Industrial developers setting new construction records, but gold rush likely to end in 2023

Industrial builders in Chicagoland smashed records for new construction this summer, surpassing the already fast development pace of 2021. Sleek modern warehouses used to store and distribute goods, feeding online customers’ appetite for ever-faster deliveries, account for most buildings underway.

“When people hear the word industrial, they still think of smokestacks, but this is, almost without exception, warehouse and distribution space,” said Craig Hurvitz, vice president of market research at Colliers International.

Rising interest rates and an uncertain economy didn’t slow metro area groundbreakings. Developers in the third quarter began construction on 48 buildings which, when completed, will total 17.2 million square feet, 32% greater than the previous record, according to Colliers. These projects brought the total under construction to 32.5 million square feet, the most at one time in the market’s history.

“This is a monumental construction report, and a lot of records were shattered,” Hurvitz said.

Demand surged soon after the pandemic began, and millions of homebound consumers started ordering products online, he added. Many firms were forced to handle the rush of orders with warehouses either too small or obsolete.

Developers responded by launching the construction of mammoth facilities, often in outlying suburbs near transportation arteries such as I-55 and I-80, including Romeoville, where Molto Properties this summer broke ground on Weber55 Logistics Park, a two-building, 1.1-million-square-foot complex on 60 acres, and Joliet, where NorthPoint Development just began construction on former farmland of a 1.2-million-square-foot building, part of its new Third Coast Intermodal Hub.

Most of the buildings under construction were launched on spec, meaning the developer got started before landing a tenant. That shows confidence in the Chicagoland market, and so far, it hasn’t been misplaced, according to Hurvitz.

“We continue to see big leases signed every quarter,” he said.

Six or seven years ago only a few companies per year would sign leases in the Chicago-area market for more than 500,000 square feet of warehouse space, but there were 16 such deals in 2020, 19 in 2021 and 13 in the first three quarters of 2022, Hurvitz said.

Companies continued signing leases for spec buildings in the third quarter, sometimes before developers even finish the jobs. Business supply giant Uline leased the entire one-million-square-foot building under construction at 10322 140th Ave. in Bristol, Wisconsin, just over the Illinois border. And Ryder Logistics leased a 543,638-square-foot property at 310 Overland Drive in North Aurora developed by Opus Group.

Economic headwinds will soon help slow the pace of construction, according to Colliers Executive Vice President Mike Senner. The Fed jacked up interest rates throughout 2022 to cool the economy and tame inflation. The moves will affect everyone in industrial real estate, and with more hikes likely, project financing is already drying up.

“The projects being built today were all baked in before everything changed,” he said. “We’re in a completely different environment than we were even six months ago, so the next couple of quarters are probably going to look a lot different.”

In addition, many construction materials and building components remain in short supply, according to Ed Lowenbaum, managing principal of Cresa Chicago. Steel loading dock levelers, for example, can take eight or nine months to get in place, and such shortages will help stifle new construction in 2023.

“There will be less of a gold rush mentality, the kind where people need space at any costs,” Lowenbaum said. “Instead, in the future any new construction is more likely to be a planned expansion.”

Even Amazon has gone quiet. During the worst of the pandemic, the e-commerce titan expanded faster in the metro area than any distribution firm, taking more than half the total space leased during the second quarter of 2020, Hurvitz said, but its leasing activity slowed to a trickle this year, and it hasn’t launched any new construction projects.

“That shows how strong the current market is,” Hurvitz said. “We’re no longer relying on Amazon.”

The industrial buildings underway probably won’t stay empty long even if new construction stalls out later in 2023, Senner said. Enough companies still want to consolidate operations into new, larger facilities, that buildings finished this year and early next should find tenants.

“There are still a lot of companies living in second-generation spaces that want to be in modern warehouses,” Senner said. “We desperately needed to add inventory, so, the spigot isn’t going to be completely shut off. We’re going to continue to see a fair amount of leasing activity, although it won’t be record setting.”