Downtown Chicago Office Vacancy, Trophy Tower Rents on Rise

Downtown Chicago’s office market just notched another grim milestone, but the pain isn’t evenly distributed.

The central business district’s vacancy rate climbed to 28 percent in the third quarter, up from 27 percent midyear. That’s more than double its pre-pandemic level, according to CBRE. Vacancy has increased for 13 straight quarters, Crain’s reported. Companies have shed 2.3 million square feet downtown over the past two years — almost twice the space lost during the Great Recession — leaving landlords and lenders to grapple with a prolonged downturn.

That weakness has chilled the investment sales market, where institutional buyers have largely stayed on the sidelines. Property tax revenue from downtown office buildings — a critical source for the city — has also eroded, raising the stakes for a recovery.

But the market split is widening. Vacancy at older, second-tier Class B properties ballooned to nearly 35 percent in the third quarter, while Class A vacancy landed at 21.4 percent.

“It’s a tale of two markets,” CBRE’s Todd Lippman told the outlet, noting that top-tier towers with lots of perks and amenities are drawing steady demand while commodity space languishes.

That demand has fueled rent growth for trophy assets even as broader asking rents have barely budged. Colliers data shows average gross rents across downtown offices have ticked up just 1 percent since 2020, while rents at the newest glass-and-steel towers have surged 26 percent. Recent deals illustrate the trend: law firm Kilpatrick Townsend signed on for a floor at BMO Tower on Canal Street, consolidating from multiple Loop offices, while private equity shop Wind Point Partners is set to sublease space at Salesforce Tower.

Overall absorption was negative last quarter, with tenants vacating 51,000 more square feet than they leased. Evolent Health’s exit from nearly 124,000 square feet at 300 South Riverside Plaza was the biggest hit, outweighing expansions by JPMorgan Chase and Adyen. CBRE expects net absorption to stay flat as more leases roll and tenants reassess footprints.

Law firms may offer a glimmer of stability. Lippman noted that most are no longer aggressively cutting space, and some are even growing, unlike the contraction cycle that reshaped the sector a decade ago.

Investment sales are scarce, though some local and opportunistic players are wading in. Blue Star Properties paid $28 million for 2 North Riverside Plaza — the historic former home of the Chicago Daily News — earlier this summer, while 601W is under contract to buy the distressed 175 West Jackson.

— Eric Weilbacher