Robust Small Industrial Demand Despite Market Worries

I get the same question multiple times a day. The stock market and economy are contracting, why aren’t small industrial prices going down?

After a record-breaking run that saw mortgage rates plunge to all-time lows, the market is finally slowing. However, while demand and price gains are cooling, any correction in the market for most industrial properties is likely to be modest. Few expect price drops on the scale experienced in the great recession. Nonetheless, intelligent investors see deals ahead.

THREE REASONS SMALL INDUSTRIAL PRICES REMAIN HIGH IN CHICAGOLAND

1. DEMAND IS STILL ROBUST IN THE SMALL INDUSTRIAL MARKET

Despite some of the largest warehouse users contracting in North America, in the Chicagoland market, small industrial demand remains high. Due to a tight supply of land-zoned industrial for the last decade, finding quality small-to-midsized industrial space was challenging. Therefore, there is still pent-up demand for industrial space. Consequently, even if the market contracts, demand remains, especially for spaces less the 20,000 sq. ft., so we expect demand to continue for at least the next 12-18 months.

2. CONSTRUCTION WILL HAVE LITTLE EFFECT ON THE MARKET

Although during the pandemic industrial growth was slowed by supply chain shortages, industrial construction activity is registering at all-time highs with around 39.6 million Sq. Ft. entering the market. However, most of the construction supply won’t enter the market until 2023. Moreover, nearly all of the 23.8 million Sq. Ft. of space delivered during the pandemic and currently under construction severed the large warehouse and logistics industry. However, the supply of large industrial properties has limited divisibility and is outside the price range of most small-to-midsize industrial users. Thus, for small industrial users, supply remains very low.

3. REAL ESTATE IS ILLIQUID

Ultimately, buying or leasing real estate takes weeks, sometimes months. As a result, unlike the stock market, where deals are completed at the click of a button, pricing changes take time. Consequently, to fully see the effect of rate hikes and economic contraction, buyers and tenants may have to wait a few weeks to see a shift in the market.