Key Points:
Our Midwestern industrial series takes a deep dive into the forces shaping the rebalancing of major Midwestern markets following an unprecedented supply wave. In part one, we assessed how long this rebalancing may take across various Midwestern cities by examining industrial inventory size, recent growth, and the impact of that growth on vacancy rates. In part two, we’ll explore whether the surge in demand for industrial space that fueled the recent supply wave existed prior to the pandemic, and how more recent development has influenced leasing trends for both large and small properties. This analysis reveals how the pandemic-era development boom created an oversupply of mega-warehouses that now sit empty, while demand for smaller spaces remains strong.
“While some markets face challenges from oversupply and softening demand in the short run, these long-term trends are likely to sustain healthy growth for the sector over time.”
Midwest Industrial Rents Follow, But Lag National Average
While rent growth in the Midwest has typically lagged the national pace, it clearly started increasing in all major Midwestern cities before the pandemic, which then only accelerated that growth. From 2000 to roughly 2015, industrial rents in major Midwestern cities remained flat—Detroit’s even declined. As e-commerce expanded in the mid-2010s, industrial rents began to climb.
The average rent per square foot in the Midwest has increased over the last 25 years. Among these markets, Chicago now leads in industrial rent per square foot—overtaking Minneapolis in 2018, as indicated in the top chart (below). Detroit has grown the slowest with just 45% rent growth since the fourth quarter of 2000, or 1.9 percent annual rent growth, compared to Columbus, Ohio, which posted the fastest industrial rent growth over the past 25 years, as indicated in the bottom chart (below).
Newer and Bigger
A common trend across major Midwestern cities is that newer industrial properties have been significantly larger than older ones, though there is still meaningful variation in average building size across markets. For example, in Indianapolis, the average size of new industrial properties peaked at 350,000 square feet in 2023—more than three times the size of properties delivered at the beginning of the last cycle. By contrast, in Minneapolis, the average size peaked at just 120,000 square feet, which was not unusually large compared to pre-pandemic norms.
The surge in large new industrial properties has subsided since those recent peaks and is now trending back toward pre-pandemic levels in most cities. In other words, fewer mega-projects have been started in the past two years compared to 2020 and 2021, suggesting softening demand for the largest of industrial properties.
The market correction is already underway—new projects are returning to pre-pandemic sizing norms.
Bigger Isn’t Always Better
The increase in average building sizes has resulted in notably higher vacancy rates for large industrial properties compared to smaller ones. Across the five Midwestern cities analyzed, small industrial buildings—defined as under 50,000 square feet—consistently maintain lower vacancy rates than those over 50,000 square feet.
For large industrial property investors, this creates a challenge: the tenant base is already smaller due to the significant financial commitment required, and tenants have many options to choose from. Adding to this, macroeconomic uncertainty is making many companies hesitant to commit to large leases. Conversely, demand for small-bay space remains strong, with vacancy rates close to or below pre-pandemic levels. This suggests that, while industrial space is still in demand in the Midwest, tenants are cautious about taking on significant square footage until they have greater clarity on their future space needs.
Over the past 15 years, vacancy rates for larger spaces have been higher compared to smaller spaces.
So, What’s the X-Factor?
The stock of industrial properties in the Midwest is larger today than it was just a few years ago. As new, larger properties are delivered, vacancy rates for large industrial properties have risen significantly more than vacancy rates for smaller properties. For large tenants currently in the market for space, the abundance of options allows them to be selective, and many are choosing to consolidate operations into fewer, newer, and higher-quality locations.
Demand for industrial space is shifting and will likely fluctuate in the near term. However, long-term trends in technology and consumer spending behavior began reshaping the industrial market during the previous commercial real estate cycle, well before the pandemic-driven surge in demand. While some markets face challenges from oversupply and softening demand in the short run, these long-term trends are likely to sustain healthy growth for the sector over time. For now, however, large industrial properties in markets with substantial new supply will remain more vulnerable to leasing volatility, which will put downward pressure on rental rates.