Looking for silver linings in Chicago’s office market

From “West Loop, new office building rentals are bright spots in Chicago’s struggling office market” in the Chicago Sun-Times by Abby Miller

One of the few bright spots in Chicago’s office market is the West Loop and its Fulton Market — where a lot of development has happened for several months. But overall the city’s vacancy rate is still much higher than it was before the COVID-19 pandemic.

Available office space throughout Chicago reached a record high 23.3% in the last quarter, compared to 22% for the same period last year, according to the commercial real estate firm Colliers, as companies slashed their office footprint after the pandemic spurred an in crease in remote and hybrid work.

And experts say it could be a couple of more years before there’s a turnaround.

According to Colliers, there were 123,598 square feet of “positive net absorption” in the second quarter, a figure that hasn’t been seen since the second quarter of 2023. This means that companies in Chicago occupied more office space at the end of a three-month period than they did at the beginning. Which is significant because it shows a demand for office space across Chicago after months of pullbacks.

Nick Schlanger, the director of research services for the commercial real estate firm NAI Hiffman, cautions, though, that this is largely due to new construction.

The company reported that more than 38 million square feet of office space is on the market, with vacancy still up year over year. But demand to move into top-tier, so-called Class A, office properties hasn’t wavered much.

“Leasing has been fairly consistent,” Schlanger said. “We saw 1.6 million square feet of new leasing during the quarter, which is down 6% from what we saw at the same time last year.”

More leases were signed in the second quarter, according to Colliers, but companies are continuing to seek smaller spaces.

West Loop office leasing heats up

The burgeoning Fulton Market and West Loop office markets have two of the lowest vacancy rates in Chicago.

This area has become a growing hub for tech companies and other businesses looking to attract young talent. In March, video software maker Vyond moved to a 6,000-square-foot West Loop office at 401 N. Morgan St. after quickly growing its staff from three to 43. The same month, NanoGraf announced plans to open a new manufacturing and research facility in the West Loop at 455 N. Ashland Ave. The company makes advanced lithium-ion batteries for the U.S. military.

All of Chicago’s smaller “submarkets” — such as Fulton Market and North Michigan Avenue — had positive absorption last quarter, except the East Loop, where two major tenants left for newer Class A spaces. Insurance giant Blue Cross Blue Shield moved from 225 N. Michigan Ave. to a new, consolidated space at the Aon Center, according to Colliers, while the second tenant was undisclosed. The East Loop is bordered by East Wacker Drive, Lake Shore Drive, State Street and East Ida B. Wells Drive.

“With the inventory that we have [in East Loop], it’s just difficult to … attract those top, large, impactful tenants,” Colliers principal Dan Arends said.

While leasing in Fulton Market is showing a positive trend but slowing, the West Loop is “absolutely on fire,” he said.

“It seemed like everybody was moving to Fulton at one point,” Arends said. “The West Loop … is certainly the largest positive.”

He said the buildings driving the market are the Bank of America Tower at 110 N. Wacker Drive, River Point at 444 W. Lake St., 150 N. Riverside Plaza, BMO Tower at 320 S. Canal St. and the Salesforce Tower.

Asking rents are up year over year, at an average of $43.07 per square foot, according to Colliers.

Schlanger said the market is starting to soften due to high vacancies.

“This is the first time I’ve seen a dip in asking rents — [Central Business District] or suburban — in a very long time,” Schlanger said.

Looking for something new

Chicago is one of many cities across the United States still seeing a “flight to quality,” Arends said. Companies are preferring newer buildings, and unusual amenities like a hidden room with duckpin bowling are helping to bring workers back to the office.

The bulk of office demand continues to be for Class A space — the highest quality property on the market, with the highest rents. But they might not need as much space as before, Schlanger said.

Contractions have created a near all-time high in vacant sublease space, as fewer workers trek to the office, with Colliers finding nearly 7 million square feet of available space. Landlords are continuing to refresh their building amenities to attract new talent and fill the empty space. Others, like those on La Salle Street, are being converted to residential to spur foot traffic in predominantly commercial corridors.

But there have been some significant leases inked during the last quarter. The food-delivery app Grubhub relocated and consolidated its headquarters, moving from the Burnham Center at 111 W. Washington St., subleasing space at the Merchandise Mart. It reduced its office space from 164,000 square feet to 108,000 square feet, according to Colliers.

Arends said the tipping point at which the office market could see positive movement is likely still a year or two away. The excess in sublease space is a major hurdle the market would have to surpass.

“The market’s starting to stabilize,” Arends said. “I think that it is growing pains, and I think that you’re going to see a lot of that.”

Click here to read the full article in the Chicago Sun-Times.

Additional context and insight

“Chicago’s CBD office market performance remains uneven, as  vacancy continues to rise to new cyclical highs. While the downtown registered positive net absorption for the first time in nearly two years, that is largely due to committed tenants occupying recently delivered product, while the year to date occupancy has softened by early 1 million square feet,” said Schlanger. “Market dynamics are beginning to shift, as rents dipped noticeably for the first time in a long time. Following many years of steady rent growth, landlords are now lowering base rents and passing the large concession packages previously offered back to the tenants, who may receive more favorable lending rates.”

“Not all news is negative, however, as Chicago has registered several notable wins over the past 12 months, including the announcement of the transformational Quantum computing campus on the southeast side of the city,” he said. “This is just the latest in Chicago’s recent push to establish a more business-friendly environment, providing new incentives for major tenants and developers to come to the region.”

About Hiffman National: 

Based in the Chicago area, with an additional five regional hubs and 30 satellite offices, Hiffman National provides superior property management, project services and accounting services to a diverse portfolio including office, medical office, retail and industrial properties nationally. The firm’s comprehensive property management platform and attentive approach to service contributes to client NOI and has helped the firm to more than double in size in five years. Hiffman National is an award-winning company with more than 250 employees strategically located throughout North America.

About NAI Hiffman:  

NAI Hiffman is one of the largest independent commercial real estate services firms in the US, with a primary focus on metropolitan Chicago, and part of the NAI Global network. We provide institutional and private leasing, property management, tenant representation, capital markets, project services, research, and marketing services for owners and occupiers of commercial real estate. To meet our clients’ growing needs outside of our exclusive NAI Hiffman territory, we launched Hiffman National, our dedicated property solutions division, which provides property management, project services, and property accounting services across the country. NAI Hiffman | Hiffman National is and award winning company headquartered in suburban Chicago, with more than 250 employees strategically located throughout North America.