New supply and absorption gap to tighten in 2017 for industrial properties
Featured in The Daily Herald Business Ledger
2017 began with 19.5 million square feet of new industrial supply under construction in the Chicagoland market, with speculative construction accounting for more than half of the space planned for delivery by year-end. In the last three years, the percentage of speculative development has not surpassed 50 percent of total projects under construction, until now.
The 10-year average for industrial construction deliveries is 11.7 million square feet, and we begin 2017 with over 10 million square feet of just speculative space under construction. 2015 marked the first time in recent years where construction deliveries outpaced the average, delivering a total of 18.6 million square feet. By the following year, deliveries doubled the average, adding 22.4 million square feet of new industrial space in 2016.
Based on NAI Hiffman's Research Group's recently published REmark statistics, amid the new supply in the Chicago market, 16 speculative buildings over 300,000 square feet constructed in 2015 and 2016 currently have vacancies. Those 16 buildings account for nearly 6.0 million square feet of the total 14.4 million square feet that has been added in the last two years -- the equivalent to 7 percent of the overall market vacancy. See www.hiffmanblog.com/remark
Since 2015, NAI Hiffman reports that the market has seen more than 41 million square feet of new supply and 47.5 million square feet of absorption. As the overall market vacancy continues to decrease, the gap between absorption and new supply has remained steady.
While there is a subset of vacancies in spec buildings of more than 300,000 square feet in the Chicago market, it's important to observe the declining vacancy rate and consistent absorption to forecast 2017.
In order to stay on pace with the previous absorption numbers, more than 20 million square feet will need to be absorbed for the third consecutive year. Over the course of the last 3 years, annual net absorption has outpaced new supply by 12 percent on average. As the new industrial supply total continues to grow year after year, the amount of speculative construction in Chicago does, too.
The gap between new supply and annual absorption will tighten in 2017.
While vacancies remain in speculative buildings built in the last two years, we are on pace to deliver nearly the same amount of speculative space in 2017 as we did in 2015 and 2016 combined. As the total amount of speculative space is drastically increasing, absorption will need to continue the same trend as years' past. Total new supply will double the 10-year average for the second consecutive year as developers continue to bet on the positive absorption trend.
What this means
The tenant flight to quality and functionality will remain strong in 2017, but absorption will not outpace speculative construction at the same rate as years past. Based on the amount of new industrial supply planned for 2017, we will see a reduced spread between new supply and absorption. We have yet to overbuild on a speculative basis, but as we begin 2017 with speculative projects accounting for more than half of industrial development, we will be testing the limits on speculative construction for the overall market.