Downtown Chicago office vacancies climb to record high of 23.7%

New records have been set in 10 of last 12 quarters

Chicago Office Vacancies Climb To Record High Of 23.7%

(Photo Illustration by The Real Deal with Getty)

Downtown Chicago’s office vacancy rate again ticked up to a record high, shedding light on the compounding challenges that have wreaked havoc on the city’s commercial real estate sector starting with the pandemic.

The downtown vacancy rate reached 23.7 last quarter, up from 22.6 percent at the midyear point, Crain’s reported, citing data from CBRE. This marks the 10th time in the past 12 quarters that vacancy rates have hit a new record high.

The prolonged struggles for Loop landlords mostly stems from stubborn remote work trends, which have caused a number of companies to reduce their footprint and undergo employee layoffs.

The combination of weak demand and declining property values, exacerbated by rising interest rates over the past year, has led to a wave of foreclosures and landlords surrendering their assets to lenders. Notable downsizes in the past quarter include Bankers Life & Casualty, which gave up more than 100,000 square feet in its move from 111 East Wacker Drive to a smaller space at 303 East Wacker, as did Yelp when it left its Merchandise Mart space when its lease expired over the summer.

However, the market’s troubles are not evenly distributed. Newer and recently updated Class A office buildings have seen positive net absorption over the last eight quarters, attracting companies looking to upgrade their workspace and lure workers back to the office. In contrast, Class B properties have experienced negative net absorption in 11 of the past 12 quarters.

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Despite the challenging market conditions, some developers are still investing in office space downtown. Nearly 1.5 million square feet of new and renovated office space is under construction, although only 27 percent of it has been pre-leased, the outlet reported. The healthy demand for updated office space hints at a potential recovery for the beleaguered sector.

Recent data also suggests that more companies are expecting workers to be in the office more frequently. The amount of available sublease space in the market decreased slightly during the third quarter, indicating some stabilization. Plus, several companies have recently expanded their footprint, such as energy firm RWE and insurance brokerage Lockton.

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While there may be signs of recovery in leasing, the capital markets remain challenging, as the number of distressed properties continue to rise in the city. Many landlords are cautious about making new deals, and in some cases are waiting to fund new costs for leasing commissions and tenant build-out incentives. One notable example is the 161 North Clark Street building, which was recently handed a $237 million foreclosure lawsuit after telling its landlord it doesn’t want to continue managing the building.

Also in the third quarter, a large downtown office building traded for the first time in over a year, with the 29-story tower at 230 West Monroe selling for $45 million. That’s 63 percent less than what it sold for nine years earlier, indicating that buyers are interested in downtown office properties but at substantially reduced prices.

— Quinn Donoghue

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