Office vacancy rises, rents hold steady amid onslaught of new inventory: report

Citywide office vacancy climbed to 13.3% last quarter, closing out a year when more than 2M sf of new space came online

Mar.March 01, 2019 03:10 PM

151 North Franklin and 625 West Adams

Citywide office rents grew slightly last quarter and vacancy crept up by about two percentage points, a fair outcome for property owners to cap off a year when more than 2 million square feet of office space came into the market.

About 14,000 more square feet of new office space was opened than was leased during the fourth quarter, according to a report from Colliers International. Office vacancy shot up from 11.6 percent during the last quarter of 2017 — roughly the same as where it had been one year earlier — to 13.3 percent at the end of 2018.

Still, the sudden spike in vacancy shouldn’t be taken for a sign that the market is slackening, according to Jim Carris, the executive managing director for Colliers’ Chicago office. The nine office buildings that opened last year, including the towers at 151 North Franklin Street and 625 West Adams Street, skew the equation, he said.

“Considering how much new class-A product has come into the market, it’s had a really miniscule negative effect on negative net absorption and vacancy,” Carris said. “With the growth of all these coastal companies, and the flight from the suburbs into [Downtown], a lot of that new product is being absorbed.”

Office rents also kept inching upward last quarter, growing by about $1.30 year-over-year to hit $40.67 per square foot at the end of 2018, matching the same rate of rent growth Colliers measured between 2016 and 2017.

Office owners may face even tougher competition for tenants this year, when up to 3.6 million square feet of new office space is expected to open Downtown. And looming on the horizon are hulking planned developments at Wolf Point, Union Station and Old Main Post Office.

But migrating or expanding companies promise to gobble up much of the new space — as demonstrated by the big leases by Salesforce, BMO Financial and Walgreens already announced for those three buildings.

Carris also expects aging office buildings to be adapted for other uses, skimming inventory off the bottom of the market while gleaming new class-A projects are added to the top. Some 4 million square feet of office buildings have been converted into residential units or boutique hotels during the past five years, he said.

He added the “tremendous growth” of co-working, which accounts for some 2.8 million square feet of the city’s combined office space, is claiming an increasing share of the empty space.

“Co-working operates on a fluctuating model, so it’s hard to say what percentage of that 2.8 million is occupied at any given time,” Carris said. “But it’s taken all those empty desks, which would otherwise be considered vacancy, and converted them to occupied space.”

The tepid fourth quarter finished out an otherwise strong year for office landlords last year, when about 1.4 million square feet of new space were absorbed into the market, according to Colliers.

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