Chicago industrial real estate powers through Fed rate hikes

“This lack of new development activity threatens to make it very difficult for occupiers to secure new space for their growth,” Rosenberg said in an email

Colliers isn’t the first real estate firm to forecast higher rents in the wake of the Federal Reserve’s rapid-fire interest rate increases. Last month, Prologis Inc. (NYSE: PLD), the world’s largest developer and operator of logistics real estate, said U.S. warehouse development will fall to a seven-year low in 2023 as higher borrowing costs bite into construction activity. Prologis said an expected 60% year-over-year decline in development starts will push nationwide rent growth above 10% in 2023. 

Financing worries notwithstanding, the Chicago industrial market — which also includes manufacturing — has performed remarkably well, according to Colliers. Demand came roaring back in the fourth quarter after a slight dip in the third. Net absorption, the ratio of space occupied during a given period relative to the amount of space vacated, totaled 9.9 million square feet in the fourth quarter. 

The fourth-quarter numbers brought the 2022 net absorption total to 40.6 million square feet, the second-highest total in the market’s history, Colliers said. Only 2021’s level of 44.9 million square feet was higher.

Vacancy rates hit an all-time low of 4.5% despite an increase in deliveries of speculative construction projects, Colliers said. Seven of the 22 submarkets reported year-end vacancy rates below 3%.

Vacancy rates slowed somewhat in the second half of the year, the firm said. However, that was due more to new vacant properties being delivered than to a drop in demand.

Rosenberg, who had grown increasingly concerned through 2022 that rising rates would sap the Chicago market’s strength, expressed surprise at its staying power. “Even I am beginning to believe that the 2023 recession is a mirage and that leasing demand by occupiers will be very strong this year,” he said.