The Midwest industrial market has responded well to the economic recovery, and according to some benchmarks has outperformed the coastal port cities that have traditionally been the power house markets for the sector.
Cities in the Midwest region, with the exception of Chicago, are typically seen as a secondary markets. Midwest industrial markets will not be directly affected by the upcoming Panama Canal widening. Manufacturing has also dwindled in many of the formerly strong submarkets. In addition, there exists a glut of vacant second generation space.
What’s changed, according to Robert Kramp, vice president and director of Jones Lang LaSalle Midwest and Great Lakes Region, is that the Midwest is directly affected by the two main drivers in commercial real estate today: technology and energy. E-commerce has pushed a model that has logistics firms and retailers trying to locate distribution facilities as close to both major population centers and the center of the country as possible, and some markets are linked to the increase in fracking oil production.
“Put those two drivers together, and add in the very affordable lease rates and the abundance of skilled industrial workers, and it’s clear the demand is great for the Midwest,” Kramp says. “With tight vacancies in pivotal cities, we expect to see quite a few retail and logistics investors entering the market in the coming months.”
The Midwest vacancy rate has remained below 9 percent for the past year, according to a third quarter report by brokerage firm Cassidy Turley. Thus, companies are flocking to the Midwest to develop new properties. Chicago, of course, is the biggest mover in the region, with 8 million sq. ft. of speculative space and 4.7 million sq. ft. of build-to-suit space either underway or proposed.
The overall industrial vacancy rate in metro Chicago was 8.5 percent in the third quarter of 2013, well below the 9.8 percent rate of a year ago, according to a third quarter report by brokerage firmTranswestern. The company said that the metro Chicago industrial vacancy rate will likely decline into the 8 percent range during the next 12 months, as demand for space outpaces the limited pipeline of new construction – currently just 0.3 percent of inventory. In fact, total new space delivered so far this year is 3.5 million sq. ft., only about one-sixth the level of the high point of 18.7 million sq. ft. delivered in 2008 in metro Chicago. The main buildings underway now, both already pre-leased, are the 384,000-sq.-ft. Union Pointe 3 in the South Interstate 55 corridor and the 1.6 million-sq.-ft. Home Depot distribution center in the Joliet/Will County submarket.
Other sub-regions of the Midwest are also seeing increased development and sales activity. HSA Commercial Inc. has partnered with Great Point Investors to launch three new speculative developments in the Midwest, including a 220,000-sq. ft. warehouse in Plainfield, Ind. and a 218,500-sq.-ft. industrial property in Waukegan, Ill. “With the supply of first class industrial product running out and ecommerce fueling new demand for high-cube distribution centers, (we) saw this as the perfect opportunity to start building again in Indy,” said Robert Smietana, vice chairman and CEO of HSA, in a statement.
Cincinnati has been one of the leaders in the market, with the third quarter marked by large transactions and dwindling vacancies locally. According to a CBRE third quarter report, the greater Cincinnati industrial market is on pace for record gross absorption at 8.5 million sq. ft. Base rental rates are on the rise and both leasing and sales activity remain fluid, with transactions such as the 520,000-sq.-ft. lease by Newgistics in Hebron, Ky. and Granite REIT buying Fifth & Pacific’s (formerly Liz Claiborne) 600,890-sq.-ft. distribution center in West Chester. The vacancy rate for industrial space in Cincinnati is at about 7.2 percent, and very few developers are adding new inventory to the market, with activity this year at about 25 percent of the historical annual average of 4 million sq. ft.
Even the St. Louis industrial market, with a vacancy rate of 8.1 percent, is seeing some upside. The I-70 corridor very strong and the supply of available space is minimal. “As of the end of the third quarter, there were less than a dozen modern bulk buildings with more than 100,000 sq. ft. of contiguous, vacant space available on the market,” sais Terrence Madlinger, a Cassidy Turley research analyst, in a recent third quarter submarket report “This is impressive considering that just 18 months ago there were more than 25 of these spaces available.”