A swath of Chicago developers are betting on small-scale industrial properties to capture red-hot demand for last-mile locations.

Elevated construction costs, financing challenges and data center developers' ability to pay more for a site have constricted supply. As a result, industrial developers want to take advantage of the limited availability of newer properties for smaller tenants that might currently be in older buildings and looking to upgrade.

“The biggest demand drivers in the market, especially in O'Hare and infill Chicago, specifically, is going to be those sub-50K SF tenants,” said Cody Balogh, director of acquisitions at Glenstar . “If you can deliver a building that suits those needs, it'll be gobbled up pretty quickly. But right now, there's just not a lot in the pipeline.”

Developers that can get a capital partner and lender willing to ride out some of the elevated costs are going to “be the only game in town,” able to charge higher rents on more functional and better-designed buildings, Balogh said. Glenstar recently completed a 76K SF warehouse in Florida and aims to close on four additional deals this year.

Glenstar is pursuing smaller, obsolete buildings built in the 1950s, '60s and '70s that can be torn down and redeveloped into a new Class-A space, Balogh said. That strategy enables it to get buildings in great locations below replacement cost, because it is going after locations that aren’t quite as attractive as “just finding a good piece of dirt,” he said.

CRG completed The Cubes at ORD, a 67K SF speculative warehouse building, late last year after the company recognized a strategic opportunity in the supply-constrained O’Hare submarket, Susan Bergdoll , senior vice president and partner for the Midwest region at CRG, told Bisnow in a statement. Vacancy in the submarket is hovering around 2%, and she characterized tenants’ response to leasing efforts as “encouraging” so far.

Bergdoll said CRG is optimistic that the site’s location and design will translate into leases with the right users in the near term.

“Vacancy in the submarket was just under 2.5% at the end of 2023​, when we acquired the site, so there was clear demand for more Class A industrial space,” Bergdoll said. “We aimed to fill a critical gap and do so with the same high-quality features as our larger Cubes projects, but on a smaller scale​.”

The total vacancy rate for the entire Chicago-area industrial market in 2024 was 4.7%, according to a year-end Colliers report. That marked a 55-basis-point decline from the 5.25% vacancy rate at the end of 2023.

The increased interest from developers in these small sites is partially a reaction to the number of large buildings that have been built over the past five years, said Robert Smietana, president and CEO of HSA Commercial Real Estate . The smaller sites are harder to execute and small in terms of capitalization.

“For a lot of developers, it's, ‘Well, I could spend a lot of time and do a 50K SF project, or I could spend the same amount of time and do a 500K SF project,’” Smietana said. “There hasn't been a lot of attention paid to that marketplace. And so those tenants are finding less opportunities to expand or to occupy space than they may have previously had.”

HSA, along with the Range Group, is developing a pair of 35K SF small-bay warehouses set to break ground this spring on Chicago’s Near West Side. The types of tenants in the market for these small spaces include those in advertising, medical supplies, manufacturing and delivery services, Smietana said.

“This is probably the smallest project by square footage that I remember doing, and I’ve been at the company for over 30 years,” he said. “But again, it's a unique opportunity.”

In addition to CRG’s O’Hare project, the company is “actively exploring” smaller infill industrial projects, Bergdoll said. The developer has broadened its development strategy to pursue sites that can accommodate facilities between 50K SF and 300K SF.

Consumer expectations for faster delivery have intensified the scarcity of infill warehouses, making these last-mile facilities increasingly valued and often hard to find, Bergdoll said​. CRG’s clients say they want modern space closer to densely populated areas and major transit nodes, so the company is responding by targeting developments that meet those criteria​.

“Moving into smaller industrial projects is a strategic way for us to meet market demand while diversifying our portfolio,” Bergdoll said. “We’re evaluating additional infill sites in Chicago and other key markets that share the same fundamentals we saw at O’Hare — dense population, great transportation access and limited industrial supply.”

The developer has upcoming projects in Cicero and Chicago it will announce later this year.

CRG anticipates the financing climate for industrial development will gradually improve through 2025 as economic conditions stabilize, Bergdoll said. Over the past few months, lenders and investors have started to reengage in the market as interest rates have leveled off.

Last-mile industrial product, marked by low vacancies, strong tenant demand and an essential role in supply chains, helps banks and investors mitigate risk, Bergdoll said.

“A lot of groups that had put their pencils down in 2023 are now picking them back up, which gives us optimism that securing debt and equity for solid industrial projects will be more feasible going forward​,” she said.