Even though the commercial real estate market is facing its fair share of challenges, it’s important not to paint all asset classes with the same brush. In fact, Colliers’ latest Chicago Industrial Highlights Report indicates that industrial fundamentals remain quite positive.
The Chicago industrial market saw a surge in new leasing activity during Q1 2023, driven by the delivery of a record amount of speculative construction. After experiencing a decrease in new leasing volume throughout 2022, the market rebounded with tenants signing 127 new leases or lease expansions totaling 12.1 million square feet between January and March. This represented a 30% increase over the last quarter’s total and was the largest quarterly total since Q2 2022.
Net absorption for the quarter 7.4 million square feet, slightly below last quarter’s net absorption total of 9.9 million square feet, but still above the five-year quarterly average of 6.9 million square feet. The past five years have seen 140 million square feet of net absorption, with 86 million square feet of that demand recorded over the past two years.
Despite strong positive net absorption and leasing activity, the vacancy rate increased during Q1 2023 for the first time since Q4 2020, due to the delivery of 20 new speculative construction projects totaling 7.1 million square feet, which introduced 5.4 million square feet of vacant space to the market. As a result, Colliers reported the overall vacancy rate increased by three basis points to 4.53%. Developers are currently working on another 79 speculative construction projects totaling 27.5 million square feet, much of which will be delivered in 2023, and will likely result in additional increases to the vacancy rate throughout the year.
In terms of new construction, Colliers reported developers completed 23 projects totaling 8.5 million square feet during Q1 2023 and started construction on another 20 buildings totaling 5.7 million square feet, bringing the total under construction to 33 million square feet across 95 buildings. Tenants signed 24 new leases totaling 6.1 million square feet in recently-completed or under construction speculative buildings, the greatest quarterly total in a year and nearly double last quarter’s total of 3.1 million square feet.
The market also saw an increase in transaction activity, with seven new leases greater than 300,000 square feet signed during the quarter, four of which were pre-leases in speculative buildings not yet delivered. Rental rates continued to climb at an unprecedented rate, up nearly 16% over asking and taking net rate averages recorded one year ago. Some in-demand submarkets witnessed increases of 20% or greater year-over-year.
While the vacancy rate is expected to continue to rise throughout much of 2023 as developers deliver a record amount of new speculative product, demand for modern product is expected to remain strong over the coming quarters. This is likely to result in the vacancy rate leveling off and beginning to fall again as development activity cools off toward the end of the year.