In a remarkable shift, Chicago has emerged as a standout in the industrial real estate sector, with its vacancy rates dipping below the national average for the first time in over two decades. This trend has persisted for nearly four consecutive quarters, showcasing the city's robust market health. Moreover, Chicago's collective availability rate, a key indicator of market vitality, has also remained below the national average for nearly three straight quarters.
This impressive performance marks a historic low since CoStar began its detailed tracking in 2006. Chicago's industrial market shines across various metrics, demonstrating exceptional demand and market strength.
Interestingly, Chicago's success mirrors trends seen across seven key Midwestern markets, with Chicago serving as a central hub. Factors like the port demand crisis, stemming from labor shortages and ocean freight challenges on the coasts, likely contribute to this Midwestern industrial boom.
Delving into specifics, by the end of 2022, Chicago's vacancy rate reached a record low of 3.85%, slightly outperforming the U.S. average of 3.91%. Following this, the U.S. vacancy rate started a sharp rise, projected to hit 6% by the end of the year. Conversely, Chicago's increase is expected to be more moderate, reaching around 5.1%.
Chicago isn't alone in this trend. Within the Midwest, cities like Cleveland, Minneapolis, and Detroit also report vacancy rates below the national average, with figures around 3.6% to 3.8%.
However, the highest vacancy rates in the top 20 industrial markets don't follow a simple pattern. These lagging markets might be struggling with an excess of inventory, higher tenant turnover, or negative absorption levels.
A closer look at availability rates offers additional insights. Unlike vacancy, availability includes spaces under construction that can be preleased. This distinction is important as markets with high availability, like Phoenix and Dallas, are also those expanding their inventories significantly.
Chicago and its Midwestern counterparts, however, are expanding at a rate below the national average while compressing their availability rates. For instance, Detroit and Cleveland are expanding their supplies by just 1% and 0.6%, respectively.
Absorption rates tie these indicators together. Cities with high availability rates, like Columbus, Phoenix, and Dallas, are also witnessing strong demand fundamentals. This is often due to speculative construction, which increases availability but also attracts new tenants. Chicago, adopting a just-in-time inventory approach, has seen its absorption rate exceed the national average by 55%, mainly driven by mega box properties.
In contrast, coastal cities like Los Angeles, Seattle, and New York, with dependencies on port operations, have seen less industrial space expansion and rising availability rates. The Inland Empire, despite negative absorption, has managed to maintain its industrial tenant influx.
As port-related challenges ease, cities like Chicago and its Midwestern peers are poised to maintain their steady industrial demand fundamentals into 2024, underlining the strategic advantage of their location and market resilience.
Source: Rhea Stephen, MMCG, CoStar