CHICAGO—The region's industrial market has just extended its streak of positive absorption to 28 quarters, according to the latest market update from Newmark Knight Frank. That means the Chicago area could soon set a record for the longest recovery in the sector since WW II. But even as tenants agree to pay ever higher rents while absorbing space almost as fast as developers can put up walls, many observers have begun to wonder when the boom times will end.
“I never want to be the naysayer in the marketplace, but we can't expand forever,” Geoffrey M. Kasselman, executive managing director of NKF and leader of its national industrial practice, tells GlobeSt.com. Most of the key statistics do currently point in the right direction, and due to the robust demand generated by e-commerce and the subsequent need for new logistics facilities, “industrial property will have a very bright future for a while.” However, “there are some early warning signs.”
Positive net absorption totaled 2.5 million square feet during the second quarter, bringing year-to-date absorption to 6.1 million square feet, significantly higher than the first six months of 2016, company researchers found. And average asking rental rates hit a new record high of $5.29 per square foot, which marks a 4.5% increase over the last 18 months, and almost 20% growth over the last five years. But the vacancy rate saw a small uptick, increasing 10 bps to 7.7%, largely due to the second-quarter delivery of more than 4.1 million square feet of new construction. Developers did more than half of this total on a speculative basis.
“There is an awful lot of space coming to the market right now,” Kasselman says. “And it doesn't take a lot to bring about change.” Even a few new one million square foot buildings in the I-80 and I-55 submarkets, for example, could give the upper hand to prospective tenants looking for that amount of space.
And even though the region-wide numbers for positive absorption are quite impressive, Kasselman points out that most absorption occurred in a little less than half of the submarkets. The South Side of Chicago led the region with about 747,000 square feet absorbed, and I-88, Far North, Southern Cook, I-39, I-55, and Fox Valley each had between 262,000 and 652,000 square feet. But others such as I-80, McHenry, North DuPage, and Northwest Suburbs were basically flat, and another sizable group lost as much as 580,000 square feet.
“That shows we're coming close to equilibrium,” he says.
Furthermore, the cost of capital should continue to rise, and that will eventually curtail some demand and slow down new construction. The recent increases put in place by the Fed had been expected for a very long time, and therefore, had little impact. But over the next year or so, Kasselman expects subsequent increases will give those in the industrial market a reason to pause.
And the upcoming mid-term elections will soon loom over the entire commercial real estate world. Whichever side of the political divide one occupies, the uncertainty inherent in such an election “might be enough to change the market,” Kasselman says, probably around the third or fourth quarter of 2018.
Until then however, “we're probably going to see more quarters of positive absorption, both locally and nationally.”
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