Developers are still optimistic about Chicago’s industrial market despite fears of oversupply, which began to take hold last year, following the pandemic-fueled industrial building boom.
Speculative industrial development overtook built-to-suit projects in the second quarter, for the first time since early last year, according to NAI Hiffman.
Many developers took a year to reassess the market and determine how long it would take for the massive amount of spec product to be leased, following the 2023 surge in construction, said Dan Worden, a research analyst with NAI Hiffman.
“There is now much more clarity in the market regarding where new construction will perform best. Building in high-demand areas, such as those closest to labor availability, highways and airports, makes much more sense given the high leasing volume for new spec products,” Worden said.
The shift signals that developers are optimistic the industrial sector will be supported by growth in distribution hubs driven by e-commerce and demand for developments like data centers that are needed to support AI.
There are 11.4 million square feet of industrial space under construction in the Chicago area, of which 50.5 percent is speculative.
Notable projects include a 1.2 million-square-foot speculative development by DHL in Plainfield, and an 802,000-square-foot speculative property in Joliet being developed by Northern Builders.
On Chicago’s Southwest side, local firm Bridge Industrial is under contract to buy Ford City Mall with a $150 million plan to demolish the 960,000-square-foot shopping center and replace it with a four-building logistics complex spanning 913,000 square feet.
Existing properties have been trading hands as well.
Houston-based Hines last week bought a distribution center at 555 Saint James Gate in suburban Bolingbrook for $29.5 million or about $73 per square foot. Seller TradeLane Properties had bought the 404,000 square foot facility in 2021 for $24.6 million.
The region saw an absorption rate of 1 million square feet in the second quarter, indicating leasing activity is still outpacing vacancies, according to NAI Hiffman. The region’s vacancy rate has hovered between 5.5 percent and 6.5 percent for the past year.
While positive, the Chicago area’s absorption rate is a far cry from the rates seen during the pandemic. At its peak in late 2021, Chicago’s industrial sector saw a 16 million square foot net absorption rate.
“Net absorption is experiencing stabilization as tenants reassess their options in the market,” Worden said, adding that absorption doesn’t appear to be heading toward the negative this year.
Market pressures like high interest rates and economic uncertainties caused by tariffs will in part determine if that rate remains positive or continues to trend downward.
“Inflation, supply constraints, elevated interest rates and even some labor shortages in manufacturing (from) reshoring could pose a real challenge looking ahead,” Worden said.