HEARTLAND SNAPSHOT, AUGUST 2010

CHICAGO INDUSTRIAL MARKET

SLOW RISE IN CHICAGO INDUSTRIAL MARKET

For those who were expecting some market relief by now, there is not a great deal of positive prognosis to provide. Despite the slow rise in the stock market since its fall, the market continues to suffer from mediocre progress with its continuous ups and downs. There is still much change needed in the global economy to sustain the stock market growth we need to realize a full and effective recovery of other markets, including commercial real estate. But I would like to say that we are now bouncing off the bottom with an ability to now understand where market corrections have settled in terms of value, cap rates, absorption and development, which is all but non-existent. With historic high unemployment, and the uncertainty what new pothole we might hit while we are finding our way out, it may still be a rough year or more ahead of us. Much depends on how the commercial lending industry plays out the myriad transactions that still linger in their portfolios. The penalties for a defer-and-deny or an extend-and-pretend philosophy may not yet to been fully realized.

On a positive note, if consumer confidence continues to eek up, while other economic indicators remain relatively positive, we can hope for improvement in the markets – both financial and real estate. What we need is for more positive factors to be realized on a consistent basis so that we can turn to better times ahead and depart from those recently past. Not that they will soon be forgotten, and hopefully with some lessons learned, but it is not a moment too soon for us to be able to sustain the momentum of transactions and bolster rents. Without stability in rental markets and absorption, as well as lending terms that are palatable, we will not recover any time soon.

Today you can still find rents at 40 to 60 percent of what the highs 2 years ago. Yet sale prices, though some have fallen, are still holding strong given there is little, if any, new supply being added to the pipeline. And although some costs of construction have come down, many material costs have not. Therefore once labor is back in demand, prices will raise again sharply.

But here is the good news…we still have everything to be thankful for!

— Randy Podolsky is managing principal with Riverwoods, Illinois-based Podolsky Northstar CORFAC International.

GUARDED OPTIMISM TAKES HOLD IN CHICAGO INDUSTRIAL MARKET

For the first time in 2 years, the Chicago industrial market experienced a quarterly vacancy rate decrease, albeit minimal, to 11.5 percent during the second quarter of 2010. Guarded optimism has begun to take hold.

Tenants continue to renegotiate or extend leases. New commitments largely involve existing space, with very little build-to-suit activity. In fact, industrial development remains incredibly limited here, with 178,700 square feet currently underway and only two recent deliveries, including Uline’s 1.27 million-square-foot facility in southeastern Wisconsin. This is good news for absorption, and will help stabilize supply and demand.

Distribution space tops the list for leasing heading into the second half of the year. Discount retailers are flourishing in today’s soft economy. Candy manufacturers, perhaps surprisingly, remain active in the market as well. Logically, the trend toward distribution outsourcing has resulted in higher demand from third-party logistics (3PL) firms.

In fact, the three largest leases Cushman & Wakefield tracked during the second quarter involved 3PL tenants. Among them, ALG Worldwide Logistics leased 499,200 square feet at 1053 Schmidt Road within the Interstate 55 Corridor, NACA Logistics leased 439,420 square feet at 250 South Gary Avenue within Central DuPage, and Cloud Packaging Solutions committed to 175,086 square feet at 1800 West Central Road in Northwest Cook County.

Chicago became the nation’s largest industrial hub for a reason — it is near major population centers and is the only city in the country that has every major rail line running through it. Looking ahead, it will be interesting to see what comes out of Washington, D.C., on cap and trade. If the cost of shipping by the truckload rises significantly, that surely will drive stepped-up use of rail as a distribution mode. As a silver lining, Chicago will benefit.

In the meantime, we hope to see more slow but steady progress.

—  Peter W. Quinn IV is executive managing director for Cushman & Wakefield’s Industrial Business Development & Operations, Global Supply Chain.

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