Tenants looking for industrial space to sublease in the Chicago market were in luck as 2023 ended: Avison Young reported that sublet availability across Chicago’s industrial market increased nearly 40% from the fourth quarter of 2022 through mid-December of 2023, with a total of 3.7 million square feet vacant.
That vacancy number represented 47% of all available industrial sublet space in the Chicago area.
Avison Young also reported that a total of 5.4 million square feet of sublet space had been leased throughout Chicago from the first quarter of 2022 through the middle of December of last year, with the top five submarkets accounting for 76% of all sublet leasing. Among these markets, the south Interstate-55 corridor emerged as a hotspot for subleasing activity, accounting for 2.2 million square feet or 42% of all sublet leases.
Not surprisingly, logistics, distribution and parcel delivery companies have dominated subleasing activity throughout the Chicago industrial market, accounting for 48% of the 5.4 million square feet of sublet leases. NFI, a national 3PL company, signed the largest sublease in March of 2022, taking an additional 997,802 square feet within the south I-55 submarket.
We spoke with Adam Haefner, principal in Avison Young’s Rosemont, Illinois office, and Kathleen Cavanaugh, research manager in the Chicago office of Avison Young, about the rise in industrial subleasing activity across the Chicago market.
I don’t think anyone is surprised that industrial sublease activity has increased. But are you surprised at how much this activity has increased since the fourth quarter of 2022? Can you outline some of the reasons for such a hefty increase?
Adam Haefner: We are neither surprised nor alarmed by the increase in sublease activity. Sublease space still only makes up a very small percentage of overall industrial vacancy, which is still below 5% in the Chicago market. There are many reasons for the uptick in sublease space, but a few of the reasons include companies adjusting their supply chains based on post-COVID demand, a slowdown in the transportation industry and consumers’ increased demand for services over goods. Related to the decreased demand for goods, Avison Young is expecting increased inventories to keep demand for industrial space high in 2024.
The Avison Young report cites the south I-55 corridor as a particularly strong spot for subleasing activity. Can you explain what makes this such a strong industrial submarket in general and why it’s been so strong for subleasing activity?
Haefner: The I-55 south corridor has historically been an attractive market for distribution to the Chicago metro market. I-55 offers streamlined access to the city and suburbs, attractive business park settings, newer functional buildings, proximity to labor and lower real estate taxes than Cook County.
Kathleen Cavanaugh: One reason that I-55 south has been so popular is because of its central location around major highways. It has also historically been a very tight market with limited availability and construction that is already accounted for. When sublease space is available in this submarket it is quickly absorbed. The logistics/distribution tenants typically have a need to be close to urban areas to meet consumer demands and delivery timeline expectations, especially with increased online sales, and south I-55 is a great location.
Why has sublease activity been so strong among logistics, distribution and parcel delivery companies?
Haefner: Avison Young has seen slowing demand for goods and increased demand for services. This has caused some of these companies to reduce the size of their supply chains that had to be dramatically increased post COVID. We expect this trend to decrease as the supply chain disruptions dissipate and inventories build up again.
3PL users are also willing to take spaces on an “as-is” basis, and most sublessors do not want to make any improvements to the space.
Cavanaugh: I think that the main reason logistics, distribution and parcel delivery has been so active with subleases is that it’s a cheaper option, it’s existing space and it’s move-in ready. Rental rate growth in that market increased 18.7% year-over-year. The terms are typically shorter, which is a plus, instead of signing a traditional six- to 10-year term.
I know it’s difficult to predict the future, but do you expect industrial sublease activity to rise or fall in 2024?
Haefner: Our local market may see continued sublease activity in 2024 as companies continue to adjust their supply chains, but we expect that space to be leased by companies with growing inventories. Overall leasing activity will remain strong, and vacancies will remain low.
In general, do you expect demand to remain high for industrial space next year? If so, why?
Haefner: Demand will certainly stay high based on growing inventories and overall economic growth. This coupled with a major decrease in deliveries of new space in 2024 will keep vacancies low and continue to put upward pressure on rents.
