Falling vacancy rates. Rising demand. Industrial market getting even stronger

John Joyce

John Joyce

by Dan Rafter

What’s going right in the O’Hare industrial submarket of Chicago? Just about everything.

John Joyce, principal with the Rosemont, Illinois, office of Transwestern, said that this busy submarket is seeing increased demand from investors and developers, lower vacancy rates and rising rates.

In short, it remains one of the stronger industrial markets in the Chicago area.

“This market is performing so well right now,” Joyce said. “More tenants are looking at this market. It has a strong location. The workforce is good. The inventory is strong. There’s a reason why this submarket has one of the lowest vacancy rates in the metropolitan area.” 

And the best news? The O’Hare submarket isn’t alone. Industrial markets across the country are booming.

The e-commerce push 

Like many industrial markets across the country, the O’Hare submarket is enjoying a boost from the continued growth of online shopping. Joyce pointed specifically to the impact that online giant Amazon is having on this submarket.

“Companies like Amazon are absorbing space in multiple markets,” he said. “They are taking industrial inventory off the market. Amazon’s footprint is 2 million square feet in Southeast Wisconsin and 3 million square feet in the greater Chicago metropolitan area. A lot of companies are trying to duplicate that effort on a smaller scale. Even small privately-held companies are getting in on the action.”

As Amazon and other companies gobble up more space for distribution centers to serve their online customers, it drives up demand for those industrial facilities that remain. This results in lower vacancy rates and higher rents.

This is all good news for industrial landlords. And those landlords in the O’Hare submarket are no exception; they, too, are enjoying a solid bump in demand from tenants on the hunt for modern industrial space.

At the same time, Amazon has become a sought-after industrial tenant. The online retailer has made a habit of consuming large swaths of industrial space. The Chicago area is an important one for Amazon, with its location in the center of the country allowing the retailer to reach large swaths of its customers from distribution centers here.

Joyce said that the e-commerce rise, though, might result in a smaller number of big-box retail stores. As industrial space is consumed, some of the larger big-box stores will convert into industrial uses, Joyce said.

“We’ll see the industrial market spill into retail,” he said. “The available industrial inventory is still low in the O’Hare market. We’ll start to see some creative use of larger retail space because of this.”

An impact on other markets 

The low industrial vacancy rate won’t just have an impact on the O’Hare submarket. It will also bring increased activity to tertiary markets.

Joyce said that as possible tenants continue to look for more industrial space, they’ll search tertiary markets such as Northwest Cook and Elgin.

“Because when you get down to a 3 percent vacancy rate in O’Hare, people have to go to the next ring out,” Joyce said. “They have to search in markets that maybe they wouldn’t have considered before.”

Sales on the rise 

Joyce said that it’s not just lease activity that is rising in the O’Hare submarket. Industrial sales are strong here, too, he said.

Joyce points to his own experience. As of late November, Joyce had six industrial properties under contract in which he was representing a seller. Each of those transactions were scheduled to close before the end of 2016.

That’s solid sales activity. And Joyce is far from alone: The number of industrial sales in this submarket continues to rise, he said.

“There has finally been some appreciation in values after that deep dip from the recession that ended several years ago,” he said. “Now we are seeing an increase in rental rates and higher interest rates. That is the two sides of this. Sellers are taking advantage of an increase in pricing to get out of long-held positions that they couldn’t get out of before.”

On the investment side, investors, both domestic and foreign, continue to chase yield in this market, Joyce said. The lure of commercial real estate here isn’t quite as strong to foreign investors as it is on the coastal markets, but this is still a much-coveted area, Joyce said.

“The size of the Chicago industrial market is impressive,” Joyce said. “The proximity to all major interstate arteries and rail lines is a positive. We are in a good location for air and freight routes. People will never overlook the Illinois opportunity because of its location and mass.”

Slim pickings 

The industrial inventory that is available in the O’Hare submarket isn’t necessarily the strongest, Joyce said.

“A lot of the inventory left is weaker,” he said. “It’s been picked over. What is left are a lot of properties that have been on the market for a long period of time. A lot of those properties are now seeing action. In many cases, it is all that is left for tenants.”

This means that many developers are renovating these lesser properties to attract potential buyers who are looking for modern industrial space.

Joyce said that experienced investors are looking to add value to older industrial assets that have become less functional.

“They are looking at opportunities to enhance the loading areas or to add trailer parking,” Joyce said. “That will attract more coveted, more sophisticated users.”

The benefit to this approach? Higher leasing rates.

Joyce said that some investors have been able to charge rents that are 50 percent or 60 percent higher than what they would have been able to charge if they hadn’t made their improvements.

“A $4 net building without improvements turns into a $6 net building with improvements,” Joyce said.

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