Industrial builders in Chicagoland smashed records this summer for new construction, 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 Group Inc.
Rising interest rates and an uncertain economy didn't slow metro area groundbreakings. Developers in the third quarter began construction on 48 buildings, which will total 17.2 million square feet when completed, or 32% more than the previous record, according to Colliers.
The projects brought the total area under construction to 32.5 million square feet, the most at one time in the Chicago market's history. "This is a monumental construction report, and a lot of records were shattered," Hurvitz said.
Demand surged soon after the coronavirus 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 being either too small or obsolete.
Developers responded by launching the construction of mammoth facilities, often in outlying suburbs near transportation arteries such as Interstate 55 and Interstate 80, including Romeoville, Ill., 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, Ill., where NorthPoint Development just began construction 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, Hurvitz said.
"We continue to see big leases signed every quarter," he said.
Six or seven years ago, few companies signed annual 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 Inc. leased the entire 1-million-square-foot building under construction at 10322 140th Ave. in Bristol, Wis., just over the Illinois border. And Ryder Systems Inc. leased a 543,638-square-foot property at 310 Overland Drive in North Aurora, Ill., developed by The Opus Group.
Economic headwinds will soon help slow the pace of construction, according to Colliers Executive Vice President Mike Senner. Most notably, the Federal Reserved has been aggressively raising interest rates in its bid this year to tame the hottest inflation in 40 years, with industrial real estate being among those struck hard by the higher borrowing costs.
And with more rate increases likely, project financing is drying up.
"The projects being built today were all baked in before everything changed," Senner 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.com Inc. has gone quiet.
During the worst of the pandemic, the e-commerce titan expanded faster in the Chicago metro 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 Amazon hasn't launched any new construction projects.
"That shows how strong the current market is," Hurvitz said. "We're no longer relying on Amazon."