2012 marked by big deals, return of spec development
The Chicago industrial market continued on its path toward recovery in 2012 – a year marked by large-sized deals and a renewed interest in speculative development.
Demand for industrial space in the Chicago industrial market continued to increase through the third quarter of 2012, as evidenced by the absorption of an additional 4.26 million square feet of vacant space over the past three months, according to a third-quarter market review from NAI Hiffman.
“I think it’s been a great year,” said Jason West, senior director industrial brokerage services for Cushman & Wakefield of Illinois Inc. “There’s been strong demand for space. There’s been a lot of absorption this year, and the vacancy rate has come down substantially across the board.”
During the first three quarters of 2012 alone, nearly 11.5 million square feet of vacant space has been absorbed through user sales, new leasing activity and companies taking back some of the space they had left vacant in response to the effects of the economic recession, according to NAI Hiffman.
“Through the third quarter of this year we tracked positive net absorption of just under 12 million square feet compared to a year ago, which was about 10.1 million square feet,” said Keith Stauber, managing director for Jones Lang LaSalle. “From that perspective, we’re heading in the right direction.”
The vacancy rate also has steadily declined for the past two years as this vacancy space has been absorbed by companies new to the Chicago area and established companies expanding their operations, according to NAI Hiffman. This rate peaked at 12.1 percent during the second quarter of 2010, one of the highest rates the market has historically witnessed. Since then, however, the vacancy rate has dropped to a level not seen since early 2008, as leading economic indicators were just beginning to sour, and well before the stock market crash and resulting panic that set in that October.
“Since the first quarter, the vacancy rate dropped 90 basis points to end the third quarter at 10.2 percent,” Stauber said. “It had been just over 11 percent at the beginning of the year.”
“The biggest storyline of the year continues to be the big deals that are getting done,” Stauber said.
By far the largest lease as of late November 2012 is Home Depot’s 1,618,048-square-foot lease at the CenterPoint Intermodal Center in Joliet. The 1.6 million-square-foot stocking distribution center is the newest addition to the 6,500-acre CenterPoint Intermodal Center and is Home Depot’s second distribution center within the development. Upon its June 2013 completion, the new distribution center will be adjacent to Home Depot’s current 657,600-square-foot rapid deployment center creating a logistics campus for the company.
Also in 2012, M. Block & Sons completed an industrial lease for 915,643 square feet of space at 18801 Oak Park Ave. in Tinley Park.
“I would say that the velocity of deals has increased in 2012 over 2011 and 2010,” said Robert Smietana, vice chairman and chief executive officer of HSA Commercial Real Estate. “That’s good news for our industry.”
Third quarter tenant demand of 7.8 million square feet, however, marked a 28.5 percent decline from the second quarter level of 10.9 million square feet, according to research from Colliers International Chicago. The drop in demand was attributed to the lack of interest from the large user. The largest lease signed in the third quarter was for 354,200 square feet, while the second quarter witnessed three leases greater than 400,000 square feet totaling 2.8 million square feet.
The big box markets I-55 Corridor and I-80/Joliet Corridor posted the highest lease transaction volume in the third quarter, totaling 2.0 million square feet and 1.1 million square feet, respectively. The DeKalb County market had no tenant activity for the quarter.
Sale activity totaled an impressive 3.8 million square feet in the third quarter, but it was significantly lower than the 5.9 million-square-foot mark registered in the second quarter, according to Colliers International.
The largest user sale of the third quarter occurred when Handi-Foil Corp. purchased a 400,100-square-foot bulk warehouse/distribution facility in Naperville from Black Rock Realty Advisors for $41.50 per square foot. Colliers International noted that the sale represents a positive indicator that manufacturing is starting to come back, as Handi-Foil, a manufacturer, is expanding its operations in Illinois.
The largest transaction of 2012 thus far is a $64.25 million sale of 2400 Dralle Road in University Park. The price per square foot averaged-out to $48.
An eight-property portfolio in Elk Grove Village purchased by Morgan Stanley from Gullo International Development Corp. commanded a price of $40.6 million, which came out to $118 psf.
“I think investment sales have probably been slightly down mainly because they were up so much in 2011,” Smietana said. “I think there was a flurry of activity for Class A product in top-notch locations. A lot of buildings traded at fairly high prices in 2011. In 2012, a lot of the big packages have been picked over. I think investors are having a little bit of a hard time finding the right product.”
Developer interest in speculative development continues to gain momentum. In the third quarter, Clarius Partners began construction on a 1 million-square-foot project at Clarius Park Joliet. This marks the first 1 million-square-foot speculative development to start since the first quarter of 2008, according to Colliers International.
“The return of speculative buildings has for sure been the biggest attention-getter for 2012,” said Pat Gallagher, senior vice president of the Alter Group. “Not that we didn’t expect it eventually, but to see them going up is a good thing.”
DCT Industrial Trust completed a 604,100-square-foot speculative bulk warehouse/distribution facility at DCT 55 in Romeoville. The project easily surpassed the 362,500-square-foot build-to-suit facility recently occupied by the Edward Don Company, according to Colliers International.
“There are spec buildings going up and more are planned for the spring, so that’s all great news,” said Tim Hennelly, president of the Great Lakes region for Ryan Companies, which built the Romeoville facility for DCT Industrial Trust. “There also have been more build-to-suits, and I think that’s simply because a lot of the empty spec buildings that were standing in 2010 and early 2011 were taken.”
Hennelly added that the Chicago industrial market’s shrinking vacancy rate and increasing rent growth has helped to spur new speculative development.
“It makes sense to do a spec building now, whereas 18 months ago, rents weren’t high enough or cap rates weren’t low enough. The equation didn’t work. The equation works now,” he said.