Finding Industrial Space in a Tight Market

February 28, 2023 — Brown Commercial Group Partner Mike Antonelli looks at what’s top of mind for industrial clients today, including the challenges of finding industrial space in a tight market. Here are three top concerns for the commercial real estate industry.

• Challenges finding product. There are still companies that want to buy, but the capital costs are much higher than a year ago and supply is very limited. We’re advising some clients to wait since prices are at top dollar. They can look at a 3 to 5-year lease and see where things go and hopefully costs will come down, there will be more product available in the future and they will feel more comfortable with where economy is.
• Concerns About a Recession. There is a lot of talk about a recession but, from the industrial standpoint, there may be a little bit of a softening in the market later this year, but I don’t think it will be that bad. So far demand is still there. Where we’re seeing a negative impact with interest rates is in the capital markets. Because of rising interest rates, it’s costing more to acquire properties and we’re not seeing as low a cap rate.
• Is there too much or too little construction? Demand has ticked back a little. There is a lot of construction coming online but even if construction stopped and our vacancy increased by a couple points, we’d still be in a good shape.

Industrial Development Recap

Industrial development has been on a strong streak for many years, but new starts tapered in the latter part of 2022 as interest rates rose. A look at key submarkets shows:

• Central Kane/DuPage – The development surge continues in this submarket and will make finding industrial space a bit easier. There was 5.2 msf of new inventory added over the past three years, an 8.6% increase in total inventory. There is another 1.5 msf under construction and slated for delivery in 2023.
• North Kane/I-90 — There is 4.2 msf underway in this submarket, almost triple the 10-year average. The current pipeline is 9.5% of the submarket’s overall inventory. More than half of the square footage under construction is being developed on speculation without any preleasing announced. There was about 1.5 msf delivered over the past 12 months and another 3 msf is set to deliver by the end of 2023.
• North DuPage — The 50,000 SF currently underway is the lowest construction count in more than three years. This represents a continuation of new development in the submarket, which had already seen 1.1 MSF deliver over the past three years.