Office Market Update: Tenant-Favorable Chicago – Midyear 2024
What is the current state of the office market?
The Chicago market continues to see an improvement in the return to the office movement, with tenants prioritizing well-located buildings with newer amenities and collaborative spaces.
The demand for better assets has caused a slight uptick in Class A rental rate asking positions, (but not effective rates) thereby forcing landlords of lower quality, higher vacancy properties to be more creative and strategic in their leasing approach. Notwithstanding, landlords throughout the market are struggling to retain ownership of their properties, and negotiating with their lenders.
Ownerships will continue to change as opportunistic investors are able to buy properties for the current debt, and in some cases less, wiping out the equity of the previous owner.
In addition, challenges throughout the market exist in identifying financially viable landlords. Many Landlords are experiencing difficulty in funding tenant improvements, making locating the right property as a tenant even more challenging. The landscape has become a lot more complicated than just finding the right building.
Notable trends and data from Chicago’s CBD in Q1 include:
VACANCY: In Q1, Chicago’s Central Business District has recorded nearly a million square feet of negative net absorption. Total availability increased as nearly 1.7 million square feet of available space was added to the market. Total CBD vacancy increased by 73 basis points to 23.5% total vacancy.
Sublease activity has slowly declined, with many spaces going back to landlords on a direct basis, further pushing vacancies across the market.
ASKING RENTS: Chicago CBD has seen a slight increase in direct gross asking rents in the first quarter. Trophy buildings averaged $68.35 per square foot in direct asking rates. Class A averaged $51.22 per square foot in direct asking rates. Class B averaged $40.95 per square foot in direct asking rates. Class C averaged $27.50 per square foot in direct asking rates.
The rising rent is due to the increases in tax and operating expenses as well as high quality Trophy and Class A buildings pushing higher rents. Lease concessions and stronger incentive packages or tenant improvement allowances are continuing with great flexibility.
LARGER BLOCKS: Currently, there are 55 blocks of contiguous large space (100,000 sq ft or larger) across 48 buildings in Chicago. 225 W Randolph, former AT&T building, contains the largest on floors 4-33 (which provides 810,000 sq ft on the market).
Overall, it continues to be a great time to be a tenant, and there are tremendous opportunities for healthy tenants who are making strategic decisions and taking advantage of the market.
Whether your real estate plans are immediate or far-off, we would like to get to know you and your office space needs.
As the leading provider of integrated real estate services with a 100% commitment to advocating the interests and needs of tenants, CBIZ Gibraltar understands that no two companies are alike and works to deliver the best possible solutions for our clients. Together, we uncover the potential of your work environment, maximize human capital and map the path to critical business success.