Office rents in the Chicago area have spiked to new record highs, thanks in part to corporate relocations and a booming economy.
The average Chicago office rent hit a record high in the third quarter was $29.75, according to a report from Newmark Knight Frank. The rate marks a significant year over year increase from $27.35 and from the second quarter’s $29.12.
The area’s two main submarkets also posted record high office rents in the third quarter. Downtown saw an average rental rate of $36.62, while the suburbs had a rate of $23.01, according to the study.
Office rates are pushing higher as the Chicago area attracts new tenants seeking young, highly educated workers. Vacancy for the metro area is at 16.6 percent, while the Downtown market had a vacancy of 13 percent, the report said.
The Downtown office market has been growing more steadily as corporations continue to move from the suburbs to the central business district.
In the third quarter, McGraw Hill closed its Burr Ridge headquarters and moved to a 50,000-square-foot office at 120 South Riverside. Co-working giant WeWork has also expanded in the city center, with two new offices that will bring its foothold in the city to some 600,000 square feet by the end of 2018, the report said.
The flight of corporate offices to the city center has not hurt suburban rents, which grew 7 percent year-over-year to post a new record high of $23.01. The suburban market was buoyed by 240,000 square feet of lease signings from the liked of T-Mobile, Elkay Manufacturing and Assertio Therapeutics, the report said.
The record rental rates show Chicago’s office market is firing on all cylinders, but a number of factors will soon test the market’s strength.
In the central business district, two new towers could add more than 2 million more square feet to the market: the 950-foot Wolf Point South office tower planned in River North that could become Salesforce’s headquarters, and a 1.5-million-square-foot office tower next to Union Station that reportedly will be anchored by BMO Harris.
BMO Harris is just one of three financial institutions possibly leaving its Financial District location for shiny, new buildings on the outskirts of the central business district. Similar plans from Bank of America and Northern Trust will leave 1.85 million square feet of vacant office space in the Central Loop.
Despite these challenges, the office market is likely to remain strong for the foreseeable future, the NKF report said.
Downtown “will carry strong momentum through the rest of the year, and there is reason to feel confident that this activity level will continue into 2019,” the report said.