O'Hare has rising land prices, record investment pricing
Chicago's industrial market continues to move at full speed, with leasing velocity reaching 8.67 million square feet in the second quarter of 2019, a 20% increase from the previous quarter.
According to Avison Young research, nearly 50% of leasing activity in the second quarter was in Lake County, the US-64 Corridor and the I-55 Corridor submarkets.
“Chicago's industrial market remains in a growth mode, with strong tenant demand and a deep speculative construction pipeline that is being filled at a steady pace,” said Chris Lydon, a principal in Avison Young's Chicago office. “We expect this level of activity to continue for the foreseeable future.”
The O'Hare submarket remains a coveted area for leasing and development, with developers pushing land prices up around $25 per square foot.
“Institutional investors remain bullish on the Chicago market and the O'Hare submarket in particular,” said Lydon. “As long as this institutional demand is present, the construction cycle will continue at a steady pace. One exception is the I-80 corridor, where additional absorption is needed before new buildings could break ground.”
On the investment side, low inventory and robust demand are pushing industrial sales in the O'Hare submarket to record highs, reaching levels only seen once before during a rare spike in 2015.
The past six quarters have witnessed significant price growth, climbing to an impressive $75 per square foot. The average price per square foot grew more than 50.2% from the first quarter of 2018 to the second quarter of 2019. This represents average annual growth of 33.5%.
A review of sales from the third quarter of 2013 through second quarter of 2019 showed the O'Hare submarket with more sales (by total volume) in 2018 than any other year before. There were 68 properties totaling $364.8 million sold in 2018 and 14 properties totaling $106.2 million sold during the first two quarters of 2019.
More than 60% of the sales in the O'Hare submarket over the last five years have been investor transactions, forcing user/owner purchasers to compete with large investment players.
This dynamic significantly impacts pricing, as investor demand drives value upward. With the majority of Class A assets in the O'Hare submarket controlled by institutional owners who are not looking to sell, other investors and users are shifting their focus to Class B and Class C assets. Given this dynamic, values for Class B and Class C assets should continue to rise.
Among the notable suburban leases in the second quarter were Ferguson's renewal of 308,782 square feet at 880 S. Rohlwing Road in Addison, and Convenience Concepts' new 286,622 square foot lease at 1717 W. Harvester Road in West Chicago.
A sampling of average asking rents per square foot in the quarter were: Lake County, $5.74, North Cook, $7.30, O'Hare, $5.46, I-90 West/Elgin Corridor, $4.78 and East DuPage, $5.94.
The Chicago market report also noted:
• Industrial businesses, including many from the growing logistics and e-commerce sectors, signed more than 1.3 million square feet of leases throughout the Chicago market in the second quarter.
• Construction projects in the works during the quarter increased slightly to 19.3 million square feet, from 18.3 million square feet, with more than 70% of the current pipeline being built on speculation. Construction deliveries in the quarter totaled 6.6 million square feet and included 27 properties.
Of that total, there were 12 properties over 100,000 square feet and totaling 4.6 million square feet delivered.
• There were 266 leases signed in the quarter, with an average size of 30,542 square feet.