Space Shortages Make Life Challenging in Industrial Market

Article sourced from ReJournals

As the industrial market in Chicago and across the Midwest continues its strong run into 2017, several trends continue to impact the small to mid-sized owners and tenants in the market. While there has been much talk about large tenants, such as Amazon and other big-box users driving new construction and leasing, market conditions are bringing other changes to those companies that need only a fraction of the space required by larger users.

With overall industrial vacancies low – they are at or below 7 percent throughout the Chicago area, for instance — a shortage of space is creating challenges across most submarkets. This is particularly true with properties in the 60,000-square-foot and under category, where tenants—whether they intend to buy or lease—are often hard-pressed to find ideal facilities.

This is a result of quarter-over-quarter positive absorption and a continued supply of active buyers and tenants looking for spaces in the 10,000- to 60,000-square-foot range. Also, new construction is limited in this size category. While it’s cost-effective for developers or large-end users to build new, state-of-the-art facilities of 100,000 to 1 million square feet, small to medium-sized users often find new construction costs to be prohibitive.

This scenario is particularly true for those users seeking Class-A building space with modern amenities. Buildings with 24-foot ceiling heights or higher, ample truck and employee parking, and multiple dock spaces, for example, are in high demand.

Those who wish to buy are often forced into plan B, leasing a smaller space within a larger building. Many properties that have been on the market for a long period of time — and might not have all the amenities tenants desire — are now seeing increased activity because of this lack of inventory.

This supply-demand equation is also driving up pricing in many markets. During the past few years, rents have increased by 5 percent to 10 percent or more in many areas. Sellers and landlords no longer need to offer aggressive concessions, especially on the most desirable spaces. This increase in average lease rates combined with steady interest rates, has caused many buyers to now consider those new-construction opportunities that were once considered cost-prohibitive.

In the Chicago area’s DuPage County and bordering collar counties, for example, sales of industrial buildings of 50,000 square feet and under remain strong, as sellers are taking advantage of the favorable market conditions compared to that of 2011. However, lack of infill sites available for development continue pushing newer, larger developments beyond the core submarkets into areas such as the south suburbs of Chicago and Southeastern Wisconsin.

The outlook for small to mid-sized industrial tenants and owners remains positive, as growth in light manufacturing, e-commerce and related supply-chain businesses should continue at a steady pace. Many business owners are more confident about their long-term growth plans today than in recent years. All this bodes well for the industrial market heading into 2017.

By Mike Antonelli, Brown Commercial Group