Chicago’s industrial net absorption rate down — for good reason

Is the Chicago industrial real estate market, the country’s largest and for the past couple of years the hottest, finally starting to slow?

On the surface, industry data would contend that to be the case. But appearances can be deceiving.

Net absorption, a calculation of the amount of space occupied during a given period minus the amount vacated, came in at 6.9 million square feet, according to data published Monday by real estate services firm Colliers International Group Inc. (NASDAQ: CIGI). That was only 58 percent of the total recorded during each of the past three quarters and the lowest quarterly total since Q4 of 2020, according to Colliers’ data.

That might indicate that occupiers, concerned about a slowing economy, have decided to back off projects for now. However, the problem — if it could be called that — stems more from an acute lack of supply in a space-constrained market, said Craig Hurvitz, Colliers’ Chicago-based vice president of market research. 

A record 30 million of speculative construction has yet to be delivered, Hurvitz said in an email. Until that happens, vacancy rates, currently at an all-time low of 4.54%, are unlikely to trend up, Hurvitz said.

“There simply hasn’t been much vacant space on the market,” he said. “Therefore, there hasn’t been as much space to absorb.”

In addition, the Q3 net absorption data is actually above the five-year quarterly average of 6.5 million square feet, Hurvitz said.

The tight supply conditions have manifested itself in elevated “taking” rents, or those that tenants are willing to accept. According to Colliers, third-quarter taking rents are up 12.3% year over year. 

Rents will continue to climb into 2023, although probably not at such a clip, Hurvitz added.

Vacancy rates are low across the entire Chicago market, which Colliers divides into 22 “submarkets.” Vacancy rates decreased in 14 of the 22 submarkets and rose in six. Vacancy rates dropped below 5 percent in 14 submarkets by the end of September, per Colliers. Five submarkets posted vacancy rates below 3 percent, according to the data.

The Chicago industrial market has long been tight on space. It barely makes the top 10 among major markets in the amount of square feet under construction. On the other side of the spectrum is Dallas-Fort Worth, which traditionally ranks at the top in available square feet under construction.

Developers in Chicago are pushing out capacity as fast as possible. In the third quarter, construction began on a record 48 industrial projects totaling 17.2 million square feet, Colliers said. That was 32 percent greater than the previous quarterly high-water mark of 13.1 million square feet of construction starts.

Despite strong project completion activity, the white-hot pace of construction starts pushed total space under construction to 37.5 million square feet, 25 percent higher than the previous record of 30.1 million set in the second quarter of 2021, according to Colliers’ data. 

New leasing activity in the quarter totaled 11 million square feet, with 131 new leases and lease expansions. This represented the fourth quarter in a row of new leasing volume declines and the lowest quarterly total since Q3 of 2020.

However, some leveling off was probably expected given that new leasing activity surged to unheard-of levels during the six previous quarters.

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