Chicago industrial real estate has been one of the major success stories of 2016 and the boom period will extend into Q4 and beyond.
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That's according to NGKF's Q3 2016 industrial market report. We chatted with NGKF research manager Joe Klosterman about three factors driving the sector.
1. The Pipeline Is Loaded With Spec Industrial
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Joe says 4.9M SF of new industrial has been delivered since July, and there are 57 projects in the pipeline totaling another 18.6M SF. These projects aren't simply announced developments; Joe says these are projects with shovels on-site and walls being erected.
Most surprising about the construction activity is the amount of spec development. Even though build-to-suit is a safer play, Joe says 48% of the pipeline is spec. This indicates that developers and investors remain optimistic for growth in the sector, and are taking the view that these projects will be absorbed by end users. Net absorption totaled 2.4M SF in Q3.
2. Vacancy Rates Continue To Set Record Lows
While developers rush to complete their new projects, demand from tenants is pushing vacancy rates not seen in a decade. Chicago's 7.8% vacancy rate in the sector is the lowest recorded since 2006, and held steady from Q2 as some of that spec development was delivered. Overall, vacancy rates have plummeted 430 bps since their 2010 high-water mark, and decreased by 50 bps in the past two years. Demand is also driving rent spreads to new records. Chicago industrial ended Q3 averaging $5.24/SF. That's an 8.3% increase year-to-year and a 21.3% spike since rates troughed at $4.32/SF in 2013.
Can the vacancy rate dip below 7%? Joe thinks it's unlikely, knowing what's in the pipeline and with past research as an indicator.
3. Diversity Of Money In The Capital Stack
Q3 sales of industrial assets of 100k SF or larger totaled 4.8M SF and accounted for $160.4M in transaction volume. That demand is drawing a diverse pool of investors from Chicago and out of town. Joe says Chicago rivals LA in institutional investment in the sector. Chicago isn't seeing the influx of foreign capital like on the coasts, but Joe says industrial is proving to be a safe sector for pension and insurance funds.
