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Industrial Demand For New Space Goes Into Steep Decline Even As E-Commerce Users Are Busier Than Ever

Hilco Redevelopment Partners' Exchange 55.

The collapse of certain sectors of the economy due to COVID-19 fears has undermined the industrial sector's once-splendid prospects in the Chicago region.

The mass closure of most offices and nonessential businesses led many to work from home, as well as strip stores of needed items, driving up demand for home deliveries and groceries. That could end up being a long-term benefit for the industrial distribution sector, and many e-commerce users are bursting at the seams.

But with so much uncertainty in the market, it's going to take time before any feel comfortable signing deals for new space.

"E-commerce and food users are just going gangbusters, and in the last week they've been telling us that they are out of space," Colliers International principal Brian Kling said. "But all of this uncertainty is not letting them do anything. We've seen a 180-degree turnaround in terms of demand in the marketplace."

Amazon may be an exception, he added. The e-commerce behemoth is realigning its business to meet the escalating demand for essential items, and with its financial wherewithal, it may start to absorb more space in the short term.

The Chicago region's developers have made sure there will be plenty of options. In the first quarter, 23 buildings totaling 6.3M SF were completed, including 3.7M SF of speculative product, according to Colliers' latest research update.

First-quarter leasing was also strong, especially in spec product. Users leased 4.5M SF in 21 spec buildings, Colliers found. Of the 73.6M SF of spec space delivered since 2013, 74.2% has been leased, a number which has risen steadily over the past seven years. 

It's possible that, with so many e-commerce and food users feeling a squeeze, landlords may soon see a series of short-term requests for between 50K SF and 100K SF, Kling said. That would relieve the pressure many occupiers now feel, but without any long-term commitments in a very uncertain environment.

Even though it will take time for robust demand to return, the coronavirus emergency may over the long term prove helpful to industrial developers, as e-commerce users seek to solve the current space crunch, Kling said.

"E-commerce users are the ones who really understand the benefits of being in modern industrial distribution facilities."