two buildings — both about 750,000 square feet — in the far southern suburbs. Other companies are expanding by consolidating operations from smaller facilities into a single larger space.

This doesn’t mean that there aren’t some potential trouble spots in the industrial market. Hurvitz said that there is 16.7 million square feet of industrial space under construction now in the Chicago area, with more than half of that space being built on a speculative basis. This means that developers will soon be bringing plenty of vacant industrial space to the market.

The question, then, becomes whether there will be enough demand to fill this space.

“Have we reached a point where we are potentially overbuilding again?” Hurvitz said. “For a while, construction activity was controlled. The demand was meeting the supply. This year, there has been a major increase in that construction activity. A lot of projects are breaking ground and going vertical. Will that add too much vacant space? Will we have another downturn like we had in 2008?”

Hurvitz said that construction began on 29 industrial projects in the Chicago area during just the second quarter of this year. About 9.3 million square feet of this new industrial construction is being done on a spec basis.

The hope, of course, is that this space will fill in quickly. And Hurvitz does think the demand for new industrial space will remain strong. He said that most new industrial construction is taking place in the Interstate-55, O’Hare and central DuPage markets, and those are some of the strongest in the area.

“I do think for the most part that these spaces will fill up,” Hurvitz said. “It’s just a matter of whether developers are adding too much space.”

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