The local industrial real estate market has completed its comeback from the crash.
The vacancy rate for Chicago-area industrial space fell to 8.4 percent in the second quarter, down from 8.5 percent in the first quarter and 9 percent a year earlier, according to Seattle-based Colliers International.
The vacancy rate hasn’t been that low since third-quarter 2006, before the recession.
Vacancies are dropping amid growing demand for space among smaller and mid-sized businesses. The second quarter included 26 leases of 50,000 to 100,000 square feet, following 19 such deals in the first quarter.
“The bread-and-butter middle-market companies that drive Chicago are active, whereas back in 2008, ’09 and ’10 they were doing anything they could to not spend any more money,” said Fred Regnery, a Rosemont-based principal at Colliers. “Now they’re feeling confident enough that they’re making long-term real estate decisions.”
Big companies are signing big leases, too. French tire manufacturer Michelin leased 1.7 million square feet in Joliet in the quarter, launching the largest build-to-suit development in the Chicago area in eight years.
The Chicago area’s vacancy rate, which peaked at 12.2 percent in 2010, has fallen in four consecutive quarters and 10 of the past 12. After apartments, the industrial market is the second-strongest real estate sector in the Chicago area: Local office and retail vacancies have yet to reach pre-recession levels.
Because companies manufacture and store products in industrial space, the market is often considered a good gauge of the wider economy. The improving job market — the U.S. unemployment rate fell to 6.1 percent in June, the lowest since September 2008 — is giving companies the confidence to expand.
‘RESURGENCE OF THE SMALLER USER’
“Chicago hasn’t had the explosive growth in new developments that some of the other markets have, but we’ve had a resurgence of the smaller user, manufacturers and smaller suppliers, filling up the smaller buildings,” said James Martell, president of Chicago-based Ridge Development Co. LLC, developer of the RidgePort Logistics Center, where Michelin is moving. “The strength of the economy is giving those smaller companies a real lift. They’re spending their money and expanding. Overall, that’s probably generating more jobs than the few bigger deals we’re seeing.”
Huge regional distribution centers, on the other hand, have recently been landing across state lines in Indiana and Wisconsin, Messrs. Regnery and Martell said.
Industrial developers and brokers have expressed several theories for large tenants’ shift across state lines, including Illinois’ politics and taxes, higher labor costs in Illinois, a desire to be closer to overnight mail hubs and changes in regional distribution patterns.
“Big distribution centers like Michelin, the Amazons and Wal-Marts, have gone past or around Chicago,” Mr. Martell said. “Michelin was a good coup for Chicago that we were able to capture.”
Other larger deals during the quarter included Swiss frozen bakery company Aryzta A.G.’s 17,076-square-foot lease in Bolingbrook and Connecticut-based Otis Elevator Co.’s 209,179-square-foot lease at 3451 S. Chicago St. in Joliet.
Demand, as measured by absorption — the change in the amount of occupied space compared with the prior period — was positive for the ninth quarter in a row. During that time, more than 30 million square feet has been absorbed from the area’s total 1.2 billion-square-foot supply.
Landlords are hiking rents as much as 5 to 10 percent in areas with limited supply, Mr. Martell said.
Developers completed 3 million square feet of industrial space in the area during the second quarter, with another 13.6 million under way—8.6 million of that “on spec,” or without tenants signed up in advance. The volume of space under construction is far more than the 8.8 million square feet completed in 2013, which was the most since 19.1 million square feet finished in 2008, according to Colliers.
“We’re not getting over our skis,” Mr. Martell said of developers, particularly on larger projects. “The general sense is, let’s get ready to pull the trigger so (a new building) can be up in six months. Get your pad ready, your drawings and your permit. (Developers are) still taking it a little more cautious.”
The new supply is likely to interest the increasing number of companies that, as the economy has improved, are looking for more modern space, Mr. Regnery said.
“We’re seeing middle-market companies upgrading their talent in operations and supply chain,” Mr. Regnery said. “They’re getting more sophisticated and they’re getting more demanding with their real estate. Across the board you’re seeing a premium placed on modern, efficient buildings. That leads to a bifurcation of rates between A and B product, and continued demand for new construction.”