Local warehouses fill up amid strong economy, e-commerce boom

Date: Wednesday, February 20, 2019
Source: Crain's Chicago Business

With its lowest vacancy rate in nearly 18 years, the warehouse market is arguably the strongest real estate sector in the Chicago area.

The market for warehouse space in the Chicago area burned even hotter in 2018, but it may cool a bit this year.

The vacancy rate for local industrial property declined to 6.34 percent in the fourth quarter, its lowest level in nearly 18 years, according to a report from Colliers International. The rate fell from 6.40 percent in the third quarter and 6.80 percent a year earlier.

Warehouses, those big windowless boxes along the highway, may not have the cachet of an office tower or luxury hotel, but the sector is an important economic bellwether, rising and falling with the production and shipment of goods. Industrial is arguably the strongest property type in the Chicago area, driven by the strong economy and the rise of e-commerce, as retailers and logistics firms add space to adapt to the Amazon era.

“Leasing and sales are very solid,” said Colliers Principal David Bercu. “There are certain submarkets that are very tight and landlords are able to push rents.”

Demand for warehouse space is strong, though not as strong as it was. The primary measure of demand, net absorption—or the change in the amount of leased space versus the prior period—totaled 16.2 million square feet in 2018 in the Chicago market, down from 18.9 million in 2017 and 26.7 million in 2016, according to Colliers.

Supply is rising, too, as developers crank out new buildings, one reason Bercu expects the local vacancy rate to tick up in 2019. Sixty-one buildings totaling 19 million square feet are under construction in the Chicago area, according to Colliers. Developers will complete about 13 million square feet here in 2019 built on a speculative, or “spec,” basis—without securing tenants in advance.

If there’s one area where supply could be a problem it’s along Interstate 80 from New Lenox west. Developers there have been building huge warehouses, some exceeding more than 600,000 square feet, and several are sitting empty. As a result, the vacancy rate for the I-80 submarket jumped to 11.6 percent in the fourth quarter, up from 7.88 percent a year earlier, according to Colliers.

“There is some concern about the lack of large deals, particularly when you compare Chicago to its peer cities,” Bercu said. “The market is still strong, but it would be unbelievable if we could knock off some of these big bombers . . . We’d like to see some more activity down there relative to the amount of supply that’s been constructed.”

It’s a different story in other submarkets. The area around O’Hare International Airport is especially strong, with an industrial vacancy rate of 2.99 percent in the quarter, down from 3.18 percent a year earlier and the lowest of all 22 Chicago submarkets tracked by Colliers. Demand for warehouse space near O’Hare has surged the past several years as more tenants push to be closer to the city, allowing them to shorten delivery times to impatient customers.

 

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