By David Liebman, SIOR, JD, LEED Green Associate
Last year was a banner year for Chicago industrial real estate properties, and the trend is continuing this year. Ecommerce companies are zeroing in on central locations to help them reach large portions of the U.S. population in ever-shorter delivery periods. Developers are keeping new construction at measured and smart levels. The end result: vacancies are at a 15-year low.
New tenants and buyers are continuing to seek out well-located and efficiently priced space throughout the region, while developers are seizing opportunities to build new spaces for these tenants whenever and wherever possible.
Overall, many of Chicago’s industrial submarkets are performing well, with third-quarter vacancy rates at 6.5 percent to 6.75 percent throughout the Chicago industrial markets. That’s lower by 25 basis points than in the first quarter of 2016 and by 50 to 75 basis points over the third quarter of 2015.
The markets that are performing the best, however, are those with the best strategic locations—namely, O’Hare, Central DuPage and Northwest Indiana. The O’Hare submarket is a behemoth with more than 140 million square feet and just 5.75 million square feet still on the market. End users like the O’Hare submarket not only for its proximity to the airport, but also because it is at the confluence of several major interstate highways.
Submarkets that are farther from the urban hub, including north suburban Lake County (7.5 million square feet available), far northwest suburban McHenry County (3.7 million square feet available) and the Elgin/I-90 corridor (3.3 million square feet available) are still competing at early 2000s, pre-recession levels, even if they are not quite as tight as closer-in markets.
And while there is plenty of new construction throughout the Chicago region, much of it is either built-to-suit or, if speculative, leased relatively quickly after it is built. This put absorption rates at record levels during the third quarter of 2016, the highest absorption levels since 2007. That’s especially impressive given the fact that more space had come on the market that year than in years past.
Buildings come in all different shapes and sizes, but those over 500,000 square feet are the hardest to come by in the Chicago metro area. Because less space is available than there has been in many years, tenant advocates who know the market are the best bet to help end-users who are new to the Chicago market when they are negotiating for their leases.
With space constrained and prices increasing accordingly, these advocates can help tenants assess the value of available properties, as well as put the terms and pricing in perspective to meet their clients’ expectations. By working with a tenant advocate, end users can find a realistic and achievable solution that meets their real estate needs and goals, even in a landlord-favored marketplace. This can mean finding an older building with lower rent for companies that don’t need higher ceilings, or targeting a larger building farther from the urban core for companies that are distributing to locations beyond the Chicago area.
Even though there may not be spaces available for all requirements, there are a variety of building types, sizes and constructions still on the market for the tenant who is willing to search. In many submarkets there are more available masonry and pre-engineered steel properties than pre-cast panel construction properties, but there are also many speculative projects currently underway.
Different submarkets might be appropriate for different tenants. Finding a 100,000- to 125,000-square-foot space in a submarket with smaller buildings or multi-tenant buildings will be easier than it might be in a submarket of mostly new construction, for example. Some tenants are less fazed than others by older buildings—working with a tenant advocate will help these tenants know that the building they select is most appropriate for their needs. A tenant advocate’s expertise can save buyers money in both the short-term, as they’re selecting a building to lease, but also in the long-term, where the tenant will occupy a building that’s functionally efficient and cost-effective for the duration of a lease.
A tenant advocate assists the occupier to identify the real going rates and acceptable terms for the building a tenant is seeking in its selected submarket. Some submarkets still offer concessions or incentives, and tenant advocates know which submarkets and landlords might have the best properties to identify. In less strategically located markets, there may be fewer buildings or building types available, but the right advocate will match the tenant with the right submarket.
There’s also a high (and often overlooked) value in the existing relationships that tenant advocates have with landlords and their brokers in the Chicago area. A tenant advocate will know which brokers are representing the most qualified landlords, and may be able to secure more favorable terms for the tenant in some circumstances. The Chicago industrial real estate community is tight-knit, and there are many advantages to tenants in leveraging these broker relationships.
So what’s next for the Chicago industrial submarkets, where steady demand and absorption is keeping vacancy rates low? The economy, interest rates, inflation and geo-political matters could definitely affect the industrial marketplace as a whole in the next few years. As ecommerce companies continue to grow, they will want more space in centrally located areas that can reach a high proportion of the population in a matter of hours or one to two days. This bodes well for the Chicago industrial market. The market is currently doing well, and most knowledgeable real estate professionals remain cautiously optimistic that we won’t see a slow-down for several years. The catchphrase for now is: enjoy the Chicago industrial real estate market for as long as possible!
David Liebman is managing broker at Chicago’s Merit Partners, LLC. Liebman leverages his legal background that encompasses commercial real estate and corporate law in providing prudent, trusted advice in all matters relating to transactions.