Chicago’s industrial developers may finally have a reason to press pause on new projects as the market unwinds from record-high occupancy.
The vacancy rate for Chicago-area industrial properties jumped to 5.2 percent in the third quarter, up from 4.6 percent at the midyear mark, Crain’s reported, citing data from brokerage Colliers International.
After Chicagoland’s warehouse vacancy rate dropped to an all-time low at the end of 2022, it has now risen in three consecutive quarters, shedding light on how oversupply driven by record-high new construction volume has caused an imbalance in the industrial realm.
The boom in warehouse demand during the pandemic led to an unprecedented increase in new projects, with a record-breaking 31.4 million square feet of industrial space added to the market in 2022. However, rising interest rates and tapering demand has led to a shift this year. While developers are on pace to add 42 million square feet in 2023, demand is expected to be about half of what it was last year.
Less need for warehouse space is flattening the market, reducing landlords’ negotiating power. Developers added 11.7 million square feet of speculative industrial buildings in the third quarter, but less than 10 percent were pre-leased. Net absorption, a key demand metric, totaled only 4.1 million square feet during the same period, the lowest figure in over three years.
For tenants seeking warehouse space, a softening market is welcome news, as it may lead to smaller rent increases and more concessions from landlords.
Developers are projected to add 24 million square feet to the market next year, with just 37 percent pre-leased.
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Leasing fell to its lowest point in six years, with 111 new lease signings totalling 5.8 million square feet last quarter. Sales of industrial properties have also slowed through the first three quarters of 2023, down 54 percent year-over year to $2.4 billion, the outlet reported.
One of the larger warehouse transactions of the year closed last month, when Blackstone bought four industrial properties near the O’Hare International Airport for nearly $137 million. Separately, in April, Boston-based Stag Industrial paid over $41 million for a 400,000-square-foot speculative warehouse in a west Chicago suburb.
— Quinn Donoghue