The Midwest’s Big-Box Sector is Primed for Rent Growth

Big-box industrial facilities—those of at least 200,000 square feet—fared well in the first half of this year in the Heartland with low vacancies, strong rent growth and new construction completed, according to CBRE. 

Almost three-quarters or 74% of big-box facilities in the Midwest fall into the 200,000-to-499,999-square-foot range. Such spaces posted the highest average taking rents to date this year, averaging $6.49 NNN, which represented an 18.6% premium above facilities greater than 500,000 square feet.

This category of facility also did well when it came to leasing activity. Although leasing declined from record levels of 2021, it did well last year with more than 131 million square feet in the Midwest. In the period from 2021 to this year’s first half, leasing activity totaled 370 million square feet. Facilities of 200,000 to 499,000 square feet constituted 46% of the activity. Those that were bigger posted less: 26% from bigger facilities of 500,000 to 749,999 square feet and slightly more than that or 28% from the largest facilities with more than 750,000 square feet.

Rental rates were also up, increasing 8.7%, for facilities in this year’s first half, based on first year taking rents. But here the Midwest increase was less than the 23% average increase for the country’s top 25 markets, which the report said is “evidence of the value proposition presented by locating distribution operations in the Midwest.”

In the pipeline, construction showed some slowdown in the year’s first half, yet there was still space under construction for a total of 81.6 million square feet in the second quarter of this year. Almost one third or 32.1% was pre-leased. In a breakdown of where the most was being built in the Heartland, Chicago came in first with 22 million square feet underway, followed by Columbus with 9.9 million square feet, 8.8 million square feet in Milwaukee and 8.3 million square feet in Indianapolis. 

Other trends of the market are that available sublease space increased only slightly and remained low at just 0.6%, and several Midwest markets posted growth rates above 6%, including Des Moines, Indianapolis and Kansas City. This compares to many of the largest markets elsewhere in the country. 

CBRE expects lease transaction volume to decline this year as some tenants wait for more macroeconomic certainty. There may be some vacancy increases but rent growth will remain significant. However, constrained financing will reduce groundbreakings significantly this year. Further out in 2025, the report predicts a big reduction in new construction deliveries, which may keep vacancies low and sustain rent growth.