Downtown Chicago Office Vacancy Continues Descent

Chicago’s downtown office market ended the year with a record-setting metric, but not the kind landlords were hoping to see.

The downtown office vacancy rate hit 26.3 percent in the fourth quarter, up from 23.8 percent at the end of 2023 and more than double the 13.8 percent rate recorded at the start of the pandemic, Crain’s reported, citing data from CBRE. This latest data marks the 10th consecutive quarter of rising vacancies for downtown landlords.

Downtown neighborhoods experienced over 150,000 square feet of net negative absorption in the fourth quarter, nearly doubling the previous quarter’s figure. This brought the total net absorption for last year to a negative 1.6 million square feet, the lowest since 2021. The majority of the negative absorption came from tenants downsizing, either by exercising contraction options, returning unused space to landlords or subleasing space.

The challenges have disproportionately affected Class B office properties, where vacancy rates rose to 31.8 percent by the end of the year. By contrast, Class A buildings, which typically offer modern amenities and upgraded features, maintained a comparatively lower vacancy of 20.6 percent.

The record-high vacancies are hitting landlords where it hurts, causing foreclosures and give-backs, but it creates opportunities for buyers at the bottom of the market.

Recently, properties at 70 West Madison Street and 303 East Wacker Drive changed hands at steep discounts compared to their pre-pandemic valuations.

Namdar Realty Group and Mason Asset Management secured the West Madison building for $60 per square foot, about 77 percent less than its 2014 purchase price. Investor David Werner and 601W secured the East Wacker building for $34 per square foot, about 82 percent less than its last trade in 2018.

A few significant leases offer a glimmer of hope for the market.

The 51-story office tower at 77 West Wacker Drive recently secured two major lease deals totaling over 500,000 square feet, including 80,000 square feet from Engineering firm Sargent & Lundy.

PricewaterhouseCoopers extended its 10-year lease for about 282,500 square feet in the Irvine-owned tower at One North Wacker Drive in the Loop.

The city of Chicago is trying to mitigate the effects of high vacancies by offering nearly $250 million in tax-increment financing funds for office-to-residential conversions

Meanwhile, office development has taken a nosedive, with 919 West Fulton the only expected delivery this year.

— Andrew Terrell