With 19.5M sf of industrial space in pipeline, worries of overbuilding begin to surface

A surge in new warehouse construction will test the strength of the Chicago industrial market: report

Marina Crossings (Courtesy of Cushman & Wakefield)
Marina Crossings (Courtesy of Cushman & Wakefield)

Developers still hoping to cash in on Chicago’s red-hot industrial market had 19.5 million square feet of speculative development underway in the fourth quarter, leading to worries the market could become overbuilt.

The surge in spec industrial construction last quarter marked a 60 percent increase year-over-year and a 5 percent uptick from third-quarter totals, according to a report by Avison Young.

The Chicago area has benefited from a nationwide rise in e-commerce that’s led companies to open last-mile distribution warehouses in population centers. After years of increased development activity in Chicago’s industrial market, developers are now moving farther outside of the city to find room for their projects.

Southern Wisconsin led all submarkets in new construction activity in the fourth quarter, with 5 million square feet of development — a 50 percent increase from the previous quarter, according to Avison Young.

“Industrial businesses, particularly those in the logistics and foodservice areas, continue to focus on the Chicago-area market,” Chris Lydon, principal at Avison Young’s Chicago office, said in a statement. “Many submarkets that are closer to the city have little to no space available for new buildings, so we’re continuing to see speculative development moving to outlying submarkets such as Southern Wisconsin.”

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So far, new industrial product has been offset by robust leasing activity, which hit a three-year high in the third quarter of 2018. Industrial vacancy dropped to a 17-year low last year, but the rash of new construction is causing the vacancy rate to inch back up.

The overall industrial vacancy rate in the fourth quarter was 6.1 percent, an increase from 5.7 percent the previous quarter, according to Avison Young.

The Interstate 80 corridor now has a vacancy rate of 12 percent, the highest of any submarket, largely because of the 15 million square feet of new construction delivered there over the last two years, the report states. There is still 3.3 million square feet of under-construction product to be delivered, making it the submarket that could have the most problem with overbuilding, according to Avison Young.

In the O’Hare submarket, vacancy ticked up to 5.8 percent from 4.6 percent after six new industrial projects were delivered in the area last quarter. There are 10 other projects under construction in the O’Hare area, according to Avison Young.

“While this will ultimately increase market vacancy, the robust demand from O’Hare-related users will remain sold throughout 2019,” Lydon said.

Despite some worry about overbuilding, investors continue to make waves in the local industrial market. The biggest industrial acquisition in the fourth quarter was Caryle Group’s $31.5 million deal for Experior’s 170,000-square-foot warehouse in the south suburbs, according to Avison Young.