Q3 2022 Industrial Real Estate Report: Chicago, IL
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
The Chicago industrial market is on track to end the year strong, even amid economic headwinds caused by inflation, increased interest rates, and signs of a recession. While a full year of decreasing vacancy rates came to an end, Chicago’s less than 5% vacancy rate for industrial real estate remains at a historic low.
Chicago’s industrial market is showing resilience in the face of economic turbulence. Despite the interruption to four consecutive quarters of declining vacancies, Chicago’s 5% is below its long-term average.
Chicago industrial activity declined sharply in the third quarter of 2022, with net absorption falling to its lowest level since late 2022. Nonetheless, demand remained positive, clocking a total of 7 million square feet absorbed during this period.
General Area Overview & Demographics
Chicago, Illinois, is the third-largest city in the United States and has a population of over 2.7 million people. Chicago’s metropolitan area covers over 10,000 square miles and is home to many large corporations and businesses.
Chicago’s economy is a major driver for the state at large, with finance, technology, transportation, and logistics among the top industries driving its economic growth. Chicago also has a long history of manufacturing, from steel production to food processing, and an emerging tech sector with numerous start-ups.
The Chicago metropolitan area is highly diverse in terms of race and ethnicity. The Chicago metropolitan area is made up of African Americans (18%), White (34%), Asians (12%), Hispanic/Latinos (29%), and other ethnic groups, making up approximately 7% of its population.
Chicago Education & Climate
When it comes to education levels within Chicago’s population, approximately 82% have earned at least a high school diploma or GED, while 32% have obtained at least a Bachelor’s degree or higher.
Chicago also offers an array of higher learning institutions, including prestigious universities such as the University of Chicago, Northwestern University, and DePaul University.
Chicago is known for its extremes when it comes to weather. Chicago experiences four distinct seasons, ranging from cold and snowy winters to hot and humid summers. Chicago also experiences a variety of weather phenomena throughout the year, such as snowstorms, thunderstorms, tornadoes, and floods.
Summary of Chicago Industrial Real Estate Performance in Q3 2022
Industrial real estate in Chicago maintained steady growth in 2022 despite a slowing warehouse market. Demand spurred leasing activity and an increase in new development projects across the city.
Year-to-date absorption is now over 30 million square feet, one of the highest in the nation, after 7 million square feet of absorption in Q3.
Despite over 9 million square feet of new deliveries, the 5% percent overall vacancy rate remained unchanged from the second quarter. An additional 32 million square feet are currently under construction in Chicago’s development pipeline.
What are industrial rents like in Chicago?
In the face of growing demand, a lack of supply is driving up rental rates.
Asking rental rates trended upward in the third quarter, increasing to an average of about $5.45 per square foot across Class A, B, and C properties, a 3.3% uptick compared to last quarter. It’s important to note that while there has been an increase, rent for industrial real estate in Chicago is below other coastal markets.
For example, Class A industrial rent in Chicago is typically between $5 and $10 per square foot, while in coastal markets, like New Jersey or Los Angeles, rents are seeing prices as high as $20 per square foot.
Purchase & Leasing Activity
Q3 2022 industrial sales in Chicago are estimated to be at about $1.2 billion. There was a decrease in volume due to an increase in CAP rates caused by the economic headwinds of inflation concerns and rising rates. Over 40 deals spanning 12.6 million square feet and 75 buildings during this quarter were completed.
Chicago’s industrial year-to-date leasing reached well over 40 million square feet as 9 million square feet of leasing activity took place this quarter.
While this shows a slight decline from last quarter, leasing will likely increase due to ongoing demand and new products in the pipeline underway.
Notable industrial Real Estate Deals in Chicago in Q3 2022
Several notable deals took place this quarter.
- The Home Depot’s acquisition of 990,000 square feet;
- Vital Proteins’ acquisition of 490,000 square feet; and
- RJW’s acquisition of 814,000 square feet.
These provide select examples among other sales and leasing activities.
New industrial Real Estate Development Activity in Chicago in Q3 2022
This quarter brought a new record with the construction of over 17 million square feet across nearly 50 projects. None of this space has been pre-leased yet, and 95% of it is being developed speculatively.
Chicago now has a total of 37 million square feet under construction. Three of the projects that began this quarter are properties larger than 1 million square feet, and 11 are at least 500,000 square feet.
Market Forecast for Chicago’s Industrial Real Estate Market
Along with this record quarter, Q4 is anticipated to bring many new project starts as well.
Demand will likely drop, but this will simply be temporary due to the current lack of supply. While new product being delivered will cause a slight uptick in vacancy, demand will start to rise again with increased inventory, and vacancy should level out and possibly decline.
Throughout this time, rents are expected to continue to rise.
Takeaways for industrial Real Estate Investors
With demand forecasted to remain strong throughout 2022 and all the prior success of industrial real estate in Chicago this year, for investors considering a healthy and active market to invest in, Chicago’s industrial market holds promise.
Regardless of the positive indicators seen, research and due diligence are always required for each to make the best decision for their situation.
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