The Midwest region is a broad geography encompassing the Great Lakes and upper Mississippi and Ohio River watersheds. Major cities in the area include well-known names like Chicago and Detroit, and fast-growing smaller cities like Minneapolis and Columbus, OH. While the region has long been valued for its stability in the face of volatile commercial real estate cycles, it continues to redefine itself as a geography that is both a pragmatic investment and a high-demand set of markets with surprising upside. Rather than a follower of coastal trends, the Midwest stands out for its steady fundamentals, abundance of land and national accessibility.
Booming industrial construction can’t keep up with demand
The Midwest industrial market continues to flourish with robust development and low vacancy rates. Rapid growth is being driven by third-party logistics, e-commerce, automotive, general retail, warehousing and food and beverage. To meet rising demand, occupiers are expanding by location and size of facilities.
Fueled largely by the rapid growth of e-commerce, Midwest industrial leasing surged 13.6% from 2019 to 2020. Activity has not slowed down, as evidenced by the first three quarters of 2021, where leasing volume has already reached 93% of the 2020 total. The leading markets for leasing activity this year include Chicago, with 49.8m sq ft, Indianapolis with 21.0m sq ft and Columbus with 19.2m sq ft.
Most large occupiers require state-of-the-art distribution facilities, which are driving an industrial construction boom. Midwest industrial construction deliveries have already reached 91% of the 2020 total through just the first three quarters of 2021. The average size of delivered distribution facilities increased by 55% from 2019 to 2021. Despite the amount of new construction being delivered, demand has continued to outpace supply. Vacancy rates decreased from 4.0% in Q3 2020 to 3.7% in Q3 2021 and rental rates grew 8.0% from Q3 2020 to Q3 2021.
The most important driver for logistics occupiers is labour, which is a far more significant cost factor than rent. Midwest markets are particularly well positioned with the ample skilled labour that logistics occupiers require. Rising transportation costs are also front of mind for occupiers and have increased the need for companies to establish distribution centres in the region. The location reduces the distance to major Midwest markets and allows companies to reach both coasts with a single distribution centre.
