Historically Low Vacancy Rates, Demand Outpacing Supply Keeps Cap Rates Strong in Chicago

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Robust leasing activity, low vacancy rates and a healthy balance of supply and demand has led to resilient capitalization rates in Chicago-area industrial product over the first half of 2016—according to the latest research from global property advisor CBRE Group, Inc. 

Despite a slowdown in investment activity, cap rates for U.S. commercial real estate were stable across most asset types during H1 2016. Industrial properties, along with multifamily, held its pricing during this period as cap rates widened, albeit slightly, in other sectors.

screen-shot-2016-09-21-at-10-34-03-amChicago specifically highlighted this trend in the industrial market, as cap rates for Class A properties sit between 4.75-5%, down from 2015 and lower than the national average of 5.5%. 

A main driver for this is Chicago’s historically low vacancy rate—which sits at 3.75% for all ABC Class types, according to CBRE Research—and the emergence of new product in core markets that are attracting investors at high price points. 

“We have seen what I call ‘supercore’ product emerge in the Chicago area, which I define as new Class A product in infill markets such as I-55 and O’Hare,” said Michael Caprile, vice chairman for CBRE. “For product like this, in areas where available land is scarce, cap rates are sitting at sub 5.”

As Class A product has continued to thrive, Class B and C product is now generating attention from core funds as well, said Caprile. 

“In Chicago, we are now seeing core funds and separate accounts target good, functional Class B product for cash flow,” said Caprile. “For the B minus and C plus product, we are starting to see equity funds partnering with local buyers to purchase portfolios, further demonstrating the strength of the industrial market across all classes.” 

The strength of the Chicago industrial market should persist as demand continues to outpace supply and developers have been more conservative about speculative construction projects in the current cycle. 

In Q2, CBRE Research tracked 49 users looking for at least 100,000 square feet in the market, with a cumulative total of 16 million square feet. Looking at the existing supply of class A buildings with at least 100,000 square feet available, the market offers 57 options, for a total of 14.1 million square feet, falling short to meet current needs. For tenants looking for at least 500,000 square feet, there are even fewer options. The Chicago industrial market currently has five existing class A buildings with at least 500,000 square feet available for a cumulative total of 3.2 million square feet. CBRE Research is currently tracking 10 tenants looking for space in this size range with a total need of nearly 8 million square feet, more than twice the available supply.

Through the first half of 2016, there have been 8.6 million square feet in construction starts divided near evenly between build-to-suit at 47% and speculative projects with 53%.

“These market dynamics should remain for a while and we should see the spread between A and B product decrease,” said Caprile.

To read the entire report, visit: http://www.cbre.us/research/2016-U-S-Reports/Pages/H1-2016-North-America-Cap-Rate-Survey.aspx

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