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Chicago industrial real estate powers through Fed rate hikes

Challenge for tenants in 2023 is to find available space, firm says

Cargo sits in a warehouse in Des Plaines, Ill., a Chicago suburb. (Photo: MIC Cargo)

The Chicago industrial real estate market, surpassed in importance only by the Southern California region, is demonstrating great resilience heading into 2023 with leasing demand remaining strong, according to research published Wednesday by real estate services firm Colliers International Group Inc.

That’s the good news. The not-so-good news is that “taking rents” — rents that tenants accept after a landlord’s initial proposal and follow-up negotiations — will remain elevated following a 14% year-on-year increase, Colliers (NASDAQ: CIGI) said. In some of Chicagoland’s 22 submarkets, asking rents have jumped 20% year over year, according to the data.

Continued solid demand for e-commerce space has played a role. But the main culprit is the interest rate turmoil that has curtailed investment and loan activity, and has left tenants with a challenge finding new space to accommodate their growth, Colliers said.

Jack Rosenberg, Chicago-based national director, logistics & transportation of Colliers’ industrial advisory group, said the firm remains very concerned about what he calls the “pencils down” behavior among institutional investors, the backbone of logistics real estate activity. Pencils down is industry lingo for investors pausing on or backing away from deals. In addition, construction loans are very hard to arrange, Rosenberg said.

“This lack of new development activity threatens to make it very difficult for occupiers to secure new space for their growth,” Rosenberg said in an email

Colliers isn’t the first real estate firm to forecast higher rents in the wake of the Federal Reserve’s rapid-fire interest rate increases. Last month, Prologis Inc. (NYSE: PLD), the world’s largest developer and operator of logistics real estate, said U.S. warehouse development will fall to a seven-year low in 2023 as higher borrowing costs bite into construction activity. Prologis said an expected 60% year-over-year decline in development starts will push nationwide rent growth above 10% in 2023. 


Financing worries notwithstanding, the Chicago industrial market — which also includes manufacturing — has performed remarkably well, according to Colliers. Demand came roaring back in the fourth quarter after a slight dip in the third. Net absorption, the ratio of space occupied during a given period relative to the amount of space vacated, totaled 9.9 million square feet in the fourth quarter. 

The fourth-quarter numbers brought the 2022 net absorption total to 40.6 million square feet, the second-highest total in the market’s history, Colliers said. Only 2021’s level of 44.9 million square feet was higher.

Vacancy rates hit an all-time low of 4.5% despite an increase in deliveries of speculative construction projects, Colliers said. Seven of the 22 submarkets reported year-end vacancy rates below 3%.

Vacancy rates slowed somewhat in the second half of the year, the firm said. However, that was due more to new vacant properties being delivered than to a drop in demand.

Rosenberg, who had grown increasingly concerned through 2022 that rising rates would sap the Chicago market’s strength, expressed surprise at its staying power. “Even I am beginning to believe that the 2023 recession is a mirage and that leasing demand by occupiers will be very strong this year,” he said.

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Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.