Developers identify industrial hot spots as areas with low vacancy rates that justify speculative construction. These centrally located sites offer convenient highway access and proximity to a wide labor pool.
In the Midwest, examples of industrial development hot spots where demand has remained strong include Chicago, Minneapolis, Columbus and Louisville, according to Steve Schnur, chief operating officer with Chicago-based CRG. He cites these markets because of their affordability, business-friendly environment and robust logistics infrastructure. These areas tend to keep a healthy supply-demand balance, he adds.
Luckily for those whose livelihood is tied to the industrial property type, 2025 is expected to bring a return to pre-pandemic demand drivers, according to CBRE’s “U.S. Real Estate Market Outlook 2025.” The brokerage firm states that industrial occupiers will focus on longer-term strategies to improve warehouse efficiency, ensure supply chain resiliency and meet the needs of an evolving consumer base.
At the beginning of this year, CRG inked a lease with States Manufacturing for 503,440 square feet at The Cubes at French Lake in metro Minneapolis. The 1 million-square-foot facility, completed in 2024, marked the largest speculative industrial project ever developed in the state, according to the developer.
On the other end of the size spectrum, CRG recently completed The Cubes at ORD, a 66,552-square-foot speculative warehouse located adjacent to the Chicago O’Hare International Airport. The smaller, infill project was designed to appeal to users who want to be located near population centers for last-mile logistics.
“While some users require large footprints, others are gravitating toward smaller, infill facilities that better accommodate their operations and allow them to get their products to consumers in less time,” says Schnur.
Josh Udelhofen, a principal with the Midwest office of Dallas-based Trammell Crow Co. (TCC), says the Chicago industrial market remains an attractive place for institutional investment given its critical location in the middle of the country and attractive supply-demand balance. “Unlike many Tier 1 markets, Chicago has not seen an oversupply of new speculative development,” he emphasizes.
Another factor that makes Chicago an industrial development hot spot is its railroad proximity. Neal Driscoll, Midwest region partner with Reno, Nevada-based Dermody Properties, says the convergence of all six Class I railroads that flow through Chicago serves as an economic driver for the region. “The resurgence of manufacturing [in the United States] will drive activity to Chicago via rail,” he adds.
According to RailState, a rail network data provider, there are six Class I railroads operating in North America that focus primarily on transporting freight and cargo — BNSF Railway, Canadian National Railway, CPKC, CSX Transportation, Norfolk Southern Railway and Union Pacific Railroad. Amtrak is also a Class I railroad, but it is primarily focused on passenger transportation.
Site selection criteria
What factors are currently on industrial developers’ checklists for site selection? For Dermody, the focus is on sites that have particular logistics advantages and high barriers to entry, including interstate or rail accessibility, connectivity to power, adjacency to a wide labor pool and community support for modern industrial uses, says Driscoll.
Dermody is developing The Logistics Campus in Glenview, about 15 miles northwest of the Chicago Loop. The 230-acre site formerly housed Allstate’s corporate headquarters. Construction recently wrapped up on Phase I, which consists of more than 1.2 million square feet of industrial space across five buildings.
The electricity needs of industrial space users are impacting transactions like never before, says Driscoll. In most major markets, data centers are consuming large amounts of power and affecting deals for tenants who need power to operate manufacturing or warehouse automation systems. “This situation is unlikely to change in the next few years,” says Driscoll.
Electricity requirements for modern industrial facilities range from 2,000 to 10,000 amps, according to Tolj Commercial. A residential home typically runs on 200 amps by comparison. Amps (amperes) are the unit used to measure electrical current. In other words, 2,000 amps means that an electrical current of 2,000 amperes is flowing through a circuit, indicating a high rate of electrical charge movement.
Jack Brennan, managing principal – Midwest region for Rosemont, Illinois-based Brennan Investment Group, says that while location is the primary driver, functionality of the site and environmental considerations also come into play. These factors affect the price the developer can pay for the land.
According to Brennan, today’s industrial tenants seek high ceiling clearance, ample auto parking, trailer parking, sufficient power, convenient ingress-egress, energy-efficient building systems and a modern building design.
Udelhofen addresses the NIMBYism (an acronym for “Not In My Backyard”) that can be associated with new industrial development. “It’s important for us to have confidence when we go into an area that [the municipality] wants our project there and understands the value proposition of our development,” he says.
Pace of development
Well-located industrial sites are more critical now than in previous years because there is less absorption occurring, states Udelhofen. In other words, developers want the best locations to entice tenants.
“In the second half of 2024, activity started to ramp up, but it didn’t necessarily result in executed leases,” says Udelhofen. “We believe this activity will spill into 2025, resulting in increased leasing activity and absorption. That said, we should expect leasing volumes to go back to historical averages, as the days of 2022 are gone for now.”
In its 2025 outlook, CBRE predicts that industrial net absorption will remain low because much of the new leasing will come at the expense of older facilities. Buildings constructed before 2000 accounted for more than 100 million square feet of negative absorption in 2024, while those completed after 2022 posted more than 200 million square feet of positive absorption. This trend will continue in 2025 as long as there is still first-generation space to lease, states the firm.
Driscoll forecasts moderate leasing volume in 2025. “The first half of the year is likely to be cooler as the business community sorts its way through the initiatives of the new [Trump] administration. That said, the economy is primed to accelerate the second half of 2025 once there is clearer direction.”
Corporations that postponed major expansion projects last year had an impact on leasing activity, acknowledges Brennan. “I expect that we will see a big uptick in activity in 2025 coupled with very little new supply.”
While leasing activity over the past 24 months has not reached the record levels of 2021 and 2022, it remains well above pre-pandemic levels, states CBRE. As of the fourth quarter of 2024, annual leasing activity nationwide increased by 6.1 percent to 838.6 million square feet.
After a building frenzy in 2021 and 2022, high construction costs and a difficult lending environment led to a slowdown in new development. In the Midwest region, there was 37.9 million square feet of industrial construction underway in the fourth quarter of 2024, according to CBRE. The Chicago market led the region with 12.7 million square feet, followed by Louisville, Kansas City and Minneapolis.
In the Midwest, the amount of industrial space under construction in the fourth quarter of 2024 was 3.1 million square feet higher than the previous quarter, marking the first increase in construction activity since the second quarter of 2022.
Udelhofen says there has been a significant decrease in the number of projects that developers have broken ground on or completed in most of the industrial markets in which TCC is active. This has created opportunities in certain size cohorts.
“We think there is an attractive opportunity to capture tenants who are seeking large spaces over 400,000 square feet, as there are very few options available,” states Udelhofen.
Late last year, TCC broke ground on the first speculative warehouse within Plainfield Business Center in the southwest Chicago suburb of Plainfield. The 788,000-square-foot building, slated for completion this fall, is situated along I-55.
With fewer new buildings being constructed, developers who have started projects are able to command a premium rent given the lack of new supply, says Udelhofen.
In the Midwest, the average asking lease rate was $6.97 per square foot triple net in the fourth quarter, according to CBRE. That figure has grown 41 percent from $4.96 per square foot in 2019. On a national level, average asking rents have declined for three consecutive quarters as landlords focused on occupancy, states CBRE.
Schnur says that a slowdown in new development has enabled industrial real estate fundamentals to remain relatively strong in the Midwest. “While leasing activity will vary by market and submarket, we expect an uptick in activity as companies firm up their plans post-election and lenders start to loosen their purse strings again,” he says. “The Midwest will continue to benefit from reshoring activities and a strong labor pool.”
— Kristin Harlow
This article originally appeared in the February 2025 issue of Heartland Real Estate Business magazine.