Chicago’s 516-million-square-foot warehouse/distribution space market continued its post-recession boom in the second quarter of 2012, with strongly positive net absorption and solid rent gains. The 49-million-square-foot Flex/R&D market is recovering more slowly, thanks to higher vacancy. Chicago’s vacancy rate is higher than the national average in both segments of the industrial market, but as in other older metro areas with long industrial histories, a significant share of the vacant stock may be obsolete. Build-to-suit development, accordingly, is picking up.
Reis reports a vacancy rate of 15.9% for Chicago’s warehouse/ distribution space in the second quarter of 2012, down 40 basis points from the prior quarter and 80 from a year earlier. The vacancy inventory totals 82 million square feet. The national vacancy rate for this type of space is 12.7%, also down 80 basis points year-over-year. For Flex/R&D space, Chicago’s second quarter vacancy rate is 18.2%, down 30 basis points from the prior quarter but up 10 from a year earlier. The national rate is 14.7%.
Jones Lang LaSalle reports a total vacancy rate of 12.6% for 600 million square feet of warehouse/distribution space and 12.9% for 75 million square feet of Flex/R&D space. “The second quarter vacancy rate fell by a stunning 52 basis points from the first quarter mark of 10.68% to 10.16%, the result of exceptionally strong occupier demand,” according to Colliers. These sources cover a broader market including southeast Wisconsin and northwest Indiana within their Chicago markets. Reis predicts the decrease in warehouse/distribution vacancy will slow starting in the second half of 2012, with the rate edging down to 15.8% at year-end 2012 and remaining above 15.0% until year-end 2016. Flex/R&D vacancy is forecast to continue to edge up slightly through the end of 2012 and then fall slowly, remaining above 17.5% until late 2016.
SUPPLY AND DEMAND
Warehouse/ distribution net absorption remained strongly positive in the second quarter of 2012, with a reading of plus 2.0 million square feet bringing the year-to-date total to 3.6 million square feet. This approximates the pace of 2011, when 7.3 million square feet was absorbed net, more than reversing the minus 6.6 million recorded in 2010. Other market watchers also report strong demand during the quarter, with Jones Lang LaSalle reporting 5.7 million square feet of warehouse/distribution net absorption, Colliers reporting 6.2 million for all industrial space due to “exceptionally strong occupier demand,” and Newmark Grubb Knight Frank reporting 4.2 million square feet. Reis, however, believes net absorption is set to slow, leading to a 2012 total of just 4.8 million with similar totals for the following two years.
Net absorption in the Flex/R&D segment was slightly negative in 2011 due mostly to a weak third quarter, but has been positive thus far in 2012. The second quarter total was plus 142,000 square feet according to Reis, bringing the year-to-date total to plus 339,000. Reis, however, predicts net absorption will total minus 9,000 square feet in the second half of 2012, and about 150,000 square feet in 2013.
All the construction activity is currently in the warehouse/distribution segment, with more than 3 million square feet under construction. No space completed in the second quarter; the 2012 total is forecast at 1.8 million square feet. Enormous amounts of space remain planned and proposed in several large business parks, and despite high vacancy there is reason to believe more will begin construction. “Bulk distribution users seeking space in excess of 750,000 square feet will find only one option available,” according to Colliers, though “those in need of space between 350,000 square feet to 600,000 square feet will have 23 choices.” Reis predicts warehouse/distribution new supply for 2013 to 2016 at about 5 million square feet per-year, with limited new Flex/R&D space expected.
Chicago’s warehouse/ distribution rents has been erratic, but have now increased for two consecutive quarters. In the second quarter the average asking rent rose 0.7% to $4.36 psf, while the average effective rent rose 1.3% to $3.79 psf. The year-over-year gains are 0.5% and 1.6%, respectively. The U.S. asking and effective averages for second quarter are $4.69 psf asking and $4.23 psf effective, somewhat higher than Chicago. Following gains of 0.5% asking and 2.8% effective in 2011, Reis predicts rents will rise by 1.6% and 2.7% in 2012. Subsequent gains are forecast at about 3.0% per-year.
Chicago’s Flex/R&D rents have now risen for two consecutive quarters. In the second quarter the average asking rent rose 0.1% to $7.55 psf, while the average effective rent increased 0.5% to $6.40 psf, bringing the year-to-date gains to 0.4% asking and 0.8% effective. Following respective losses of 5.5% and 3.8% in 2011, Reis predicts gains of 1.2% and 1.9% for all of 2012. Gains of around 2.0% in 2013 are forecast to be followed by increases of about 3.0% thereafter, despite continued high vacancy. For this segment, as well, Chicago rents are lower than the U.S. averages of $8.77 psf asking and $7.73 psf effective.
“Rents continue to increase, but at a slower pace than expected,” according to Jones Lang LaSalle. This source puts the marketwide average asking rent at $4.29 psf for warehouse/distribution and $10.95 psf for Flex/R&D. Colliers puts the overall industrial rental rate at $4.09 psf. It had been just $3.84 psf the quarter before but $4.13 psf a year earlier, according to this source. “The average asking rent fell to $4.03 psf from $4.08 psf the previous quarter, indicating the lowest average asking rent since 1996,” according to Newmark Grubb Knight Frank.