Industrial Market Overview
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Q4 2014 | INDUSTRIAL CHICAGO INDUSTRIAL MARKET OVERVIEW CONSTRUCTION DELIVERIES RISE A key indicator of the health of the metropolitan Chicago industrial market is the notable increase in new construction deliveries witnessed in 2014. Industrial construction deliveries totaled 11.5 million square feet in 2014, a 30.2 percent increase from total 2013 volume. Other statistical indicators followed suit, as the vacancy rate fell by almost one whole percentage point, leasing volume increased 2.0 million square feet, and sale volume surpassed 20.0 million square feet for just the third time since 2000. In addition, net absorption improved by more than 5.5 million square feet in 2014 versus 2013 results. MARKET INDICATORS VACANCY AND SUPPLY Chicago’s industrial vacancy rate fell by 97 basis points from the year-end 2013 rate of 8.70 Chicago Metro percent to 7.73 percent at year-end 2014. This was caused primarily by strong user demand and 2013 2014 a small amount of second generation space returning to the market. VACANCY 8.70% 7.73% The Chicago area industrial vacancy rate has not fallen below 8.0 percent since 2001 when it dipped to ironically 7.73 percent. ABSORPTION 12,760,948 18,301,811 The I-290 North and O’Hare industrial submarkets witnessed a year-over-year vacancy rate RENTAL RATE $4.11 $4.41 decline of more than 200 basis points from 2013, while vacancy in the Northwest Suburbs and I-55 Corridor rose more than 100 basis points. Vacant supply in the metropolitan Chicago industrial market totaled 102.2 million square feet at the end of 2014, an impressive 12.2-million-square-foot improvement from year-end 2013. Spaces larger than 300,000 square feet saw a 13.7 percent decline in vacancy supply from totals reported at year-end 2013. Market indicators benefited from the fact that only 48.0 million square feet of space returned to HISTORICAL TRENDS the Chicago industrial market in 2014, the lowest total of the past decade. The 48.0 million Absorption and Vacancy Rates square feet were composed of 5.1 million square feet of speculative development and 42.9 25.0 14% million square feet of second generation space. 20.0 12% 15.0 10.0 10% LEASING AND SALE ACTIVITY 5.0 8% Total 2014 industrial leasing volume edged up from the prior year’s volume of 35.7 million 0.0 -5.0 6% square feet to 37.7 million square feet in 2014. The 5.6 percent increase was realized primarily Vacancy Rate Vacancy -10.0 4% from smaller users in the 10,000- to 25,000-square-foot range. -15.0 2% -20.0 Square Feet Absorbed (Millions) Feet Square Big box transactions greater than 300,000 square feet were not as prevalent in 2014 as 14 such -25.0 0% 2008 2009 2010 2011 2012 2013 2014 leases were signed compared to 19 transactions consummated in 2013. However, the total volume of those leases was higher with 8.5 million square feet versus 8.3 million square feet. Leasing activity in the I-80/Joliet Corridor totaled 4.9 million square feet in 2014, surpassing the www.colliers.com/chicago RESEARCH & FORECAST REPORT | Q4 2014 | CHICAGO | INDUSTRIAL 2013 total by an impressive 1.7 million square feet. This was followed closely by the Elgin I-90 Corridor, which saw an increase of 1.2 million square feet in 2014. The weakest markets in terms of year-over-year leasing activity include Central DuPage, which fell 1.3 million square feet, and the I-55 Corridor which fell 927,700 square feet from 2013 results. Year-end 2014 sale volume escalated to 20.6 million square feet which represents an impressive 15.5 percent increase from the 17.8 million square feet sold in 2013. All size ranges realized higher transaction volume, with the big box user sales achieving the highest gain with 8.7 percent over the prior year’s total. The 20.6 million square feet sold in 2014 represents the highest volume sold in the past ten years. User sale volume was strongest in the South Suburbs as 2.8 million square feet of sale transactions were completed, accounting for 13.5 percent of all 2014 sale activity in metropolitan Chicago. However, the I-290 North market sale volume of 2.1 million square feet represented the largest gain of any Chicago market from one year ago. ABSORPTION Heightened user demand drove cumulative 2014 net absorption to 18.3 million square feet. This was a remarkable 43.4 percent increase from the 12.8 million square feet posted in the prior year, and the highest net absorption volume achieved since 2005 when 20.0 million square feet were recorded. Eight Chicago-area industrial submarkets realized a positive swing in net absorption of more than 1.0 million square feet from one year ago, with O’Hare market leading the results with 1.9 million square feet. Conversely, net absorption in the Central DuPage and the Northwest Suburbs dropped more than 1.0 million square feet from the 2013 total. CONSTRUCTION ACTIVITY Construction deliveries in 2014 topped out at 11.5 million square feet, a sharp increase from the 8.8 million square feet completed in 2013. More than 6.4 million square feet of all new 2014 deliveries resulted from build-to-suit projects. Although new construction is on the rise it is still considerably below the height of the market which reached 21.0 million square feet in 2009. The Chicago Metropolitan area witnessed 45 new projects started in 2014, with a collective inventory of 12.6 million square feet. Thirteen construction projects were started in the fourth quarter alone, which will add 1.5 million square feet to Chicago’s inventory base when completed. The largest fourth quarter development was started for Niagra Bottling, LLC which commenced construction on a 377,300-square-foot warehouse/distribution facility at Lakeview Corporate Park in Pleasant Prairie. The I-55 Corridor reclaimed the top spot for most construction activity in 2014, as 3.1 million square feet of new projects were constructed. This marks 27.2 percent of all 2014 construction activity in the metropolitan Chicago area. No new construction completions occurred in DeKalb County, Far South Suburbs, McHenry County, and Northwest Indiana. WHAT TO EXPECT IN 2015 Speculative development will remain strong in 2015. Developers will remain focused on building multi-tenant product in sizes from 100,000 square feet to 500,000 square feet. We could see big box development in 2015 if the current pipeline of deals comes to fruition. Rent growth will continue to rise modestly in Class A. Class B product will also see a slight uptick in rents in core markets due to limited supply, while Class C product will still see limited interest. Low interest rates will continue to draw buyers to the market, however, limited supply will push up pricing. P. 2 | COLLIERS INTERNATIONAL RESEARCH & FORECAST REPORT | Q4 2014 | CHICAGO | INDUSTRIAL Central DuPage VACANCY AND SUPPLY After reaching 8.60 percent in the first quarter of 2014, the vacancy rate in the Central DuPage submarket receded dramatically throughout the year to a fourth quarter total of 7.35 percent. This was also a 21-basis-point decline from the fourth quarter 2013 total of 7.56 percent. At the end of the fourth quarter Central DuPage’s available industrial supply measured 6.2 million square feet, a modest decrease from the 6.4 million square feet reported vacant at year-end 2013. Spaces between 30,000 square feet and 60,000 square feet proved to be the most sought-after, as the available options in that size range dropped from 41 in 2013 to 28 in 2014. MARKET INDICATORS Declining supply has caused a complete absence of available space greater than 350,000 square feet. Central DuPage CONSTRUCTION 2013 2014 Three build-to-suit developments were completed in 2014 adding 188,000 square feet to Central DuPage’s inventory base. All three projects represented company expansions, and the largest was a VACANCY 7.56% 7.35% 80,000-square-foot food warehouse for Portillo’s at 350 Rohlwing Road in Addison. 2,165,011 170,709 ABSORPTION In 2013 just one speculative development was completed, a 139,000-square-foot property at 201 RENTAL RATE $5.04 $5.21 Gary Avenue at Turnberry Lakes International Business Park in Roselle. LEASE AND SALE ACTIVITY Occupier demand was weaker in 2014 as just 2.7 million square feet of lease transactions were completed. This represents a decline of 1.3 million square feet 4.0 million square feet leased in 2013. Market conditions in 2013 benefited from two large lease transactions in spaces over 350,000 square feet. However, the largest lease signed in the Central DuPage market in 2014 was Com2 Computer Recycling Solutions’ 207,800-square-foot commitment at 500 Kehoe Boulevard in Carol Stream. HISTORICAL TRENDS Absorption and Vacancy Rates On a positive note, leasing activity witnessed an increase in signed leases in the 60,000 to 2.5 14% 100,000-square-foot range, as seven such transactions were completed in 2014 versus just five in 2.0 12% 2013. 1.5 10% 1.0 Massive fourth quarter sale activity of 781,600 square feet drove the year-end sale volume to 1.5 0.5 8% million square feet. This was a dramatic 47.1 percent gain from 2013’s results. 0.0 6% -0.5 4% Rate Vacancy User demand was most prevalent in building sales between 10,000 and 60,000 square feet, as 26 of -1.0 2% -1.5 the 29 sales recorded in 2014 were in this size range.