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CHICAGO-The effects of the economy hit Chicago’s industrial market in the third quarter, slowing leasing and construction slightly. However, some analysts say this is only the beginning, with reports leaving off where the real financial turmoil began. Activity is expected to decline further into the fourth quarter and 2009. Occupancy rates dropped to around 90.4%, down from around 91% in the second quarter.

“During the last 60 days, it’s definitely slowed down,” says Mitch Rothstein, SVP with Transwestern. “The deals that were in the pipelines to get signed got done, but I think today people and companies are slow. If they don’t have to make a decision, they don’t want to, and there’s a little bit of stalling and delay.”

Leasing activity declined for the third consecutive quarter, to six million sf, down from 6.3 million sf in Q2, according to a Cushman & Wakefield market report. Also for the third quarter in the row, the market experienced negative overall absorption, totaling more than two million sf year-to-date, according to the company’s research. Contributing to this negative absorption was a large amount of space delivered onto the market, including a 1-million-sf manufacturing building at 5401 W. 65th St. and a 657,000-sf warehouse/distribution facility at 2600 W. 35th St. in Chicago.

According to Cushman and Wakefield, while Q2 offered an unusually high amount of construction completions, third quarter deliveries were remarkably low in comparison, bringing only about one million sf onto the marketplace. The market is expected to suffer in the future, as tenants downsize existing operations, causing decreased demand and increased vacancy. The industrial market may not fully recover for another year or two, the company said in its report.

“Total market recovery is hard to predict,” says Michael P. McKiernan, executive managing director of industrial brokerage with Cushman & Wakefield. “Currently there are still users signing new leases. In 2009, companies will be challenged to determine what is their best business decision, and will rely more heavily on the advice of real estate professionals.”

Rothstein said he expects the historical steadiness of the market will help it ride out the storm of rough economic times ahead. “We’re in for some difficult times, but I think Chicago industrial will be relatively stable,” Rothstein says. “For the next six months, I would guess there’s going to be a slowdown in the leasing activity. I think speculative development will slow, and if people aren’t in the ground, they aren’t going to start now; they’ll start maybe in the springtime instead.” Rothstein also said he expects to see a sharp decrease in the amount of million-plus-sf developments, given the economy and lack of available credit.

According to a Transwestern Q3 market report, leasing activity, absorption and construction deliveries will all continue to decrease significantly into 2009. However, Rothstein says certain characteristics of the Chicago industrial market lends it to being more stable than other property types or locations elsewhere. “Chicago is a central location, and has a diverse economy, not dominated by any one industry. The other thing that creates the stability here is tremendous institutional demand to own properties. You have both institutional demand and continued user demand, which stabilizes the marketplace.”

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