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CHICAGO-Brokerage companies are beginning to see occupancy, rents and construction fall, as demand for industrial begins to wane in the contracting economy. However, experts suggest Chicago’s diversity of industries may be its saving grace, keeping absorption positive and providing less economic impact than some other markets are seeing. Analysts expect the slow down to continue for at least the remainder of 2009.

“We’re somewhat fortunate in Chicago because we have such a diverse range of industries,” says Dennis Vicchiarelli, managing director with nonprofit economic development organization World Business Chicago. “It’s probably the most diversified economy in North America. With many other cities, people can name its industry, but here it’s not all based in one sector, so the dips aren’t quite as large as elsewhere.” Vicchiarelli tells GlobeSt.com that while the auto industry is struggling, other sectors present in the Chicago area, such as heavy machinery, chemicals, electronics, and food, haven’t been hit as hard, resulting in greater market stability.

Craig Meyer, head of Jones Lang LaSalle’s industrial and logistics practice, echoes that sentiment, highlighting Chicago’s unique strength as a central distribution point for the country. “Industrial is no different than any other product in commercial real estate, and we’re enduring a significant slow down in all types of activity,” Meyer tells GlobeSt.com. “But everything is relative, and relative to retail, office, multifamily and other product classes, industrial will fare better across the board and be less impacted than other product lines for a number of reasons. Industrial construction was pretty limited, and industrial didn’t enjoy the same run-up in pricing to the extent that some trophy-class office buildings did.”

Transwestern puts industrial vacancy in the metro Chicago market around 10% at the end of Q4, up from 9% at the same time in 2007. Absorption has struggled to remain positive with decelerated demand, according to Transwestern’s year-end 2008 report, but the market still saw 69,000 square feet absorbed in Q4. Net absorption for the year shows the toll the economy has taken however, with 6 million square feet absorbed in 2008 – an amount less than half what the market saw in 2007.

The company’s research also shows that sublease space is up about 200,000 square feet from year-end 2007. It says construction is about a third of what it was a year ago – 5 million square feet under construction now, down from more than 14 million square feet 12 months ago. Rents also fell about 3.2%, after increasing 3.7% in 2007. Transwestern’s research forecasts that rents will continue the decline through 2009.

However, it’s not all gloom and doom, according to Jones Lang LaSalle, which reports it has seen an uptick in activity thus far in the first quarter of 2009, with more than 2.3 million square feet of new tenants entering the market. “It remains to be seen how much of this activity will actually translate into transactions as much of the activity is concentrated within the third party logistics sector,” says Trevor Ragsdale, EVP with the firm’s Chicago Industrial Group. Ragsdale says the most significant activity come from the Dr. Pepper/Snapple group, which is considering relocating its 953,000-square-foot bottling and distribution plant, now in Northlake. The company is looking for a similar-sized facility, expandable to 1.2 million square feet, in the interstates 80 and 55 corridors, Ragsdale says.

“It’s going to be slow-going and we’re going to see significantly reduced leasing activity and non-existent sales activity,” Meyer says. “Companies are seeking to be far more efficient in how they operate, so almost across the board, firms are non-expansive and looking to reduce real estate expense. At lease renewals, they’ll be looking for lower rents or smaller space. We have a significant amount of commercial mortgages coming due this year, and how we deal with liquidity will have to be handled on the federal level.”

Meyer emphasized the cyclical nature of the market, and that moving forward, one perk of that lack of liquidity is the significant decrease in construction and therefore, new space coming online. “The positive side is there’s little to no construction, and if we continue at this same level of zero construction, it’ll really help solidify and put good foundation in the market for the future,” he says. “We won’t be overbuilt for a number of years.

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