Chicago's Industrial Market: 8 Key Points for Investors

Centralized Location and Connectivity

Chicago’s industrial sector thrives due to its centralized location and excellent rail and highway connectivity. It is the only U.S. city with six Class 1 railroads. This advantage attracts national and local developers. Chicago efficiently serves the Midwest and North America.

Strong Industrial Market

Chicago’s industrial market absorbed 24.8 million square feet (SF) over the past year, ranking it among the top five U.S. markets, alongside Dallas, Houston, and Phoenix. However, leasing activity has significantly dropped in recent quarters. Developers built most of last year’s 25.4 million SF supply speculatively.

Rail Freight Developments

Rail freight declines nationally, but local improvements boost Chicago’s prospects. Political challenges remain, but authorities are resolving some conflicts. The Joliet Area’s resurgence highlights its critical role in the nation’s railway system.

Consumer Demand Trends

Consumer demand for hard goods remains strong despite a national drop in container and cardboard sales. Consumer spending is expected to decrease, which will likely impact local distributors and the industrial market.

Amazon’s Market Adjustments

Amazon has reduced its expansion plans, canceling Crystal Lake and Hoffman Estates warehouses. Despite closures, Amazon employs around 25,000 people in Chicago and occupies over 21 million SF. It continues to expand selectively, with new leases in Kenosha, Huntley, and DeKalb.

Joliet Area Dominance

Joliet leads in leasing volume and absorption, recording almost 9 million SF. The South I-55 Corridor also saw strong absorption with 7.4 million SF. Major transactions include leases by Target and Unilever, each taking 1.2 million SF.

Speculative Space and Vacancy Rates

We expect absorption to remain positive, but deliveries will outpace it. This speculative space, lacking pre-leased tenants, will raise vacancy rates. However, analysts project vacancies to stay below the market’s average by at least 200 basis points.

Rental Growth

Industrial market rents in Chicago rose by 7.5% over the past year. Logistics and specialized segments grew most at 8.8% and 5.1%, respectively. Although Chicago lags slightly behind the national average, the market remains strong.

Chicago’s Rental Growth Trends

Chicago’s industrial rental growth was 8.5%. This is down from the peak of 9.6%. It’s still above the all-time and 10-year averages of 2.7% and 4.8%. However, signs suggest rental growth may slow soon.

Declining Leasing Volume

Leasing volume in Chicago has dropped significantly recently. This occurred while industrial inventory expanded, increasing competition among landlords. Average square footage decreased by 30% in the past year, and landlords also increased their abatement packages by 30%.

Positive Rental Bumps

Rental bumps and term lengths are rising. Chicago’s rental growth lags behind port-city rents. Historically, the Midwestern hub has trailed coastal markets. We expect this trend to continue as other U.S. regions grow and Chicago’s population shrinks.

Influence of Small Spaces on Rent

Average market rents are $9.20/SF, influenced by smaller industrial and flex spaces. Larger space leases often secure lower rates. Depending on location and age, big box rents range from $4 to $6.50/SF NNN.

Notable Lease Examples

U.S. Medical renewed a 1.31 million SF lease at $4/SF in the I-88 West Submarket. This property, built in 1986, was used to manufacture sterile gloves. Ryder Systems leased 544,000 SF at $5.65/SF NNN in Central Kane/DuPage.

Logistics and Specialized Spaces

Logistics spaces generally lease for less than specialized or flex properties. However, logistics rents grew by 8.8% year over year. Specialized segment rents increased by 5.1%, and flex space rents rose by 5.2%.

Historical Trends and Future Outlook

Although strong, Chicago’s rental growth historically lags behind port cities. As southern and western U.S. regions expand, Chicago’s growth may decelerate. Population contraction and increasing competition will influence future rental trends.

Geographic and Infrastructural Advantages

Chicago’s location and infrastructure attract national and international companies. Unlike areas relying on population growth, Chicago ranks in the top five for import and export activity. Manufacturing, retail, and logistics companies seek modern, large distribution centers. Developers have responded by bringing this type of industrial product to market.

Industrial Construction Activity

Chicago’s industrial construction hit an all-time high of 35.3 million SF over the past year, and deliveries are expected to continue at a high pace. Most developers designate under-construction spaces for logistics. Nearly all the 25.4 million SF delivered in the past year was in the logistics segment.

Logistics Properties

Logistics properties currently have a 4.3% vacancy rate. Dermody Properties purchased the 232-acre former Allstate HQ to build 1.2 million SF of warehouse space. The remaining 125 acres are for build-to-suit tenants.

Specialized Industrial Properties

Specialized industrial properties, including data centers, are increasing in Chicago. Facebook completed a 2.4 million SF data center in DeKalb. CloudHQ plans to deliver its 1.5 million SF “hyper-scale” facility phases from 2024 to 2027—the Class 6b Program incentivized data center construction in Illinois, spurring new projects.

Submarket Growing Pains

Kenosha East and the Joliet Area face growing pains with 4 million SF of speculative industrial space each. Most projects are along major interstates and intermodal terminals. The Third Coast Intermodal Hub in Joliet will deliver 2.3 million SF of warehouse space. Another 2.1 million SF is still in the proposal stage.

Reduced Construction Starts

Construction starts have dropped due to slowed leasing and financing difficulties. Higher interest rates have increased construction costs and cap rates, reducing developers’ resale values. Construction decreased by 45% over the past few quarters and 55% year over year.

Forecasted Supply Pipeline

CoStar forecasts that the supply pipeline will stay elevated. Analysts expect tapering. The current high construction activity aligns with national trends. However, challenges like rising costs and financing issues may impact future developments.
Chicago Industrial Market Sales Volume

The Chicago industrial market posted the fourth-largest sales volume in the nation at $5.0 billion over the past year. Logistics facilities drove this volume, accounting for $3.5 billion in confirmed transactions.

Decline in Sales Volume Velocity

Sales volume velocity dipped significantly from year-end 2022. Sellers are retracting buildings from the market due to unattractive offers. Rising interest rates and economic concerns are causing hesitancy in capital markets.

Investor Preferences

Investors seek fully leased properties with value-add opportunities. They prefer leases set to expire soon, allowing rent increases to current market rates. This presents opportunities for opportunistic buyers.

Private Buyers Leading Transactions

Private buyers completed most industrial sales transactions. REITs and private equity firms made up the smallest group of buyers. Shawn Clark of CRG noted the unique opportunity to acquire properties at lower prices amid rising costs and cap rates.

Recent Opportunistic Sales

Recent transactions include opportunistic buys for fully leased Class B and C properties. For instance, EQT Exeter purchased a 397,000-SF distribution center in Kenosha for $47 million at a 6.8% cap rate. Last year, a similar property sold for a higher price per SF.

Rise in Sale-Leasebacks

Sale-leasebacks were common over the past year, especially within 3-star investment-grade assets. This trend is ticking up. Businesses with equity in properties see benefits in keeping them rather than redeveloping them.

Low Vacancy Rate

Chicago’s industrial market has a 4.2% vacancy rate. This low vacancy rate and a price per SF higher than the historical average suggest a strong market. However, economic concerns and rising interest rates impact overall sales volume.

Modest Price Growth Forecast

The baseline forecast calls for modest price per SF growth in Chicago’s industrial market. Despite strong fundamentals, rising costs and economic uncertainties temper growth expectations.

Closing Thoughts

Chicago’s industrial market shows strong fundamentals despite economic uncertainties. Investors seek value-add opportunities in logistics and specialized properties. The market remains robust, with modest growth expected. Contact Lumicre for your investment needs.