This article originally appeared on CoStar Insight. It has been republished here with permission.

Chicago’s O’Hare industrial space market appears to be well-positioned to thrive again thanks to low supply side pressures, with almost no speculative projects underway, and in spite of a few demand bumps over the past several months.

The market’s overall vacancy rate has steadily risen since it hit the 2.6% record-low rate in mid-2022. In addition, over the past nine months, this transportation hub consistently reported more tenant move-outs than move-ins.

Yet, it’s also hard to be concerned about an industrial space market with a 4.2% vacancy rate — almost 80% lower than its 7.4% 10-year average overall vacancy rate. “The O’Hare industrial space market is in pause mode after it saw 36 months of unprecedented growth,” George Cutro, director of industrial research for JLL, told CoStar market analysts. During 2020’s pandemic lockdowns, there was a paradigm shift in how durable goods were brought to the consumer. “E-commerce demand skyrocketed. Manufacturers and distributors pivoted from business-to-business commerce to sell their wares directly to the consumer,” Cutro said.

Retailers such as Costco and Home Depot also pursued last-mile warehousing options. “There was general chaos in the area’s supply chain,” Sam Durkin, senior managing director for industrial services at JLL, said. “Goods needed to be stored for longer periods and within larger facilities” than they needed before. O’Hare absorbed almost 8.3 million square feet of industrial space from 2020’s third quarter through 2023’s second quarter.

Fast forward to today, however, and the market has some pain points that should be addressed.

Sublet Space

The largest culprit in O’Hare’s industrial space demand slide is the hefty vacated sublet supply over the past five quarters and counting. In fact, from 2022’s year-end through 2023, the submarket lost approximately 600,000 square feet to sublet space move-outs. The
secondary space market continues to expand in girth, too. Ceva Logistics, for example, listed its more than 159,000-square-foot space at 640 N. Central Ave. in Wood Dale, Illinois, on the secondary market during 2024’s first quarter.

Year to date, O’Hare’s sublet availability rate is 1.5% — two-and-a-half times greater than its pre-pandemic average rate.

Data shows that O’Hare’s rising vacancy rate is mainly attributable to the whopping 17% sublet availability share of all available space, or almost four times greater than its pre-pandemic average.

Lackluster Leasing

O’Hare industrial space’s leasing velocity dropped by 30% from 2023, compared with the submarket’s previous three-year average and by 20% from the 2013- 2019 collective average. In fact, leasing activity is so muted, it’s on pace to be one of the lowest 12-month leasing volumes ever recorded. Hesitancy around future demand and rising interest rates reportedly keep tenants on the sidelines or unwilling to commit to a long-term lease.

To make matters worse, the market recorded three consecutive quarters of negative absorption. Though these measures mirror absorption trends across the Chicago metropolitan area, with five of its top 10 largest industrial space submarkets posting negative absorption over the past year, O’Hare’s fall from grace was noticeable, retracting almost 800,000 square feet of logistics space.

Little to No Supply Side Pressures

On a positive note, this legacy market has little supply side pressure. Over the past 12 months, the 950,000 square feet of completed industrial space was mostly pre-let before delivery, posting a 100% occupancy rate by this month.

In addition, construction starts and square feet under construction plummeted. The current under-construction stock of only 860,000 square feet is posting an availability rate of less than 15%. This data set includes the 100% preleased 750,000-square-foot Prime Data Center owned by Elk Grove Village, set to finish construction in 2025.

With few parcels available for industrial space development, the O’Hare industrial market is also well-protected from oversupply issues more than other regional submarkets. As such, the pain O’Hare is absorbing right now should right itself by year-end. “The O’Hare industrial market is always in demand,”
Cutro said. “The tight infill location coupled with its great air and freight connectivity attracts a diverse base of industries, from data services and manufacturers requiring specialized space, to distributors, retailers and food manufacturers seeking logistics and cold storage uses.”

This article also appeared in the May/June 2024 issue of BID Magazine, spotlighting Chicago. Interested in additional market insights and updates? Download your free copy here!