Downtown Chicago office vacancy creeps to new all-time high

High demand couldn’t counter new space to hit the market

downtown, Chicago office market

Demand for office space in downtown Chicago hit its highest post-pandemic level last quarter, yet couldn’t shake a booming sublease market and a wave of exits that propelled vacancy to another all-time high.

A report from real estate services firm CBRE found the downtown office vacancy rate hit 21.4 percent in the fourth quarter last year, a jump from 19.7 percent at the same time the previous year, and a tick up from 21.3 percent the previous quarter, Crain’s reported. The vacancy rate remains significantly higher than the 13.8 percent rate at the beginning of the pandemic three years ago.

The data reflects the struggle many office landlords have been going through since the public health crisis kicked off a trend of remote work and led many companies to trim office space to accommodate fewer in-person employees. Companies looking for new office space are at big negotiating advantage over landlords, who have taken to offering incentives like free rent, more cash for building out space and other perks in an effort to court potential tenants.

A record amount of space hit the sublease market in 2022 as well. There was 6.8 million square feet of downtown office space available for sublease downtown, an increase of more than 900,000 square feet from the year prior.

Newer and higher-quality offices performed better than older, outdated spaces. Class A office buildings had more than 2 million square feet of positive net absorption in 2022. Meanwhile, Class B buildings lost more than 620,000 square feet of tenants.

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“There are two sides of the market. The Class A landlords who continually invest in their assets are typically performing the best,” CBRE First Vice President Jason Houze told the outlet. “Meanwhile, there are other landlords who rightfully have some concerns going into 2023. Some may not be capitalized to make those investments or have other headwinds challenging them. Their concerns are valid in some cases.”

Still, signs of recovery have emerged. Net absorption — a measure of how much space office tenants lease versus shed — rebounded in a big way from a miserable 2021, fueled by the best quarter since 2019 in the final months of last year. With about 294,000 square feet of positive net absorption, last quarter marked the fifth straight of positive increases to bring 2022 to 1.2 million square feet total, up from a negative 2.1 million square feet tallied in 2021, the biggest space-shedding year CBRE has ever recorded.

Leases were recently inked by cold storage tenant NewCold and trading firm Chicago Trading for bigger offices, contributing to the boost for absorption.

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Victoria Pruitt