Chicago Getting Nearer the Top of Investors’ Wish Lists

CHICAGO—All signs point to the Chicago industrial market continuing to expand for the foreseeable future. That fact should also give potential investors, especially ones hunting for higher yields, a lot of confidence in a wide range of properties in the metro area.

These were two conclusions reached by Marcus & Millichap, which just released its 2018 North American Investment Forecast. The Chicago region’s overall economic health looks good, the firm reports. Payrolls last year were nearly 3% above the pre-recession peak, “which is an encouraging sign for a metro that took longer than most to recoup its losses.” And payrolls in the trade, transportation and utilities sector, which uses the largest amount of industrial space, were less than 1% above the last highpoint, “suggesting even further upside potential for industrial operations.”

Meanwhile, developers have begun reinventing Chicago’s one-billion-plus square-foot inventory. They plan to complete more than 30 million square feet of new industrial space between 2017 and 2018 and convert big chunks of older stock. The former Chicago Tribune distribution center in Streeterville will soon provide new office and apartment space. Nearby, R2 Cos. has decided to give Morton Salt’s old warehouse a second life as an apartment, office and entertainment complex.

“Investors seeking upside potential are searching Chicago for higher yields and appreciation that has already been realized in most other markets,” the firm says. “Warehouses are in particularly high demand, accounting for a greater number of sales for each of the past two years.” And although many larger class A properties have traded hands in the last year, opportunities exist in other portions of the market. “Overall, cap rates for smaller buildings were above 8% last year, more than 250 bps higher than many coastal metros.”

Marcus& Millichap’s 2018 national industrial property index ranked the desirability of the 30 top industrial markets, and for this year Chicago rose to ninth, a jump of six places. Along with Detroit, it’s the only metro area off the coasts to reach the top ten. That boost was largely due to the expected slowdown in new completions paired with strong absorption.

In 2018, Marcus & Millichap says Chicago-area developers will complete another 13 million square feet, the least since 2014, and industrial vacancy will fall to 5.8%.

“Average asking rents will rise to $5.74 per square foot by the end of 2018, up 5.5% annually,” the firm adds. “Last year, average rents soared 6.9%. This year, many investors will focus on last-mile distribution assets near densely populated areas adjacent to the Tri-State Tollway.”