The impact of the Federal Reserve Board’s recent interest-rate cut on the Chicago industrial market? At least one local real estate professional says that it’s brought a bit of mental relief to local developers and investors.
R. Kelly Disser, executive vice president with the industrial services group at Oakbrook Terrace, Illinois-based NAI Hiffman, said that the Fed’s rate cut will provide at least a mental boost to developers and investors – to at least provide an impetus for some momentum to continue in the market. Except for a recent successful portfolio sale in late summer 2024 – which was great real estate — there has not been much institutional activity.
And if the Fed continues to reduce its benchmark interest rate? That could help unclog the pipeline of industrial deals, Disser said.
“There has not been much new development in the industrial sector in our market recently, nor new land purchases for additional development,” Disser said. “We are seeing roughly a third of what was constructed at our high point after the pandemic – 14M sf under construction now with roughly half spec, compared to 40M sf plus coming out of the pandemic. If the interest rate cuts continue, that should help spur new development and increase investment sales. But for now, that first rate cut helps mentally and we need to continue to see demand, continued leasing absorption.”
Even with the slowdown in investment sales and new construction, Disser said, the industrial sector in the Chicago market remains a healthy one. It’s not fair to compare to the industrial market today to what the sector saw in 2020 and 2021, years that count as boom times for development and sales.
Today, the sector’s fundamentals remain sound, and demand for industrial space is still solid from tenants. Disser said that Chicago’s industrial market has fared well when compared to many other major U.S. markets. That’s partly because developers here didn’t overbuild – except perhaps for one submarket.
“Industrial real estate and our economy have taken some massive shocks to the system, starting with all the increased activity coming out of COVID and then the increase in interest rates starting in 2022,” Disser said. “That increase in rates which started in 2022 essentially shut off the development pipeline for the last 24 months. Fortunately, we didn’t overbuild in Chicago, and part of that was due to the timing of interest rate increases and correlated disruption in cap rates and capital markets. We didn’t get as hot as some of the other markets, but we haven’t experienced the extreme slowdowns that some of those markets are going through now.”
Why has the Chicago-area industrial market been so resilient? Disser pointed to the diversity of the market. Chicago is home to a wide range of businesses and industry types. That helps during challenging economic times. If one industry is struggling, the odds are high that another is doing well. That keeps the Chicago-area industrial market from experiencing a sector-wide slowdown.
As an example, the trucking and transportation sectors have struggled the last 24 months. But during this same time, manufacturing, packaging and food-related deals are helping to carry the Chicago-area industrial market.
Disser said that the Chicago market is blessed with a strong manufacturing base, a thriving food industry and a steady demand for distribution space.
“We have major players across different sectors within the spectrum of industrial,” Disser said. “The demand from users has remained relatively stable. Different components of the industrial spectrum have had different levels of activity.”
Disser also credits the restraint shown from developers and owners during the boom times. Despite an increase in industrial construction during and after the latter days of the pandemic, Chicago’s industrial market still wasn’t overbuilt. Disser said that developers added about 41 million square feet of new industrial space at the peak of the recent construction boom.
Now that the construction pipeline has largely shut down, the market has reacted quickly, with tenants absorbing a good chunk of Chicago’s remaining industrial space.
Disser said that leasing demand is probably down about 50% from the record levels the Chicago market saw in 2021 and 2022. Leasing activity today is similar to what the Chicago industrial sector saw in 2018 and 2019.
“The leasing fall-off is drastic if you compare it to the recent boom period,” Disser said. “But appears healthy when you compare it to a normal historical backdrop.”
Disser said that the current industrial sector reset is necessary. As he says, the industrial sector is regulating itself and finding a new base level. The pace of investment sales and construction in the pandemic years wasn’t sustainable, Disser said.
Disser added that the Chicago industrial sector is poised to see a rebound in leasing activity and construction soon. He said that developers have a significant amount of land under contract in the Chicago area. Many are tentatively planning to break ground in 2025.
Certain Chicago submarkets are performing better than others. Disser said that the Central DuPage submarket has performed well with industrial vacancy rates still under 3%.
“Vacancy rates are still relatively low,” Disser said. “But the vacancies that exist are taking longer to lease. If you have a building that is leased, you are probably seeing high rents and loving life. If your building is vacant, you might be a little nervous. In good news, though, the leases that are being signed are still seeing great numbers. Rental rates haven’t softened at all. They are maintaining in most submarkets.”
