It has been a head-spinning few years in Chicago industrial real estate. Now, the market is showing signs of a return to more normalized levels after record activity in 2021 and 2022 driven by e-commerce trends.
Industrial absorption in the Chicago market ended 2023 at 17.8 million square feet, a 48% decline from the prior year, according to the end-of-the-year Chicago industrial report from Lee & Associates. Eight of the 22 submarkets posted negative absorption, returning to the historically consistent levels of activity that we witnessed in 2019 and 2020.
Absorption standouts included South Cook, Will County and Southeast Wisconsin, each with more than 1.1 million square feet of absorption, while I-80 achieved 6 million square feet of absorption for the year.
Overall Chicago industrial vacancy ended the year at 5%, after dipping slightly below 4% in 2022. The demand pullback and new speculative deliveries should open up new options for occupiers just as rent growth tapers off. The most active developers in 2023 included Bridge Development, Dermody Properties, Midwest Industrial Funds and Prologis.
Jay Farnam, principal, Lee & Associates of Illinois
2023 dynamics, mixed-signals
There are mixed signals closing out 2023. On one hand, vacancy is still in historically low territory but tenants are taking longer to make capital decisions while overhauling their supply chains. Investors continue to push rents, although rent growth has dialed back from more aggressive levels earlier in the year.
Developers are also pulling back on new speculative starts due to capital constraints and higher costs of debt, which will lead to supply shortages when looking ahead into 2024 and 2025.
From a macroeconomic perspective, the U.S. unemployment rate has ticked slightly lower, but consumers are feeling the pinch from inflation on everyday purchases. The holiday season was busy for shoppers as well as parcel and logistics delivery companies, but slowdowns at the ports in LA and Long Beach are expected to translate into lower demand for space from some of the large 3PLs and retailers receiving intermodal containers in Will County.
Even with the pandemic gridlock, though, port activity is starting to normalize. Port of Long Beach CEO Mario Cordero, recently stated that “We are in a normalized state of mind — and also in operations,” with 2023 container volumes at the Port of Long Beach projected to be about 5% above 2019 numbers. He also stated that “projection of long-term loss has not come about.”
Submarket spotlights
The Central DuPage submarket is the tightest of all Chicago industrial submarkets with a 2.5% vacancy rate. Approximately 60% of the available space here is in Class-B buildings, and as a landlocked market new development will continue to be limited.
In the Chicago North Submarket, characterized by older properties and limited amenities, redevelopment faces more challenges because of rising residential prices. The vacancy rate stands at 7.8%, encompassing 4.5 million square feet of second-generation spaces. Rents here range from $10 to $12 a square foot net for existing properties, while new developments command higher rates at $15 to $18 per square foot net. The Kinzie Corridor and West Fulton Market are prime targets for value-add developers, with average sale prices hovering around $125+ per square foot.
The O’Hare market is one of the most land-constrained infill markets in the country. New deliveries in 2023 were limited to a pair of two-building developments constructed by Prologis and Bridge Development. Absorption dropped 60% in 2023 when compared to 2022, while user sales remained strong, but the lack of available inventory is driving up pricing.
Southeast Wisconsin’s vacancy rate has climbed from a low of 4.4% in 2021 to the current rate of 12.7%— the highest in Chicagoland— and should continue to tick higher following new 2024 construction deliveries. Southeast Wisconsin is an institutional-grade market with more than 90% of the market composed of existing Class-A or new construction. We will be watching to see if Illinois labor legislation or the City of Kenosha’s potential casino plans impact demand for area industrial buildings..
I-55 Corridor’s vacancy rate has doubled when looking at the 1.33% posted at year-end 2022 but still remains historically low at 2.6%. As one of the most robust big box markets in Chicago, if not the country, absorption has fallen significantly over the last 12 months.
Future projections: Vacancy will climb
Looking ahead, we expect vacancy to climb in Chicago’s industrial market but certainly not into double-digit territory. Additionally, while rental abatement incentives have increased, we expect that most landlords will be able to maintain net rent stability and hang onto annual rent escalations in the 3% to 4% range.
Lee & Associates of Illinois’ Q4 Chicago Industrial Market Report is available for download here.
Jay Farnam is principal of Lee & Associates Illinois.
