Industrial vacancy improves for first time since 2007

(Crain's) — For the first time in more than two years, there's something positive to talk about in the industrial real estate market.

The vacancy rate for warehouses and factories in the Chicago area fell to 11.9% in the second quarter from 12.3% in the first quarter, snapping a streak of 10 straight quarterly increases.

The vacancy is still higher than it was a year ago, when the rate was 11.7%, according to a new report from the Rosemont office of Colliers International.

Meanwhile, a key gauge of demand known as net absorption also took a turn for the better after trending negative for nine straight quarters.

While the data was far from robust — and was aided by the demolition of several large properties — the drop in vacancy and the positive absorption were welcome news.

"From where we've been, it's progress," says Colliers principal David Bercu.

Mr. Bercu believes it could be a lasting trend. He says there's a pipeline of big deals in the works and predicts vacancy will continue to inch lower over the remainder of the year.

The catch for industrial property owners, he says, is that deals are getting done at decidedly tenant- and buyer-friendly prices.

"I think the momentum will continue," Mr. Bercu says. "Now, the (rental) rates and prices are certainly lower than what Chicago is accustomed to. But before we can see recovery in pricing, we need to see some absorption."

Net absorption, which measures the change in the amount of leased and occupied space, was 2.06 million square feet in the quarter. Net absorption had been negative for nine straight quarters as companies shed space and new warehouses stood empty as development outpaced demand.

Over that nine-quarter stretch, net absorption tallied a whopping -37 million square feet.

Most of the good news on the demand side was concentrated, as 13 of the 21 submarkets Colliers tracks had negative absorption, with Lake County and the north suburban submarkets being the biggest losers.

Four submarkets had more than 500,000 square feet of positive absorption in the second quarter: Southeast Wisconsin, Fox Valley, the south suburbs, and O'Hare.

Mr. Bercu says the performance of the O'Hare market is most notable because it's the biggest submarket and also because there's a diversity of properties, such as buildings that have freight forwarding operations, light manufacturing and bulk warehousing.

Chicago's uptick in activity comes a quarter or two after other markets, says Brian Roach, a vice-president with DCT Industrial Inc. who oversees leasing and acquisitions in Chicago, Minneapolis and Denver.

Denver-based DCT on April 29 announced three big leases in Chicago that brought the firm's 5-million-square-foot portfolio to more than 90% leased.

"It feels like there's a good stream of activity," Mr. Roach says. "We're kind of coming out of the hole."

Some of the biggest deals in the quarter included:

* ALG Direct, a third-party logistics firm, leased 499,200 square feet at 1053 Schmidt Road in Romeoville.

* NACA Logistics USA Inc. leased 439,000 square feet at 250 S. Gary Ave. in Carol Stream from DCT.

* Stepan Co., a Northfield-based chemical manufacturer, signed a build-to-suit lease for a 217,712-square-foot building in Joliet that will be constructed by Oak Brook-based CenterPoint Properties at the new CenterPoint Intermodal Center-Joliet.