A challenging lending environment and a national shrinking away from spec building have some speculating the once-fiery-hot industrial sector could be in for a cooldown.

Data from Colliers suggests activity is slowing in Chicago — not just because the economy is souring in what has been one of the nation’s largest industrial markets but also because supply is falling well below what is needed, with little hope in the near term that the situation will resolve itself.

Industrial absorption across the metro area fell to its lowest point in two years in the third quarter, per Colliers, coming in at 6.9M SF, the lowest quarterly total since late 2020 and about 40% below the past three quarters.

At the same time, Chicago barely cracked the top 10 among major markets in square footage under construction despite a record 30M SF of speculative development set to be delivered. That means there will be little space to absorb for the foreseeable future and vacancy rates, currently at a record-low 4.5%, aren't likely to rise anytime soon.

“There simply hasn’t been much vacant space on the market,” Colliers Vice President of Market Research Craig Huvitz told FreightWaves. “Therefore, there hasn’t been as much space to absorb.”

The squeeze has resulted in higher taking rents, which are up more than 12% already year-over-year.

Hurvitz told FreightWaves rents will likely continue rising into 2023, albeit at a more moderate pace, as the supply-demand imbalance shakes out. A record 48 industrial projects totaling 17.2M SF kicked off in Q3, a 32% jump from the previous quarterly high.

Overall, net absorption this year is expected to surpass 2021 levels, Avison Young said in its Q3 Chicago industrial report. But broader economic turmoil could stall some construction projects, it said, pointing to several planned speculative projects paused in the third quarter due to uncertainty of pricing, timing and exit cap rates.

“If things do slow down next year on the development side, which I think a lot of people are predicting, construction is also going to slow down because it’s extremely difficult right now to raise equity or debt for new development or spec development,” Avison Young principal Adam Haefner told the Chicago Business Journal.

“We’re seeing people being forced to stop projects because they can’t raise the money right now."