Developers delivered 10.8M SF of new industrial product in the first half of 2017, and an additional 17.5M SF is under construction, according to Transwestern's Q2 2017 Chicago industrial market report. The pipeline and deliveries are just two indicators that the area's industrial sector continues to expand and perform among the nation's top industrial metro markets.
Net absorption in Q2 was positive, with over 2.7M SF occupied, while the vacancy rate remained tight at 6.2%. Average rents continue to hover near record highs at $5.55/SF, fueled by demand from online retailers and intermodal transportation companies seeking distribution centers near desirable interstate submarkets. Industrial cap rates rose from 6.4% in Q1 to 7.5% in Q2, and industrial REITs are seeing improved returns.
There are some things to keep an eye on moving forward. Land costs for industrial development across the market rose at least 20% over the past 18 months. While Transwestern believes this will not temper demand for new construction, it will affect the scope, size and locations of new industrial development. The average sale price of industrial assets dropped to $66.60/SF last quarter, as Class-B assets out-traded core product. And the tightening vacancy rate and outsized demand for quality space means landlords can be tougher in lease negotiations.
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