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Industrial Developers And Many Tenants Shrug Off Pandemic And Set New Records

The chaos set in motion by the coronavirus pandemic, the economic recession and political uncertainty hasn’t clogged up the Chicago region’s industrial market. Many users keep expanding to meet demand from homebound consumers who order products online and from essential businesses such as grocery stores.

“One could argue that COVID has been an accelerant for some leasing demands,” CenterPoint Properties Chief Investment Officer Jim Clewlow said Thursday during Bisnow’s Chicago Deep Dish: Industrial & Logistics webinar.

Commerce Park Chicago

Companies that continue to grow include e-commerce, third-party logistics providers, packaging supply companies, food users, and medical companies, especially ones connected to COVID-19 tests.

WBS Equities CEO Wendy Berger told webinar participants her firm specializes in creating food manufacturing and food distribution facilities, and the sector hasn’t skipped a beat this year.

“We’re feeling more grateful than ever to be in that sweet spot,” she said.  

That type of growth was largely expected. But the most recent local data contains pleasant surprises. The Chicago region now shows a broad base of growing tenants, strengthening the prospects for long-term growth and driving up new construction to a record pace.

“A couple types of users have grown despite expectations,” Colliers International Executive Managing Director Jeff Devine said. “We’ve seen a significant amount of activity from big-name automotive users like General Motors, Ford, Volkswagen and Mazda.”

GM signed the largest deal of Q3. It leased the 1M SF speculative warehouse at 1023 East Laraway Road in Joliet delivered in 2017 by Core5 Industrial Partners.

Amazon played an outsized role in the local economy during the first two quarters of 2020, leasing about 14M SF in the Chicago area. Construction continues on the internet giant’s two five-story distribution facilities in south suburban Markham and Matteson, each totaling 3.8M SF, the largest industrial buildings in Chicagoland’s modern history. The massive ventures make the south suburbs the most active construction submarket. More than 8.4M SF is underway there, roughly double the I-80 Joliet Corridor.   

And Amazon plans to do more than open up a few suburban behemoths. In order to reach the largest number of consumers with one-day deliveries and directly compete with Walmart, the Seattle-based company will soon open roughly 1,500 small delivery hubs across U.S. cities and suburbs, including the Chicago region, according to a September report by Bloomberg.

But the Chicago region does not depend on Amazon to drive growth. Although it accounted for about half of the 14M SF in new leases signed in Q2, its share sank to only 7% of the activity between July and September, according to Colliers.

“This was good news,” Devine said. “Any single tenant responsible for that percentage of the leasing volume is concerning.”

Clockwise from top left: Liston & Tsantilis' Brian Liston, WBS Equities' Wendy Berger, Realterm's Derek Fish, FCL Builders’ Chris Moore and CenterPoint Properties’ Jim Clewlow.

Although total leasing declined in Q3, activity was still robust, he added. Tenants signed for 8.7M SF in Q3, eclipsing the 8.2M SF taken in Q3 2019.

“New leasing activity among users other than Amazon actually expanded during Q3, totaling 8.1M SF compared to 7M SF during Q2,” Devine said. “A broader base of users is good news for the industrial market.”

The economic crisis is taking a bite out of some users. New vacancies continued to open up as tenants terminated leases, moved out or downsized, Colliers found. At the end of Q3, 95.9M SF in Chicagoland was vacant, the most since 2015. That helped boost the overall vacancy rate 31 basis points to 6.73%, the highest in three years.

“User types that have pulled back include apparel companies, some manufacturers, some retailers and users that produce or distribute consumer durables,” Devine said.

Despite the economic uncertainty, builders have not hesitated to break ground this year. Development has also rolled forward in spite of initial fears that the pandemic would force a shutdown of construction sites.

“We only had two projects shut down, but that was just for a short period of time,” FCL Builders Director of Project Development Chris Moore said during the webinar. 

So far, most new Chicago-area projects have been build-to-suits, such as shipping firm Uline's 1.4M SF warehouse on its main campus in Kenosha, Wisconsin, the largest start of Q3, according to Colliers.

The new developments bring the total amount under construction across the metro region to 27.3M SF, the most ever and far above the 17M SF recorded one year ago. More than 20M SF, or about 74%, are in build-to-suits.

“This is a complete flip from the past five years or so, when speculative development dominated the pipeline,” Devine said.

But spec developers continue to land tenants, and spec demand could return if the market stays healthy despite present-day challenges. According to Colliers, the vacancy rate among regional spec projects completed since 2013 fell to 24%, the lowest-ever rate. A total of 20 industrial projects got underway during Q3, with 70% of that 5.8M SF being built on a speculative basis.