http://www.globest.com/sites/brianjrogal/2016/08/11/ex-dominicks-space-gets-a-tenant/

CHICAGO—On the surface, it may look like industrial tenants in the Chicago region took a bit of a breather in the third quarter. Leasing volume in the past three months totaled about 5.2 million square feet, or about two million square feet less than in the second quarter, according to a report from JLL. But experts say the market probably still has enough demand to absorb the roughly 15 million square feet that developers have under construction.

“We've had a little bit of a blip this year,” John Picchiotti, managing director and Chicago industrial brokerage lead for JLL, tells GlobeSt.com. However, “supply and demand are still in balance.”

He points out that of the 19.5 million square feet of new construction completed year-to-date, build-to-suits account for 8.5 million square feet, or about 45%. “That shows discipline on the part of developers.” In previous development booms, speculative buildings would account for up to 75% of the total.

Developers still have a lot of confidence in the market. In fact, two one million square foot speculative projects are underway in the I-80 submarket, the most ever at one time in the Chicago region, according to JLL. If this pair goes unused, that could further push up the regional vacancy rate, which just ticked up slightly to 7.66%.

“When you build a one million square foot building, that really moves the needle,” says George Cutro, JLL's director of industrial research. But if the developers can land tenants relatively quickly, “everybody will be happy,” and that would spark even more new construction. On the other hand, if the structures stay vacant for six months or so, that would introduce some nervousness into the market.

But both Cutro and Picchiotti believe it's a mistake to focus too much attention on the new buildings in one particular submarket, even one as important as I-80. A careful analysis of the region shows “all the markets are pretty well-balanced with the exception of North Kane County,” Cutro says. In the latter case, a flurry of demand several years ago kicked off more development than it could handle.

But in other key submarkets such as I-55, O'Hare and North DuPage County, things have gotten so tight that developers struggle to find enough land for the modern distribution buildings that tenants now demand. “You're seeing old, obsolete buildings being torn down to make way for new ones,” Picchiotti says.

And they expect this boom will continue. A typical business cycle in the industrial sector lasts around five to seven years, but we are already heading into this expansion's ninth year, and the engine driving it is not hard to identify. “E-commerce has kept demand going strong,” Cutro says. Customers now expect to get ordered products quickly, sometimes within hours, and companies are still in the midst of reconstructing their supply chains.

And with so many highways and railroads converging on Chicago's giant inland ports, the region will increase in importance as a distribution hub. Picchiotti says that as long as the national economy holds steady, for Chicago 2018 looks like “It could be another year like 2016 or 2017.”

Instant Insights /

Industrial Boom to Continue Into 2018

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