Chicago’s Industrial Real Estate Surge
Despite its position as the largest big-box industrial market in North America, Chicago often gets overlooked. A new report suggests the market is hitting new heights.
While coastal and Sun Belt markets have broadly received the most optimistic outlooks for rent growth and investment in the white-hot industrial sector, these metros are far from the only ones realizing outsized growth. Chicago, the continent’s largest big-box industrial market, is one to watch. A first-quarter report from JLL highlights several key shifts in the market, and why you may wish to consider the Windy City for your next industrial acquisition.
Chicago’s Absorption Hits All-Time Highs
Between January and March, Chicago’s industrial absorption hit above 8.1 million square feet, about 2 million square feet higher than the first quarter last year. This indicates — despite rising inflation and fuel prices, not to mention increasing global political instability — there is clear, accelerating demand for industrial space across the metro.
At the market level, 78.5% of this absorption occurred in warehouse or distribution center properties, with the remainder falling under manufacturing. Even though the metro has a large manufacturing base, logistics hubs dominate, with Amazon signing two 1 million-square-foot leases in the first quarter alone, one in Joliet and the other a build-to-suit in Kenosha, Wis.
Industrial Vacancy Falls in Chicagoland
Naturally, with record absorption, vacancy rates have fallen drastically in Chicago. Just five years ago, the total vacancy for the market was 7.3%. But at the end of the first quarter this year, reported vacancy was 3.1%, a drop of 2.3% compared to the same time in 2021. JLL expects this figure could fall even further, owing to elongated construction timelines intersecting with unparalleled demand.
Some areas of the metro are seeing variations in occupancy, of course. The I-55 corridor had one of the tightest warehouse and distribution center vacancy rates of the first quarter, at 1.0%, followed by the I-80 corridor at 1.5%. At the other end of the spectrum, the Chicago South submarket’s logistics vacancy rate was 5.0%, though that area is heavily focused on manufacturing space, which registered a vacancy of 2.7%.
The Windy City’s Development Pipeline
The development pipeline will likely mitigate some of the vacancy drops in the long term. Though the 30.1 million square feet underway in March may seem impressive — and it is — it may not make a huge dent immediately, however. Preleasing is still going strong, for one thing, and many large industrial occupiers continue to expand their footprints across the market.
Higher rents have not had a measurable impact on leasing activity, a clear indication that the market is still some ways from equilibrium. Rents hit $5.87 per square foot in March, $1 higher than the end of 2018.
Chicago Has Many Investment Opportunities
With the market firing on all cylinders, it’s easy to assume that industrial real estate investment opportunities may be priced out of reach of many. And while the Chicago’s average sale prices have certainly increased in recent years — up more than 40% since 2020 to $89 per square foot in March, according to a recent Yardi Matrix report — this significantly lags the national average price point of $125 per square foot.
Related Questions
What are the benefits of investing in industrial real estate in Chicago?
Investing in industrial real estate in Chicago offers many benefits. The city's location in the heart of the Midwest serves as a key advantage, especially when considering the importance of reducing shipping distances to distributors. Additionally, Chicago has seen a 50% uptick in total industrial property sales during the 12 months ending in September, and unemployment dropped nearly 1%, to 4.0%, bringing it close to the national rate of 3.8%. Rental rates have also increased to $5.48 per square foot, continuing the area’s trend of industrial rent growth. In addition, industrial vacancies dropped by 1.3%, and more than 4.8 million square feet of industrial space was added via construction completions.
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What are the current trends in industrial real estate in Chicago?
Chicago is one of the hottest markets for industrial real estate in 2021. Over the first quarter of 2019, unemployment dropped nearly 1%, to 4.0%, bringing it close to the national rate of 3.8%. More than 8,000 jobs were added to Chicago’s manufacturing sector from Q1 2018 to Q1 2019, which is likely one of the strongest drivers of the area’s industrial real estate market.
While less square footage was absorbed than during Q1 2018, rental rates increased to $5.48 per square foot, continuing the area’s trend of industrial rent growth. In addition, industrial vacancies dropped by 1.3%, and more than 4.8 million square feet of industrial space was added via construction completions. Nearly 16 million square feet of industrial space remains in the construction pipeline, much of which should be completed in 2019. Despite this, even more projects are expected to break ground over the next 6-12 months, which should help bring supply in line with demand.
Total industrial property sales in Chicago surpassed the $9 billion mark during the 12 months ending in September, which is nearly a 50% uptick from the previous period. This is likely due to the market’s location in the heart of the Midwest, which serves as a key advantage when considering the importance of reducing shipping distances to distributors. Third-party logistics companies had the largest chunk of leasing activity in the third quarter, according to a report from JLL.
What are the best financing options for industrial real estate in Chicago?
The best financing options for industrial real estate in Chicago depend on the size of the loan and the type of industrial property. For loans of $1,000,000 and up, Commercial Real Estate Loans offers a complete portfolio of industrial property loans, including manufacturing properties, warehouses, and flex properties. To speak with a commercial mortgage banker, please contact [email protected].
What are the risks associated with investing in industrial real estate in Chicago?
Investing in industrial real estate in Chicago comes with a few risks. The first is the potential for rising taxes. In recent years, new real estate assessment practices have taken effect, combined with growing tax rates to cover both the city’s and the state’s budgetary shortfalls. Today, property taxes are assessed at 25% of a commercial building’s value, compared to 10.7% in New York City. This could lead to landlords needing to boost asking rates or risk cutting into operating margins significantly.
The second risk is the potential for oversupply. Despite more than 4.8 million square feet of industrial space being added via construction completions in the first quarter of 2019, nearly 16 million square feet of industrial space remains in the construction pipeline. This could lead to an oversupply of industrial space, which could lead to a decrease in rental rates.
Finally, there is the risk of a decrease in demand. Over the first quarter of 2019, unemployment dropped nearly 1%, to 4.0%, bringing it close to the national rate of 3.8%. More than 8,000 jobs were added to Chicago’s manufacturing sector from Q1 2018 to Q1 2019, which is likely one of the strongest drivers of the area’s industrial real estate market. If the job market in Chicago were to slow down, this could lead to a decrease in demand for industrial real estate.
What are the most important factors to consider when investing in industrial real estate in Chicago?
When investing in industrial real estate in Chicago, there are several important factors to consider. Location is key, as the city's central location in the Midwest makes it an ideal spot for reducing shipping distances to distributors. Additionally, the city's strong job market and low unemployment rate make it an attractive option for investors. Finally, the city's construction pipeline is expected to remain strong, with more projects breaking ground over the next 6-12 months, which should help bring supply in line with demand.
For more information, see Cushman & Wakefield's Chicago Industrial Snapshot and JLL's report on Chicago's industrial market.
What are the tax implications of investing in industrial real estate in Chicago?
Investing in industrial real estate in Chicago can be subject to high taxes due to the city's new real estate assessment practices and growing tax rates. Property taxes are assessed at 25% of a commercial building’s value, compared to 10.7% in New York City. It is important for investors to work with a qualified tax professional who understands the field and can help them reduce their levels of stress and use the best strategies when it comes to taxes and their property. Source and Source.