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CHICAGO-The Metro Chicago industrial market contracted in the first quarter, with falling occupancy and rents, and the decline is expected to continue through the rest of the year. The region saw occupancy sliding down to 89% now from 90% at year’s end, according to Transwestern’s Q1 industrial market report. Rents fell to $5.03 per square foot net in Q1, taking a 1.4% hit, after having already dropped 3.2% over the course of 2008.

“It’s definitely slowed down and there’s not a large volume of transactions,” Mitch Rothstein, senior vice president with Transwestern, tells GlobeSt.com. “People are waiting to see a bottoming or stabilization of the economy, and until then, there will be fewer transactions just because people are really delaying the decision-making process and sitting on their hands. If they don’t have to do something, they don’t want to do it.”

In Q1, the metro Chicago area experienced negative 5.2 million square feet of net absorption, falling sharply from positive 69,000 square feet in Q4 2008. Despite that, NAI Hiffman’s market report released in late March suggested that absorption would not remain negative for long. “Absorption rates should trend more positive as construction has largely stopped and much of the vacant space throughout the market is absorbed,” the report says.

New development is at a standstill, and has been for more than six months, Rothstein says. According to Transwestern’s research, the pipeline has shrunk dramatically, by more than 50%, to 2.3 million square feet currently under construction from 5 million square feet at year’s end. “If something wasn’t started after the summer of 2008, it didn’t start,” Rothstein says. “Hopefully we’re getting to a stabilization of the economy, but it depends on the banks and the credit markets. The real estate market is a bit of a lagging indicator, you’ll see it from the banking and financial side before the real estate side, but for now, loans are still very difficult.”

Rothstein says he expects velocity to remain low on deals for some time into the future, but that he hopes that things will have picked up a bit by the second half of this year. “It really is a wait-and-see thing, and people actually aren’t quite certain of what they’re waiting for,” he says. “People are afraid of entering into a transaction today in case the economy tumbles further. People are waiting to see some stability before entering into a new venture.”

For those companies willing to take the risk, he says there are great deals to be had. “It’s absolutely a good tenants’ market, but you do need a little bit of visibility with your business,” Rothstein says. “If you know where your business is going to be in the future, you can go out and expand, but if you don’t have that vision, it’s very difficult. People just don’t want to be making decisions.”

NAI Hiffman’s research also reflects the favor market conditions are showing toward tenants. “Leasing will likely remain active as companies look to negotiate their lease terms, or sign new leases to take advantage of the many incentives being extended by landlords,” the report says. “Companies may continue to approach real estate with caution, however, resulting in fewer long-term leases. Increasingly competitive rental rates will remain prevalent as owners compete to fill their vacant space.”

The firm’s report highlights a silver lining, however, as Chicago may be faring better than other markets and see a recovery sooner. “The evolving Chicago industrial market is critical to the nation’s manufacturing, distribution and transportation industries and is centrally located,” NAI Hiffman’s report says. “These significant advantages will allow the market to maintain its value and recover more quickly than other industrial markets throughout the country.”

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