Office rents in and around Chicago aren’t falling despite vacancies

Companies seeking a pandemic-era deal on their next Chicago office may be in for a surprise: rents are stuck at 2019 levels even as vacancy rates hover at records.

Landlords are loath to tinker with downtown and suburban leases that were signed before the pandemic and have years left before they expire. Meantime, an influx of new Class A “trophy” buildings with fitness centers and rooftop decks are driving up market prices even for lower end buildings, and the rising cost of raw materials has inhibited the effectiveness of concessions like partial rent abatements, allowances for renovations and giving tenants flexible move-in dates.

A seller’s market before the pandemic limits landlords’ ability to lower rents because the high rates don’t allow for flexibility amid a downturn. And then there are property taxes, tied to a national inflation rate that’s accelerating faster than the local one.

“They’re frustrated because all they hear about is the huge shift to work from home, there’s nobody in the office anymore, the Loop is a ghost town during the week,” said Michael Marrion of Cresa, a commercial real estate firm. “They’re expecting rent to drop 10 to 15 percent if they move and it’s not happening.”

It’s a conundrum with few answers for tenants or landlords at a time when the future of office work has never seemed so clouded. It’s left tenants stuck with high costs and landlords sitting on high vacancy rates that could lead to more foreclosures on buildings that define the city’s skyline.

For now, well-capitalized owners aren’t feeling enough of a pinch to drop rents, said Rawly Lantz, principal at Cawley Chicago – at least in the suburbs. “Vacancy rates are up and the market rate is up half a percent,” he said.

Others paint a slightly rosier picture for tenants. Data collected by JLL show rents have been dropping slightly for Class A and B buildings in the downtown market. Concessions have increased by as much as 50 percent, and savings are more common in the suburbs where rents are cheaper, said JLL’s Andrea VanGelder.

“In most asset types, the amount of concession is not being washed out,” VanGelder said. “We’re especially seeing this in the Northwest suburban market.”

Granted, suburban and downtown office markets, while closely related, have plenty of differences. While the suburbs generally draw less demand, generalizations are tough because they span hundreds of small towns and cities.

Yet in both markets, rents for Class A and B office buildings are at or above pre-pandemic levels, according to data from Cresa and Cawley. The market rate in downtown Class A buildings is just over $50 per square foot, up from $47 in 2019, Cresa data shows. Class B space is now $41.65, up from $41.27.

In the suburbs, the market rate for Class A buildings is $27.25, right where it was in 2019, according to Cawley. The rate for Class B buildings has increased just 10 cents per square foot over 2019 prices. JLL data also shows a slight increase across the board for Class A and B buildings in the suburbs.

Downtown, build-out concessions have generally increased to $12 per square foot from $10, which is being washed out by a 14 percent increase in building materials, according to Cresa.