All Signs Point Toward Industrial Continuing To Boom Despite Rising Construction Costs
The Chicagoland industrial market kept up a robust expansion in Q1 and shows no sign of slowing down for the rest of 2021. The expansion of e-commerce is typically tagged as the reason new warehouses and logistics facilities have mushroomed across the region in the past several years, but tenant demand is coming from several sectors, making it more likely growth will continue for the foreseeable future.
“People get tired of hearing about the growth in e-commerce, but the post-pandemic world is also proving that tenant demand is strong in the consumer goods and home improvement sectors, and we’re even starting to see big leases signed by automotive companies,” Colliers International Executive Vice President Brian Kling said.
That escalating demand is pushing developers to push forward with new projects, he said. According to Colliers’ Q1 research, builders now have 24.2M SF under construction, below the record-setting amounts recorded last year but far above the 16.9M SF and 18.6M SF recorded in Q1 2019 and Q1 2020, respectively. In Q1 2021, developers finished 8.6M SF of new product, the most in two years.
“The tenants are speaking right now, and that’s as a result of the consumer demand coming from below,” Kling said.
Amazon signed several Chicago-area leases in 2020 for more than 1M SF, including for its 3.8M SF multi-story warehouse underway in south suburban Markham, a 1.3M SF build-to-suit lease in Beloit, Wisconsin, and another 1M SF build-to-suit lease at I-57 and Steger Road in south suburban University Park. Also in 2020, home improvement firm Lowe’s Cos. took 1.3M SF in Manteno near Kankakee, and Scott’s Miracle-Gro leased 1.3M SF in southwest suburban Channahon.
The automotive sector was led in 2020 by General Motors, which agreed to occupy the entire 1M SF building developed in 2017 on a speculative basis by Core5 Industrial Partners, according to Colliers. And Ford Motor Co. recently occupied a 360K SF facility at Northpoint Development’s Commerce Park Chicago on the Far Southeast Side, one of five buildings the developer plans for the site.
The steady lease-ups in spec projects help illustrate the region’s growing industrial might, Kling said. Tenants in Q1 2019 signed 5.2M SF worth of new leases and one lease expansion in spec projects completed since the industrial boom began in 2013. That sank the vacancy rate to 19% among these spec facilities, which now total 86M SF, down from 32% recorded two years ago, Colliers found.
The amount of construction starts in Q1 totaled 3.7M SF, and although that was the lowest in two years, Kling said it wasn't surprising.
“We saw a brief pause early on in the coronavirus pandemic on the development side,” he said.
Because it typically takes at least 12 months to secure the proper zoning and building permits, among other requirements, that pause had an impact on the number of starts roughly one year later. Developers were already committed when the pandemic hit to most of the 8.6M SF completed last quarter, so those projects generally went forward without delays, Kling said.
The largest projects completed in Q1 were a two-building, 1.6M SF development for Ferrara Candy in DeKalb and a 1.6M SF building developed by CenterPoint Properties for Harbor Freight in Joliet, Colliers found.
Kling said he expects the total amount of construction starts to begin ramping up again, as demand for new product intensified after the first shock of the pandemic wore off. The coming year should also see healthy rental rate growth, especially in several infill submarkets.
“Markets like O’Hare and DuPage are largely built out, but tenant demand is stronger than ever,” he said.
The rising cost of construction will further push up rental rates. Kling partly attributes the current price escalation to material shortages caused by supply chain hiccups, which started when the coronavirus shut down much of the economy, eventually leading to key imports getting caught in seaborne traffic jams outside many U.S. ports.
Pricing increases aren’t likely to slow down as the year unfolds. Labor costs will also keep rising in 2021, according to a JLL forecast, and even if supply chain bottlenecks clear up, materials costs will continue increasing due to spikes in demand driven by the economy reopening.
“Every year from 2012 to 2019 recorded between 3.5% and 5.5% cost inflation across U.S. construction,” JLL found. “For the full year, 2021 will bounce back to be within that range, and may even approach the higher end of it.”