In a scalding U.S. logistics real estate market, Chicago is not taking back seat heat to anyone.
The numbers bear it out. According to data published in late July from real estate advisory firm Newmark Group Inc. (NASDAQ:NMRK), the Chicago market, which is geographically defined as the city and its suburbs along with Milwaukee and the Wisconsin counties of Kenosha and Racine, had more than 1.16 billion square feet of industrial inventory in the second quarter. That was the largest of any market in Newmark’s database. Los Angeles was second at slightly more than 1 billion. The combined Philadelphia and central Pennsylvania markets, as well as the combined northern New Jersey and Long Island, New York, markets, could not break 1 billion square feet of inventory in the quarter, according to the data.
More than 16 million square feet was under construction in Chicagoland during the quarter, an all-time quarterly record for the market, according to Newmark data. Net absorption, the amount of capacity occupied minus the amount vacated, stood at 10 million, also a quarterly record, Newmark said.
Most remarkable for the Chicago market was that the second-quarter vacancy rate for big-box facilities with clear heights of 28 feet or more stood at between 6% and 6.3%, despite the large amount of square footage that was under construction. Historically, such heavy industrial development in Chicago would result in a 15% vacancy rate because newly built facilities would sit empty for a period of time before being occupied, said Jack Rosenberg, the Chicago-based national director of logistics and transportation for real estate advisory firm Colliers International Group Inc. (NASDAQ:CIGI). However, demand is so strong across the region that the traditional link between new construction and higher vacancy rates is nonexistent today, Rosenberg said.
“To have a 6.3% vacancy rate in light of the strong pace of new construction is amazing,” said Rosenberg, who has lived in Chicago all his life and has worked in industrial development for 40 years. He said that one of his clients sought a 400,000-square-foot warehouse near O’Hare International Airport west of downtown, but nothing was available to lease.
West of O’Hare in DuPage County, developers Prologis Inc. (NYSE:PLD) and ML Realty LLC have acquired 200 homes and will raze them in favor of two logistics developments totaling about 900,000 square feet. Most of the industrial space is already spoken for even though the buildings aren’t slated for occupancy until 2022.
Chicagoland is attractive to e-commerce companies because of its population of nearly 10 million, its centralized location for fast-cycle e-commerce distribution and its stature as the country’s transportation hub. Yet although some companies are using Chicago as a platform for nationwide distribution strategies, many are planting their flags there to capitalize on its dense and still-growing population, Rosenberg said.
Chicago’s growth comes amid arguably the best quarter ever for the U.S. logistics warehousing market, no small feat considering that the category has been in a 12-year bull market. Net absorption exceeded 100 million square feet for the first time in any quarter, according to Newmark data. Square footage under construction hit an all-time quarterly record of 423.4 million.
Asking rents, on average, hit a quarterly record of $8.32 per square foot, Newmark said. Vacancy rates dipped to 5.1% from 5.4% in the first quarter of 2021, and just above the cyclical low of 4.8% set at the start of 2019, according to its data.
Asking rents rose 8.6% year-over-year, and Newmark analysts said there’s nothing on the horizon to cap rent growth. Commodity costs, which have been soaring for months, may moderate somewhat as supply shortages abate, Newmark said. However, escalating land and labor costs may not be as elastic, it said.
Another factor, according to Rosenberg, is that warehouse rents account for just 7% to 8% of an occupier’s overall logistics costs. Transportation is a much higher slice of the cost pie. Because of rents’ relatively low cost priority, tenants would be more willing to bid up a property, especially if it brings their products closer to the end customer and reduces transport charges, he said.
At this extraordinary point in the cycle, when conditions are actually tightening after more than a decade of strength, the main objective of tenants is to just get their hands on property rather than wonder what they’re going to pay to lease it, Rosenberg said.