Investment sales volumes saw significant declines across commercial real estate sectors, particularly in industrial properties, at the beginning of 2024 due to rising borrowing costs and market volatility. However, experts from both Avison Young and Cushman & Wakefield remain optimistic about the future of Chicago’s industrial real estate market, citing newfound stability and pent-up demand as key factors driving a recovery in the second half of 2024.
“Interest rates have moved down in concert with the 10-year Treasury rate since its April high levels,” said Erik Foster, head of Industrial Capital Markets for Avison Young. “This is causing some uptick in industrial deal velocity in Chicago as compared to past months and it’s our belief at Avison Young that we will see this in future sales data.”
“Base rates are lower than they were at the beginning of the year, but more importantly they’ve been stable,” explained Mike Tenteris, executive director of Cushman & Wakefield’s Industrial Advisory Group. “Everyone has a pretty good handle on what their borrowing costs are going to be when they enter a transaction.”
That’s a contrast to the instability spiked by the ten-year Treasury rate in Q4 2023. This increase, Tenteris noted, caused many investors to go “pencils down” until market conditions stabilized. The slow first quarter of 2024 was, in many ways, a delayed response to this uncertainty.
“Despite the drop in overall sales volume, industrial continues to outperform other asset classes amongst investors because of the asset’s strong fundamentals, which are in line with our consumption-based economy,” he said.
Foster believes that the industrial sector will remain the favored asset class as we head into 2025, even amid challenges in other commercial real estate areas.
The strong fundamentals that Foster referenced are reflected in low vacancy rates and growing rents across Chicago, which Tenteris described as one of the key reasons the market remains attractive for industrial development.
“Chicago’s still a good place to invest in industrial assets. The property fundamentals in Chicago are definitely the best in the Midwest for industrial,” Tenteris said.
Unlike some other regions, Chicago has not experienced significant overbuilding during this cycle, keeping vacancy rates steady, according to Tenteris.
“There are quite a few properties on the market across the Midwest,” he said. “Sellers are behind on their disposition goals and buyers have business plans to execute. It’s happening now, just a little slower than a lot of us expected.”
“We fully expect for the Chicago markets to recover and Avison Young is seeing more investor activity,” echoed Foster.
While both experts agree that borrowing costs have been a major factor in dampening investment activity, they also highlight the critical role that market clarity has played in helping sellers and buyers alike navigate these challenges. Tenteris explained that success in this environment relies on staying in close contact with both debt and equity markets. He also stressed the importance of keeping an open dialogue with lenders, buyers and sellers to adapt to ever-changing conditions.
“You find out what will still work,” Tenteris said. “A transaction that might have worked six months ago might not be the same one that’ll work today.”
He emphasized the value of understanding what buyers and lenders are seeking in the current environment, as well as using real-time market feedback to inform clients’ decisions. He also highlighted Chicago’s unique position as a stable market for industrial investments, thanks to its steady rents and controlled vacancy rates.
Foster pointed to Avison Young’s ability to leverage proprietary market data and insights as a critical advantage in delivering results for clients. Combined with the firm’s client-first approach, Foster said this allows Avison Young to offer tailored solutions in structuring deals despite fluctuating market conditions.
The experts agree that while challenges remain, the fundamentals of the industrial sector make it a resilient and attractive option for investors heading into 2025.
“Right now, I see the market as still in recovery mode, with investor confidence rising and the industrial capital markets remaining at the top of the heap in terms of investment traction,” Foster said.
