Rate Cuts Likely To Get Chicago's Industrial Engine Turning Again, But A Space Gap Looms

Federal Reserve Chair Jerome Powell gave a clear indication that the Fed is likely to cut rates at its September meeting, and the resulting impact could rev Chicago’s sputtering industrial engine back up.

The Chicago industrial market has come down from its frenetic high during the peak of the pandemic, with construction activity pulling back from all-time highs in 2021 and 2022. And as construction slows, the potential space gap, or imbalance between supply and demand, is beginning to look similar to the levels seen from 2009 through 2014 in the wake of the Global Financial Crisis, according to an Avison Young industrial market report. 

That projected supply and demand imbalance could provide opportunities for developers able to start construction now, industry insiders said. But there remains a sizable chunk of recently delivered buildings that are still vacant and may need to be leased up first.

Dealmakers considering industrial assets will have more clarity in the coming months after rate cuts begin and election results are confirmed, said Erik Foster, Avison Young’s head of industrial capital markets. Throughout the pandemic, industrial has proven its staying power and desirability as an asset class, and that anticipated clarity will improve how industry players price the asset, he said. 

“I believe that the rate cuts will, in fact, make pricing more aggressive,” Foster said. “You'll start to see these allocators of capital have a more clearly defined road in front of them. But right now, there's a sense nobody wants to really go out and make a mistake, and so there's some trepidation from some buyers in the marketplace.” 

Additional economic clarity will help both lease-up of existing properties and the development of new ones, Foster said. Developers who are willing to start building assets now to have them occupied by 2026 will be “ahead of the curve” and bring some of the lone new product to the marketplace at a time when there’s tenant demand, he said. 

“If you're a developer, 12 to 18 months from now, I think, [will] be a great time to have a building ready in the marketplace.” Foster said. 

While the overall health of the Chicago industrial market is still strong, big-box spaces are struggling to lease up and have vacancy rates nearly double the overall asset class’ rates, said Diana Perez, director of industrial research at Colliers. Colliers defines big-box assets as buildings within the Chicago metro area that are 200K SF or larger, with a ceiling height of 28 feet or more and precast construction.

The overall industrial vacancy rate for Q2, including big-box properties, was 4.84%, while big-box properties in isolation recorded a vacancy mark of 8.37%. The big-box vacancy rate did fall by 84 basis points from Q1 — the first improvement in eight quarters — but these newly constructed buildings aren’t doing as well as their older, smaller counterparts, Perez said.

As a result, developers are probably not going to start construction until their recently delivered buildings start leasing up, Perez said. Landlords may have to start offering more months of free rent or tenant improvement dollars to entice tenants.  

But even as activity slows down from meteoric highs, Perez said she sees it as a return to a stable cycle and a departure from ups and downs in the marketplace. 

“The Chicago market is still strong,” Perez said. “It will remain strong. It's just that we're used to this fast-paced lifestyle after Covid, and now we're back to the pre-Covid era that we were living in, which was very steady.”