In good news for a suddenly slowing Chicago industrial market, JLL reported that industrial leasing volume rose to 10.2 million square feet in the market during the second quarter of this year. That’s a significant increase from the 7.4 million square feet of industrial space leased in the Chicago-area market in the first quarter.
This leasing activity included three 1-million-square-foot leases, sizable deals that provided a boost to the Chicago area’s industrial absorption levels.
Major brands such as Samsung and Amazon signed big industrial leases in the Chicago market during the second quarter. As JLL writes in its second-quarter report, that is a sign that despite the challenges it faces, the Chicago industrial market remains a top destination for end users seeking industrial warehouse space.
Kate Coxworth, executive vice president in the Chicago office of JLL, said that those three 1-million-square-foot deals accounted for a good portion of the market’s increased leasing activity in the second quarter.
Coxworth said that the big deals show, too, that Chicago remains a prime destination for industrial end users.
“Chicago has those impressive population numbers,” Coxworth said. “It’s a transportation hub with its Class-1 rails. The labor market is also very strong in Chicago. That makes a big difference when companies are looking to move into a market. At the end of the day, it’s always good to be in Chicago.”
JLL reported that increased demand from big-box uses is behind the Chicago market’s leasing uptick during the second quarter. This demand could deplete the limited supply of large industrial spaces available in the area. JLL reported that only six Class-A buildings of more than 750,000 square feet are available in the Chicago market. Only one Class-A industrial building of more than 1 million square feet is available.
In additional good news, JLL reported that industrial asking rents reached a high-water mark at $7.50 net, up 44 cents from the end of the first quarter.
Coxworth said that this rent increase was a long time coming.
Spec development activity in the Chicago industrial market has slowed, a slowdown that became even more pronounced last year. With little spec development available, industrial property owners have been able to increase their rents, Coxworth said.
“Owners are now in the driver’s seat,” she said. “They are holding onto those rental rate increases.”
Coxworth said that she was pleasantly surprised to see how significant the growth in average rental rates was in this market.
“We typically see very stable industrial rents in the Chicago market,” she said. “Owners fought tooth-and-nail for this kind of price increase that we’ve never had before in the Chicago market. They want to hold onto that as long as they possibly can. So far, all signs are pointing in the right direction when it comes to maintaining those higher industrial rents.”
This good news doesn’t mean that Chicago doesn’t face challenges in its industrial sector. As JLL reports, the amount of speculative industrial construction has slowed significantly. According to JLL’s second-quarter report, of the 16.2 million square feet of industrial space under construction in the Chicago area, only 6.6 million square feet, or 41%, is speculative.
No one knows how long the slowdown in spec industrial construction will last. Coxworth, though, said that JLL brokers have had conversations during the last three weeks or so with developers who are considering starting up spec industrial projects again.
“I think that we will see a different story in the third quarter,” Coxworth said. “Developers are either more accepting of the current conditions or they feel that those conditions will change. If the Fed does cut interest rates, I think that will definitely spur more spec construction. I think it’s a mental game for some. They will become more active once the Fed cuts rates. We think that will happen. We are comfortable that moving forward we will see more spec industrial construction.”
Coxworth said that there is plenty of money on the sidelines waiting for investment.
“People who have secured land positions and haven’t started construction? I see them starting construction soon,” Coxworth said. “We see positive signs for the market here.”
