Chicago’s industrial market saw a record number of speculative deliveries in 2023 as product that broke ground during the sector’s pandemic boom came online.

But the pipeline is beginning to dry up as interest rates pump the brakes on new starts.

Chicago recorded 4.8M SF of construction starts in the fourth quarter, the second-lowest quarterly total since Q1 2022, according to a new Colliers industrial report. Even so, the starts marked a 94% increase over the 2.4M SF that got underway in Q3.

Developers delivered a record 33M SF of speculative product in 2023, but that space was only 25% leased at the end of Q4, according to Colliers. That leasing percentage will likely go up over the course of 2024, but probably at a slower pace due to so much spec space added to the market last year.

“For a significant amount of time, absorption outpaced new construction,” Colliers Executive Vice President Mike Senner said. “In the last four quarters, however, new construction starts have outpaced absorption for the first time in a number of quarters. Not that this by any means is a soft market, but you see the market flattening.”

A sharp uptick in interest rates in 2023 increased the cost of capital, which slowed the industrial market, Senner said. As a result, some companies slowed transaction activity in the latter part of 2023, he said.

“Once rates were moved in an aggressive manner, I think people felt that at some point, we would have some form of a pullback and vis-​​à-vis [that], there’d be less demand,” Senner said.

Chicago’s overall industrial market recorded 4.1% vacancy in Q4, a 33-basis-point increase over Q3, according to CBRE’s report for the quarter.

Construction activity was down 53% from this time last year, with the Joliet and southeast Wisconsin submarkets accounting for 41% of the overall construction activity, CBRE reported. There are still 45 projects totaling 17M SF in the construction pipeline.

“There's still bullish developers out there that aren't worried about capital and that may have some internal powder that they'll still keep building,” CBRE Vice Chairman Matt Mulvihill said. “Those are the guys that will win, because there's still great, great tenants out there that are willing to lease space.”

New leasing in Chicago dropped 12% year-over-year from 10M SF recorded at the end of 2022. Even so, Q4’s new leasing activity was the highest recorded in 2023, CBRE data shows.

A confidential tenant in Morris signed the largest new lease of the quarter for 1.2M SF, according to CBRE. That contributed to the Joliet area’s 2.3M SF of new leases, which topped all other submarkets in Q4.

Developers and investors may continue to take a cautious approach to the industrial market in 2024, particularly in areas where tenant demand isn’t as robust, Mulvihill said.

“You'll still see some conservativeness with certain holders,” he said. “But I do think there will be strategic projects that will come out of the ground in core areas of markets.”