CHICAGO INDUSTRIAL MARKET MONITOR THIRD QUARTER 2015 Chicago s industrial market thrives during the third quarter. Demand across the Chicago industrial market remains high sending absorption up and vacancy down. Economic Overview Chicago Historical Job Growth Chicago s diverse economy continued to strengthen throughout the first three quarters of 2015. The metropolitan area added more than 61,000 jobs since August of 2014, prompting unemployment to drop an impressive 120 basis points (bps) to 5.6% over the same period. The supersectors that recorded the highest year-over-year growth in employment were trade, transportation and utilities; education and health services; and professional and business services witnessing increases of 390 bps, 160 bps, and 120 bps respectively. The manufacturing sector saw moderate improvement, though still trailed the national average. To increase advanced manufacturing employment within the city of Chicago, the World Business Chicago organization along with several other public/private institutions have created The 1000 Jobs campaign. Their goal is to aide 1,000 local individuals in securing employment within the manufacturing sector. To date, the campaign has raised $1 million in private funding and has supported several hundred individuals in obtaining either full employment or in-job training programs, all within the advanced manufacturing sector. The housing market remained relatively active during the third quarter of 2015. Suburban home sales rose 4.3% from August of 2014, the seventh month in a row to post an increase. Sales within the city of Chicago remained relatively unchanged up 1% over the same period. Rents across the city are expected to rise considerably with the proposed tax increase. This trend should continue throughout the remainder of 2015 and will directly affect the commercial real estate market. Chicago s unemployment rate continues to fall. Down to 5.6% as of August 2015. According to World Business Chicago, Chicago enjoys a highly diversified economy with no single industry employing more than 14% of the workforce. The metro Chicago area added over 61,000 jobs year-over-year. This correlates to a 1.2% increase in jobs compared to 2.2% nationally. Job growth for the remainder of 2015 and into 2016 is expected to occur in industries such as professional and business services; education and health services; and technology. Active manufacturing licenses within the market remained relatively unchanged since mid-2014. The most active industry in the Chicagoland area during the second quarter of 2014 was the trade, transportation and utilities sector, which added 14,500 jobs. While job creation in the manufacturing sector remained stagnant. Partnership. Performance. - 1 -
Industrial Market Overview Comprised of more than 1 bsf, the Chicago industrial market saw another quarter of record-breaking growth. During the third quarter of 2015, the market recorded upticks in both leasing activity and net absorption. Vacancy continued to trend downward surpassing prerecession levels. Rental rates have remained increasingly competitive, causing a slight shift in market conditions favoring landlords over users. Construction of both speculative and build-to-suit projects remained strong across the market. Infill development continued to track investor/developer interest, particularly within submarkets located in urban areas which are inundated with older buildings and land is limited. This follows the trend of users wanting to be located closer to workforce and transportation hubs. Vacancy Rates Asking Rents ABSORPTION & DEMAND Absorption within the market rose moderately throughout the third quarter and was recorded at 6.6 msf, up 2.4% over last quarter. The I-80 East Corridor was the most active, with 2.7 msf of space being absorbed up from 260,000 sf in the second quarter. It was followed by the O Hare submarket which saw 629,000 sf absorbed. While overall absorption is up across the market, several submarkets continue to struggle. Both McHenry County and the I-39 Corridor continued to witness declining absorption since the first quarter. Leasing activity remained strong during the second quarter, with over 6 msf leased. The most notable third quarter transactions included The Wrigley Company renewing their 500,000 sf lease within the I-55 Corridor. The Central American Group leased 476,000 sf, also located within the I-55 Corridor. Lake County s largest lease transaction during the third quarter was the long-term lease renewal for 315,000 sf by Nemera. With several large tenants actively looking in the market and a healthy mid-sized deal pipeline expected to continue, activity should remain strong throughout the remainder of 2015. Top Leases Tenant Submarket Size (SF) Type Wm. Wrigley Jr. Company I-55 Corridor 500,160 Renewal Central American Group I-55 Corridor 476,000 New Swap.com I-55 Corridor 361,176 New H.D. Smith Medical US-64 Corridor 334,718 New Nemera Lake County 315,000 New Net Absorption Top Sales Address Regent O Hare Center (9 Properties in Elk Grove Village) 800-850 Veterans Pky Boilingbrook, IL 2501 Galvin Dr. Elgin, IL Buyer Seller Sales Price Distribution Realty Group, LLC Prologis Conor Commercial Real Estate DK Real Estate Services International Airport Centers Zurich Alternative Asset Management, LLC $59,750,000 ($62.53 PSF) $40,000,000 ($58.28 PSF) $29,000,000 ($84.64 PSF) 5800 W Industrial Dr. Monee, IL Exeter Property Group Griffin Capital Essential Asset REIT, Inc. $22,000,000 ($31.42 PSF) - 2 -
VACANCY & AVAILABILITY The overall Chicago industrial market continued to record a declining vacancy rate, down 60 basis points year-over-year to 6.9%. Most submarkets witnessed decreases in vacancy when compared to last quarter, the most notable being the I-80 East Corridor, the US-64 Corridor and North Cook submarkets down 160 bps to 6.3%, 160 bps to 4.4% and 70 bps to 5.1%, respectively. Both the I-90 West/Elgin Corridor and the I-55 Corridor witnessed moderate dips in vacancy during the third quarter as space has been absorbed into the large number of speculative buildings recently completed. The O Hare submarket remained increasingly tight and vacancy remained unchanged when compared to last quarter. It currently sits at 5.4%. The O Hare submarket, along with East DuPage and the US-64 Corridor, should continue to see infill development throughout the remainder of the year. Due to several large speculative buildings having been delivered throughout the quarter, the Southern Wisconsin submarket witnessed a minor uptick in vacancy up 20 bps to 3.4%. RENTAL RATES Asking rental rates have remained relatively stagnant over the past several quarters, though still considerably higher than this time last year up 3% from third quarter 2014, averaging $4.62 psf. Rental rates have been trending upwards an average of 2.3% per quarter since the beginning of 2013. Submarkets with the greatest increase in rates from last quarter were West Cook, Lake County and East DuPage up 28%, 9 %, and 4% respectively. All other submarkets experienced little variation from last quarter. Rental rates have become more competitive, especially in submarkets where demand is high, which has been causing a shift in market conditions favoring landlords over users. CONSTRUCTION Construction activity remained strong across the market. There was 4 msf of industrial product delivered throughout the third quarter with another 10 msf under construction. Submarkets such as the I-80 East Corridor, I-55 Corridor and the I-88 Corridor continue to record the most projects under construction with 2.7 msf, 1.2 msf and 1.1 msf under construction during the third quarter. The increasingly tight O Hare submarket continued to benefit from a construction boom with 235,000 sf delivered and another 885,000 sf under construction during the third quarter. Much of this development is infill, with the existing outdated properties being razed to make way for new, modern facilities. Notable projects include ULine s 1.1 msf build-to-suit located in the Southern Wisconsin submarket, which is expected to break ground during the fourth quarter of 2015. ULine is relocating from the Lake County submarket bringing 475 jobs once the new facility is completed. The largest speculative project currently under construction is Hillwood s 1 msf development located within the I-80 East Corridor. Construction activity will likely remain active throughout the remainder of 2015 and into next year as many developments are slated to break ground. INVESTMENT Investment in industrial product continued to record high pricing as market fundamentals propel investor appetite. The purchase of class B product has gained momentum, especially when there is value-add opportunity, though there is a substantial gap in purchase price as class A facilities remain favorable among investors and attract the highest premiums. Cap rates have reached prerecession levels, averaging 6.5% at the mid-year mark. However, in select submarkets buildings are trading at 5% or below. These low cap rates predict that investment into industrial product should continue through the remainder of the year. Notable third quarter investment sales transactions included an eight-property, 955,000 sf portfolio acquisition by Distribution Realty Group and Pearlmark in Elk Grove Village (O Hare submarket) from Draper and Kramer for $59 million. Another transaction of note was 2501 Galvin, which traded for $29 million or $84 psf. The property has an RBA of 342,000 sf and is located in the I-90 West/Elgin Corridor. It was sold by Conor Commercial to Zurich Asset Management. Recently Completed Buildings Address Developer Submarket Size (SF) Type 29900 S Graaskamp Blvd Ridge Property Trust I-80 East Corridor 1,700,000 Build-to-Suit 29700 Graaskamp Blvd Ridge Property Trust I-80 East Corridor 1,078,867 Speculative 21215 Frontage Rd SW Clarion Partners I-80 East Corridor 751,966 Build-to-Suit 11681 88th Ave Centerpoint Properties Southern Wisconsin 411,415 Build-to-Suit 1341 Enterprise Dr Duke Realty I-55 Corridor 324,115 Speculative - 3 -
Market By Numbers Submarket Inventory (sf) Vacancy (sf) Vacancy (%) Net Absorption Under Construction Avg Asking Rent North Cook 41,321,161 2,105,194 5.10% 105,020 217,280 $6.50 O Hare 112,157,987 6,045,978 5.40% 629,655 885,265 $6.43 I-90 East Corridor 19,651,147 1,588,035 8.10% 134,127 423,672 $5.61 I-90 West/Elgin Corridor 29,622,269 2,799,227 9.40% 119,734 329,368 $5.50 Lake County 67,985,172 5,277,136 7.80% 264,757 626,848 $5.41 McHenry County 22,381,772 2,304,508 10.30% 71,091 0 $4.25 West Cook 46,677,226 2,737,785 5.90% 146,996 0 $5.55 East DuPage 33,203,354 1,679,251 5.10% -3,831 0 $5.49 US-64 Corridor 64,833,462 2,882,457 4.40% 324,807 777,125 $4.93 I-88 Corridor 51,792,323 2,663,754 5.10% 94,808 1,136,648 $4.29 South Cook 75,962,698 5,005,666 6.60% 244,977 150,000 $4.59 I-55 Corridor 85,226,978 6,287,020 7.40% 622,953 1,262,314 $5.64 I-80 East Corridor 61,809,134 3,906,733 6.30% 2,787,140 2,748,534 $3.57 I-80 West Corridor 10,110,485 596,843 5.90% 5,760 0 $4.68 I-57 Corridor 19,518,333 1,319,282 6.80% 69,530 25,000 $4.56 I-39 Corridor 44,870,735 3,978,992 8.90% 143,007 220,000 $3.23 South Chicago Industrial 103,730,294 8,251,845 8.00% -83,091 587,538 $4.88 North Chicago Industrial 60,205,049 5,383,172 8.90% 275,093 0 $8.17 Southern Wisconsin 27,113,935 925,497 3.40% 589,931 173,165 $3.97 Overall Market 1,051,104,216 71,163,950 6.90% 6,650,716 10,022,570 $4.62 Key Terms Vacancy The vacancy rate is the percentage of the total amount of physically vacant space divided by the total amount of existing inventory. This represents both direct and sublease space. Net Absorption - The net change in occupied space over a given period of time and includes both direct and sublease space. Speculative Construction A property that is being built with no commitment from a tenant. Build-to-Suit Construction A property that is being built for a specific tenant. Cap Rate is the expected rate of return based on the projected income that a property will generate. Calculated by dividing the annual net operating income by the sales price. - 4 -
Leasing Activity Trends Address Developer Submarket Size (SF) Type Properties Under Construction 24593 Lorenzo Rd Ridge Property Trust I-55 Corridor 1,700,000 Build-to-Suit 12575 Uline Dr - Uline Building W2 Uline Southern Wisconsin 1,100,000 Build-to-Suit 201 Emerald Dr - Hillwood Spec Hillwood Development I-80 East Corridor 1,059,092 Speculative 1750 Bridge Dr - Spec Building I Bridge Development Lake County 626,848 Speculative 555 Northwest Ave Bridge Development O Hare 588,233 Speculative 1 O Hare International Aeroterm US, Inc. O Hare 428,000 Build-to-Suit 10 Falcon Ct The Opus Group I-90 East Corridor 423,672 Speculative 4200 Ferry Rd Atlanta Land L K E LLC I-88 Corridor 402,860 Speculative 3348 S Pulaski Rd Panattoni Development South Chicago 316,680 Speculative Trends to Watch Population Growth: Census data shows that the Chicago area population remained relatively flat over the past several years. Employment: Job growth continued to rise in most sectors, prompting the unemployment rate to fall to 5.6%. Active Markets: I-88 Corridor, I-55 Corridor, and O Hare. Market Drivers: E-commerce; Third-party Logistics; Professional and Business Services. THE INFORMATION CONTAINED HEREIN WAS OBTAINED FROM SOURCES BELIEVED RELIABLE; HOWEVER, AVISON YOUNG MAKES NO GUARANTEES, WARRANTIES OR REPRESENTATIONS AS TO THE COMPLETENESS OR ACCURACY THEREOF. THE PRESENTATION OF THIS PROPERTY IS SUBMITTED SUBJECT TO ERRORS, OMISSIONS, CHANGE OF PRICE, OR CONDITIONS, PRIOR TO SALE OR LEASE, OR WITHDRAWAL WITHOUT NOTICE. For more information: avisonyoung.com 2015 Avison Young - Chicago, LLC All rights reserved. Gregory Rogalla, Research Analyst 847.637.0704 gregory.rogalla@avisonyoung.com - 5 -