'Slow, slow' recovery expected for industrial space
(Crain's) — The market for industrial real estate in the Chicago area continues to worsen, with demand depressed and vacancy rising, as the recession has manufacturers and shippers alike moving less product.
The vacancy rate for warehouse and manufacturing space climbed for a seventh consecutive quarter, reaching 11.7% in the second quarter. That's up from 9.4% in the year-earlier period and 11.1% in the first quarter of this year, according to a report by brokerage Colliers Bennett & Kahnweiler Inc.
The rate is now at its highest in at least 20 years, according to Colliers data, which dates back to 1990.
The demand picture is perhaps even more grim.
Net absorption, a key demand gauge that measures the change in occupied and leased space compared with a prior period, was negative for the sixth straight quarter, at -6.8 million square feet. In the first quarter, net absorption was -8.3 million square feet. The two quarters combined, at -15.1 million square feet, represent another 20-year lowlight for Chicago's industrial real estate market.
"It's not surprising. This has been the most challenging real estate market that we've faced in 25, maybe 30 years," says David Bercu, a principal with Rosemont-based Colliers. "When people are not buying houses and they're not buying cars and in general are cutting their consumption, it has a profound impact on manufacturing and distribution."
Mr. Bercu says the majority of deals these days are tenants renewing their leases of existing space, often a year or two in advance of expiration dates in agreements that sometimes include rent reductions.
Such deals provide savings to tenants and peace of mind for landlords, who don't have to worry about losing a tenant in the near term and hope they'll be able to raise rents in a few years as the market improves. Mr. Bercu expects landlords will have to wait a while before rents and vacancy trends start going their way.
"There's really no catalyst in the economy or the market to change current activity levels," he says. "It's going to be a slow, slow road to recovery."
Yet Colliers' report manages to find three "statistical silver linings" in the second-quarter data: Leasing activity edged up slightly to 6.3 million square feet from 6.1 million square feet in the first quarter (the 10-year average for the second quarter is 8 million square feet); new construction continued to slow, down to 3 million square feet from 4.7 million square feet in the first quarter, and the pace of the vacancy rate increase slowed.
Mr. Bercu says he thinks the most significant improvements were the slowed vacancy rate increase and the lower negative absorption figure compared with the first quarter.
"That gives you some solace that things will not continue to accelerate downward," he says.
One developer says there were markedly more requests for proposals from brokers in the second quarter compared with the first quarter, an indication that the market could improve.
"It couldn't get a whole lot worse," says Jeff Lanaghan, vice-president of leasing and development with Atlanta-based Industrial Developments International Inc. "But once you see proposals going, there's going to be deals happening somewhere."
Industrial Developments, known as IDI, controls about 12 million square feet of properties in Chicago, including two buildings the firm built last year as speculative projects — meaning tenants weren't lined up in advance. Both buildings, a 363,000-square-foot warehouse in Aurora and a 309,000-square-foot warehouse in Joliet, are vacant.
"There are other ones (built by competitors) that have been out there longer," says Mr. Lanaghan, who handles leasing for the Aurora building and says he's gotten good interest lately.
Significant industrial leases in the second quarter included:
* Home Depot Inc., the Atlanta-based home improvement chain, signed a one-year renewal for 800,000 square feet at 1701 Remington Blvd. in Bolingbrook, a building owned by New York-based ING Clarion Partners.
* Distribution firm California Cartage Co. leased 374,460 square feet at 251 Laraway Road in Joliet. Long Beach, Calif.-based California Cartage moved from a smaller space in the CenterPoint Intermodal Center in Elwood. The firm signed a three-year lease in its new building, owned by Minneapolis-based Ryan Cos.
* BGE Ltd., a direct-marketing collectibles business better known as Bradford Group, renewed a lease for 352,119 square feet at 794-854 Golf Lane in Bensenville, a building owned by AMB Property Corp.
