One of the few bright spots in Chicago’s office market is the West Loop and its Fulton Market — where a lot of development has happened for several months. But overall, the city’s vacancy rate is still much higher than its pre-pandemic figure.
Available office space throughout Chicago reached a record high of 23.3% last quarter, compared to 22% for the same period last year, according to commercial real estate firm Colliers, as companies slashed their office footprint after the pandemic spurred remote and hybrid work schedules. Experts say it could be a couple years before the city sees a turnaround.
Colliers said there was 123,598 square feet of positive net absorption in the second quarter, something that hasn’t happened since second quarter 2023. This means for the first time in at least a year, companies in the city occupied more office space at the end of a three-month period than they did at the beginning. It’s significant because it shows a demand for office space across Chicago after months of pullbacks.
But Nick Schlanger, director of research services at commercial real estate firm NAI Hiffman, said that’s largely due to a lot of new construction.
The company reported over 38 million square feet of office space is on the market, with vacancy still up year over year. But demand to move into top-tier, or Class A, office properties hasn’t wavered much.
“Leasing has been fairly consistent,” Schlanger said. “We saw 1.6 million square feet of new leasing during the quarter, which is down 6% from what we saw at the same time last year.”
More leases were signed in the second quarter of the year, according to Colliers, but companies are continuing to seek smaller spaces.
West Loop office leasing heats up
The burgeoning Fulton Market and West Loop office markets boast two of the lowest vacancy rates in Chicago.
It’s become a growing hub for tech companies and other businesses looking to attract young talent. In March, video software maker Vyond moved into a 6,000-square-foot West Loop office, at 401 N. Morgan St., after quickly growing its staff from three to 43. That same month, NanoGraf announced plans to open a new manufacturing and research facility in the West Loop, 455 N. Ashland Aveoffice market. The company makes advanced lithium-ion batteries for the U.S. military.
All of Chicago’s submarkets such as Fulton Market and North Michigan Avenue had positive absorption last quarter, except the East Loop where two major tenants left for newer, Class A spaces. Insurer Blue Cross Blue Shield moved from 225 N. Michigan Ave. into a new, consolidated space at the Aon Center, according to Colliers, while the second tenant was undisclosed. The East Loop is bordered by East Wacker Drive, Lake Shore Drive, State Street and East Ida B. Wells Drive.
“With the inventory that we have [in East Loop], it’s just difficult to … attract those top, large, impactful tenants,” he said.
While leasing in Fulton Market is showing a positive trend but slowing, the West Loop as a whole is “absolutely on fire,” Colliers principal Dan Arends said.
“It seemed like everybody was moving to Fulton at one point,” Arends said. “The West Loop … is certainly the largest positive.”
He said the buildings driving the market are the Bank of America Tower at 110 N. Wacker Drive; River Point at 444 W. Lake St.; 150 N. Riverside Plaza; BMO Tower at 320 S. Canal St. and the Salesforce Tower.
With the exception of 320 S. Canal — the newest construction among the towers — all the properties are 98% to 100% occupied, he said. The activity has pushed up rents with those buildings seeing rates rise as high as 7% in the last 12 to 15 months, according to Arends.
Asking rents are up year over year, at an average of $43.07 per square foot, according to Colliers.
Schlanger, of NAI Hiffman, said the market is starting to soften due to high vacancies, which can bring down rents.
“This is the first time I’ve seen a dip in asking rents — [Central Business District] or suburban — in a very long time,” Schlanger said.
Looking for something new
Chicago is one of many cities across the U.S. that’s still seeing a “flight to quality,” Arends said. Companies are preferring newer buildings, and unique amenities like a hidden room with duckpin bowling are helping to bring workers back into the office.
The bulk of office demand continues to be for Class A space — the highest quality property on the market, with the highest rents to match. But they may not need as much space as before, Schlanger said.
Contractions have created a near all-time high in vacant sublease space, as less workers trek to the office, with Colliers finding nearly 7 million square feet of available space. Landlords are continuing to refresh their building amenities as a way to attract new talent and backfill the empty space. Others, like those on La Salle Street, are being converted into residential to spur foot traffic in predominantly commercial corridors.
But there have been some significant leases inked during the last quarter. Chicago-based food delivery app Grubhub relocated and consolidated its headquarters, moving from the Burnham Center at 111 W. Washington St., and subleasing space at the Merchandise Mart. It reduced its office space from 164,000 square feet to 108,000 square feet, according to Colliers.
Arends said the tipping point — where the office market could see positive movement overall — is likely still a year or two away. The excess in sublease space is a major hurdle the market will have to surpass to get there.
“The market’s starting to stabilize,” Arends said. “I think that it is growing pains, and I think that you’re going to see a lot of that.”
