The Real Deal Chicago

Downtown office rents stuck, absorption slows in lackluster Q3: report

A Colliers International report pegged the Downtown vacancy rate at 12.7 percent, barely changed from a year ago
By Alex Nitkin | October 22, 2018 02:00PM

WeWork’s lease for five floors at 515 North State Street held up the Downtown office market last quarter (Credit: Getty Images)

Downtown office rents remained flat and absorption slowed in the third quarter, signaling the environment may be tipping in favor of tenants.

The city core’s office vacancy rate held to 12.7 percent during the third quarter, down 10 basis points from one quarter earlier but up 10 points year over year, according to a report from Colliers International.

Downtown rents held to an average of $40.74 per square foot last quarter, up from $40.69 during the second quarter and $39.22 year over year. The West Loop, River North and North Michigan Avenue submarkets averaged the sharpest rent spikes, all posting year-over-year gains of more than a dollar per square foot.

But the rent numbers hide the widening popularity of tenant concession packages landlords are offering to fill their buildings, which drag down net effective rents, Colliers International senior vice president Corby Marx said.

“We’ve been seeing landlords in (class) B or B-plus buildings having to get really aggressive in fighting over that class of tenants,” Marx said. “Tenants are less willing to pay new-construction rental rates, so I thought these numbers would be ticking down a bit further.”

The sharply higher tenant demand for class-A office buildings is pushing class-B landlords to shell out for major renovations, Marx added.

About 139,000 square feet of Downtown office space were absorbed into the market last quarter, a positive but significantly slower figure than the 662,000 square feet Colliers measured during the second quarter.

Rents and absorption were both boosted by WeWork’s pair of new leases totaling more than 200,000 square feet in River North this fall. The coworking giant’s expansions into 330 North Wabash Avenue and 515 North State Street accounted for the bulk of River North’s positive net absorption last quarter and helped shave the neighborhood’s vacancy rate from 9.1 percent to 7.6 percent.

Big names like FacebookSalesforce and CIBC are shepherding a pack of new tech and finance tenants to “buoy the overall market” for office space while other firms are shrinking or consolidating their footprints, Marx said.

Landlords took a hit when W.W. Grainger and Holland & Knight both shrank their Chicago footprints last quarter, weighing down rents and cutting net absorption across the map.

A CBRE report earlier this month measured a jump in the third quarter Downtown vacancy rate to 13.3 percent from 13 percent the previous quarter and 12.9 percent during the first quarter of 2018.

Newmark Knight Frank, meanwhile, found that citywide office rents hit record highs last quarter.