Colliers recently reported that the Chicago industrial market saw a record number of deliveries in 2023, with developers adding 40.1 million square feet of new industrial product to the market last year.
That total was 28% greater than Chicago’s previous record-setting year, 2022, when 31.3 million square feet of new industrial product was added to the Chicago market.
But 2024? Don’t expect another record-setting year when it comes to either the construction of new industrial buildings or industrial sales activity.
Chicago Industrial Properties spoke with Mike Senner, vice chairman with the Rosemont, Illinois, office of Colliers about the state of the Chicago-area industrial market in 2024. Here is some of what he had to say.
Mike Senner, vice chairman, Colliers
(Photo courtesy of Colliers.)
Will we see fewer industrial deliveries in Chicago market this year?
Mike Senner: The deliverables have already slowed. We did have a record of industrial deliveries in 2023. But a lot of that had been agreed to way prior to 2023. If you look at last year, because of the debt markets and where the 10-year Treasury went, a lot of new industrial space wasn’t being built here. We just saw a lot of development that started before last year wrap up in 2023.
We will, then, see less new industrial product in the Chicago industrial market this year. But as interest rates have stabilized, we are seeing new discussions about future development. That’s the best way to put it. New conversations about vacant land sites slowed in the second half of last year. Those conversations are once again picking up.
Still, at this moment it is very difficult to secure debt and find capital to build spec industrial in the Chicago metro area. In the first quarter of 2024, we are in the same boat as we were in the last couple of quarters of 2023. We anticipate more of the same in the next quarter.
Will those record deliveries we saw last year boost vacancy rates in the Chicago industrial market this year?
Senner: The Chicago industrial market saw vacancy rates as low as 3.6% at one point in 2022. That is very low. Now because of all the new space delivered in 2023, we will see vacancy rates creep up slightly, maybe above 6.5% in 2024. That will only be temporary, though. We anticipate vacancy rates tapering below that level in 2025, primarily because there won’t be as many new deliveries in 2024.
What impact will a more stable interest-rate environment have on the industrial sector in Chicago?
Senner: The lending environment needs to improve. It seems that interest rates have leveled off. We need to see predictability and cuts. That will be helpful in getting new industrial buildings built. As the buildings that were put on the market in 2023 get absorbed, then you will have a better argument for building on spec again. Once the space that is out there gets absorbed, you can then argue that we don’t have enough inventory. That will help bring about an improved capital markets environment.
Is demand from tenants looking for industrial space in the Chicago market still strong?
Senner: Tenants are still looking for industrial space. But I think there are fewer tenants looking today than what we had seen in recent years. Absorption has been down the last four quarters. We saw record absorption in 2022 and 2021. Those were unbelievable years for absorption. We were off those numbers last year. We were slightly below pre-COVID absorption numbers. But I wouldn’t say we are experiencing a soft market. We were just a little off on the historic absorption of 2022.
Tenant demand will be somewhat flat this year. There are still tenants out there. It’s not like in a recession where no one is looking for space. But everyone will tell you that demand is soft.
What about industrial rents in the Chicago market?
Senner: We saw verry solid industrial rent growth here through 2021. And rent growth in 2022 was off the charts. In 2023 we saw some rent growth, but it certainly wasn’t like what we saw in the previous year. In 2024, we anticipate that industrial rent growth in the Chicago market will be slightly above what you would think a typical consumer price index bump would look like.
In our market, rents might not necessarily compress. But I do think they will be flat. Landlords are going to have to offer more concessions.
Of course, not all industrial properties are equal. Buildings near O’Hare and in the city of Chicago, or those close to the city that are strategic and in demand, will see higher rent growth. Rent will continue to grow for those properties. When you are looking at commodity properties where there are more choices, rents will probably remain flat.
How about industrial sales? Will we see more sales activity in the Chicago market this year?
Senner: The properties that are selling today are those with short-term leases remaining and rents that are below market. The buyers can then push rents up after purchasing these buildings. Those are the kind of deals getting done. We are seeing a lot fewer 10-year-lease deals closing.
The consensus is that it remains slow on the capital markets side. There is not as much being built and user demand is fine but not robust. People are eager to get back into the sales side of this market. They are just waiting for rate cuts or even more stability in the economy.