Speculative construction is always a risk. But for those willing to take the leap, it’s paid off—so far.
Major Midwest markets saw a heightened demand for bulk warehouse space in the last six years. Based on Cushman & Wakefield’s Midwest Speculative Construction Report, 259 million square feet of spec product was delivered, with nearly 86.8% occupancy as of Q3 2022.
Chicago’s market alone recorded significant spec development over the last few years, with 87 million square feet of spec space built between 2016 and Q3 2022, of which nearly 90% is occupied. And about half of the 87 million square feet of space has been built since 2020 around I-80, I-55 and Southeast Wisconsin, accounting for 51.5% of completed spec space.
In these big-box submarkets, the average spec building size is 385,933 square feet, compared to the market average of 285,271 square feet.
And this year? Of the 13.9 million square feet of product delivered so far, 49% was preleased, with an additional 1.9 million square feet of preleased spec space under construction.
Yet despite these strong numbers, what with the looming economic threats, many are worried for what’s to come. Not just in Chicago, but U.S.-wide.
A new report by Prologis has predicted that warehouse development starts will drop to a seven-year low, even as rent growth exceeds 10% across the U.S. In support of this prediction, the company said that, driven by a rise in the cost of capital, development starts will decline by 60% to less than 175 million square feet in 2023. The company has seen quarterly starts fall 30% from their peak in Europe and expect a similar pattern in the U.S.
A pullback of this magnitude would create a shortage of space in 2024 and the pipeline will likely drop from over 500 million square feet in Q3 to 275 by year-end 2023, according to Prologis.
