CHICAGO—Researchers have tabulated the first quarter data for the Chicago region's industrial market, and its long run of superb numbers has continued. The first three months of 2017 saw 3.5 million square feet of net absorption, the 28^th consecutive quarter for positive growth, according to a new report from Newmark Grubb Knight Frank. That is 3% higher than last year's first quarter, and brings the total for the past year up to a 14.5 million square feet. The vacancy rate was just 7.6%. In the past seven years, that percentage has dropped 430 bps.

Not surprisingly, the intense level of demand means developers have also been extremely active. About 4.8 million square feet of new space, much of it designed for e-commerce or logistics, came online in the first quarter, NGKF found. And since the end of the recession, area developers have constructed 66.9 million square feet of new space.

Rents have also continued to rise, due to an aggressive push by landlords, and a willingness by tenants to pay. In the past five years, rents have roughly increased on average about 1.0% each quarter.

But even with the extra fuel added by the rise of e-commerce, and the consequent need for massive new distribution buildings, this remarkable expansion can't continue forever. How and when it comes to an end, and whether the eventual slowdown is mild or severe, is a subject of much debate.

“There seems to be a growing amount of uncertainty,” Geoffrey M. Kasselmann, executive managing director of NGKF's national industrial practice, tells GlobeSt.com. Much of it centers around the rhetoric heard from the new Trump administration. Some of this talk, including possible plans to expand US manufacturing or rebuild portions of the country's infrastructure, have heartened many people who work in industrial real estate.

But other chatter, such as the possibility of renegotiating trade deals, has the same people worried that the volume of imports will decline. “Any transition of that kind will cause uncertainty,” Kasselmann says, and users on the lookout for new spaces may decide to hold out and wait on the sidelines.

Kasselmann has recently taken a few trips overseas, and the talk there is definitely not encouraging. “Everybody wants to talk about Trump,” he says. Many foreigners, for example, seem less likely to travel to the US and spend money, and many also say they don't want to attend American schools and universities at this time. “That hasn't hit our economy yet, but it will.”

And in the midst of these uncertainties, there is also the near certainty that interest rates will rise at several points during the year. An increase in the cost of capital at this time, along with perhaps a substandard jobs report or two, may take the local industrial market down a peg.

Still, Kasselmann remains an optimist, and the market does have a lot going for it. For years after the recession, new development proceeded at a very disciplined pace, and this has helped sustain demand. And the expansion of e-commerce, and the need for many firms to reconstruct their supply chain, is by no means done.

“There is still a wave of clients to be served,” he says, and that should carry the market through much of 2017, notwithstanding all those other concerns. However, the real test will come as we get closer to 2018.

Even now, he adds, there are two types of clients that brokers serve. One of these wants to hurry up and get the deal done, even if it means having to pay a bit more in rent. The other kind is already “starting to get jittery.” These folks will say, “'Let's talk again in three months. I'm going to take a wait-and-see attitude.'”

And which group will be more numerous one year from now depends not just on political developments, but on factors like consumer confidence and the price of oil. “Watch those two things and you will know what happens next.”

Instant Insights /

Industrial Market Booming, but Uncertainty Lies Ahead

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