The chatter about the current state of the suburban industrial real estate market quickly tends toward superlatives.
“Hottest I’ve seen,” said Dan Brown, president of Brown Commercial Group in Elk Grove Village.
“In the last 18 to 24 months, I’ve never seen anything like it. It’s accelerating at an extremely aggressive rate,” added Alfredo Gutierrez, founder of SparrowHawk Real Estate Strategists.
“It’s pretty amazing what’s going on right now,” said Kelly Disser, executive vice president, industrial services at NAI Hiffman in Oakbrook Terrace.
To be clear, this is also a national trend. But the Chicago area is setting the tone.
The space race
The vacancy rate for industrial space is normally around 10%, said Jeff Lanaghan, senior vice president and partner, Midwest Region, CRG.
Now it’s about 5% in the Chicago area, or “essentially zero because a business has to move to move in,” Brown said.
That would make Elk Grove’s vacancy rate of 2.3% essentially below zero, Brown added.
Disser tracks the vacancy rate in the O’Hare submarket from 6.46% at the end of 2020, to 3.54% at the end of Q3 2021 to 2.86 at the end of Q4 2021.
In other words, we went from hot to absolutely sizzling.
Part of this is an increase in the need for crafting space. Part of this is an increase in the need for warehouse space.
Let’s talk about manufacturing first.
Businesses are under pressure to increase production to meet increased demand from a booming economy. Many companies are trying to meet that need by bringing production back to North America from overseas — particularly Mexico, but also Dallas and Chicago, Gutierrez said — to meet increased demand.
It’s only cheaper to send production overseas if you can actually get it made there, which has proven difficult during the COVID-19 pandemic, and then get it through overrun US ports.
“Companies were kind of caught off guard by not having inventory with the supply chain,” Brown said.
They learned a lesson. Businesses want inventory levels 5% higher than they were before the pandemic, Gutierrez said. Just-in-time inventory no longer means the same thing.
“And 5% is a lot of space,” Gutierrez said.
Our commercial real estate experts are also seeing an increase in demand for warehouse space, likely even more than demand for manufacturing space.
The growth of e-commerce is an obvious reason for this. First, people are buying more and more on their phone or laptop. Amazon and big-box retailers with a large online presence are building or renting throughout the suburbs. The same goes for small retailers. And then there are companies like Addison-based CPG.IO, Disser said, which helps large companies get closer to customers to reduce shipping time.
You can’t be there in two days or less from coast to coast.
Location and transportation have played a big role in the growth of the Chicago area since the 1800s, and it’s no different today. Our location in the middle of the country is a kind of natural resource. And companies have a choice of ways to ship their products: by plane from O’Hare Airport, by rail, or by road.
For example, Chicago is the only city in the country where all seven Class 1 rails pass, Lanaghan noted.
Fresh water from Lake Michigan is also valuable in the manufacturing process.
“I think it’s often overlooked,” Disser said of our Great Lake. “He’s a very positive resource, a great resource that Chicago has.”
So, with demand so high and supply so low, what can businesses that need space do?
The Interstate-55 corridor is second only to O’Hare in demand, Lanaghan said, because “the newest product of the highest quality” along with its proximity to Chicago and Interstates 80 and 55, allows businesses easy access fast to the Gulf of Mexico and both coasts.
For some, that means moving west from O’Hare to less developed areas. Hello, Elgin, Hampshire, Huntley, Bartlett and West Chicago. If you don’t have to be so close to O’Hare you can hear the planes roar overhead, DuPage County Center and Kane County are good places, and Taxes land is lower.
“There’s a big land grab by these developers to bolster supply,” Brown said.
Others, however, cannot afford to stray too far from the airport. Air freight companies, for example.
“Proximity to O’Hare is critical. An air freight company can’t go 25 miles west. Their business economics can’t stand it,” Disser said.
Businesses might also wish to stay in more populated areas, close to both customers and their workforce.
For them, that might mean getting creative. This vacant office building? This underutilized commercial space? Two good candidates to be demolished so that an industrial building can see the light of day.
Allstate sold 232 acres of its campus along Interstate-294 in Northfield Township in November for about $232 million to Dermody Properties, an industrial and logistics developer.
Brown said property sales prices have risen 20-25% year-over-year.
“We’ve never had these swings like this,” he said.
Even the houses give way to industrial spaces. In O’Hare’s shadow, 106 homes in Bensenville’s Mohawk Terrace neighborhood are collapsing. Going up, four buildings total 1.2 million square feet of industrial space.
And if you own industrial space in the suburbs, chances are you’ve gotten a call asking if you’re ready to sell “for some stupid number,” Brown said.
This “dumb number” may sound good until you consider where you would move your business. There just aren’t many options in the suburbs.
Gutierrez tells the story of a construction price quoted in December at $775 per square foot that by mid-February had risen to $925.
Things are moving “incredibly fast”, Gutierrez said. “I’m stunned because I’ve never seen this – and I’ve been doing this for 30 years – this fast. I come home and say to my wife, ‘It’s almost a bit scary, when it all goes so well, you think to yourself, is this going to overheat? What is it going to do? And I think it would overheat if not for the fact that the supply chain kept the developers in check.
Waiting for a new space
Lanaghan said many companies are looking for bigger spaces than ever before.
“The biggest change I’ve seen in the 30 years I’ve done this is the size of the buildings. When I started 30 years ago, a 100,000 square foot contract was huge. was a major deal, right?” he said.
Now, he joked, it’s almost not worth doing something so small anymore.
But if you find space to build, the shortage of building materials means high prices and long delays in the construction process. For example, Brown said, you might have to wait until the spring of 2023 to get those pre-made panels for your new industrial building, not the three or four months of previous years.
If you want to rent, well, rent for industrial space is the opposite of rent for office space. This is especially true for buildings under 100,000 square feet, where rent inflation is around 12 to 15 percent, Gutierrez said.
So how long is this going to last?
Our experts agree that it’s hard to pin down. Gutierrez sees this homeowner and seller-friendly market continuing for another two or three years, although it should ease over time.
Supply chains will be repaired, things will start moving faster, more product will hit the floor and the trend will start to lean towards tenants and buyers, he said.
But for now, industrial real estate is an outlier.
“Not everything becomes industrial, believe it or not. There are other uses,” Lanaghan said. “It’s just that industrial is the hottest right now. It’s the one everyone needs.”