Chicago’s industrial market posts two decade low vacancy at 4.0%.

Chicago’s industrial market is strong according, having realized 29.4 million net square feet of positive absorption over the past 12 months, as reported by CoStar. This level of demand is almost 30% greater than the high set for Chicago in 2006 (24 million SF) and two and half times greater than the average levels seen for the metro’s all time average. Construction activity is at its highest, and vacancy is still compressed to record lows. This is expected to change soon as delivery schedules outpace absorption as the year unfolds.  Leasing activity metro wide took a sizable dip each quarter since 22Q2 and this trend is continuing into 2023. Despite the dip in leasing activity, new industrial supply is still coming on line at a robust pace into 2023 as if leasing activity maintained momentum that was set earlier in 2022, when these projects were approved by local municipalities. Approximately 22.8 million SF of new space materialized over the past year, with another 41.1 million SF of industrial space currently under construction in Chicago. More than 70% of the current under-construction supply is not pre-leased before it’s set to deliver. New building projects are the most prevalent in the Joliet, I-88 West, North Kane/I-90, and South I-55 Corridor submarkets. Currently, demand is still outpacing new supply, with vacancy within Chicago’s industrial market declining by -0.6% over the past 12 months to post one of the lowest vacancy rates in over two decades at 4.0%.

Buoyed by record levels of new demand and tight fundamentals, average industrial market rents are still rapidly rising in Chicago. Although industrial rents increased by an impressive 9.4% over the past year, while the national average rental increase is 10.1%.  After the rush of new construction deliveries are expected to arrive here through 23Q2, construction levels are projected to dip by mid-2024. As consumer confidence dips while capital becomes more expensive to acquire, industrial projects are pulling back and withdrawing their approved plans. The result is construction starts are leveling down to historical averages. Chicago’s vacancy is expected to rise over the course of the next few years, but with vacancy levels this low, the market certainly has room for overall occupancy levels to drop.

A driving force behind Chicago’s industrial sector is its centralized location and unparalleled rail and highway connectivity as the only U.S. city to contain six Class 1 railroads. According to the Chicago Metropolitan Agency for Planning (CMAP), approximately 25% of all U.S. freight trains and one-half of all intermodal trains pass through Chicago, which serves as the continent’s main interchange point between Western and Eastern railroads. In March 2023, the U.S. Surface Transportation Board approved Canadian Pacific’s $31 billion acquisition of the Kansas City Southern. Upon approving the deal, the regulator stated that the new single-line service would shift about 64,000 truckloads a year to rail from the roads, potentially enhancing safety and reducing carbon emissions, and add more than 800 union jobs in the United States. Other proponents of the deal said with more competition in the railway market, the power should shift from the carriers to the warehousers and distributors in the region. Those who fought to block the merger and lost, claim increased rail traffic shall raise the area’s noise pollution for the thousands of residents who live near these lines.

In 22Q4, the $380 million railroad project called the Forest Hill Flyover broke ground on the South Side. Its purpose is to eliminate one of the most congested rail chokepoints in the Chicago area where over 8,500 hours of passenger and freight delays are logged per year. These geographic and infrastructural advantages help Chicago play a critical role in the many supply chains for retail, transportation, and manufacturing companies around the globe. Despite Chicago being the third-largest metropolitan area in the nation, its transmodal strength, legacy infrastructure, and warehouses occupied by manufacturers and distributors alike keep the area top of mind for industrial space occupiers