2022 Office Space Report: Chicago, IL
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The commercial real estate market is constantly evolving, and these changes are often most evident in different subsectors. The office sector is no exception.
The way that companies operate has changed significantly over the past few years. As a result, so too have the requirements for office buildings.
This Chicago office space report highlights key trends in the Chicago commercial real estate office sector and their implications for future CRE performance.
Chicago Office Space Highlights
Chicago, with an office space vacancy rate of about 20%, still has some office space available with room for investors to move into the market.
Here are a few highlights from Chicago’s office space market:
- Overall, the Chicago commercial real estate market experienced among the highest recent price gains in the world.
- The industrial sector in Chicago is outperforming the office sector.
- The office market in Chicago has been adversely impacted by work at home and hybrid work models from the pandemic. Class A office space vacancies stand at about 17%.
- Class B office space vacancies were about 23.5%.
- Class C office space vacancies were about 20%.
- Some office landlords have defaulted.
Before buying into Chicago’s office space market, you should have a solid plan for profitable investment despite office rent prices being low.
The Pacing of Office Space Rents in Chicago
The office space market in Chicago, as of July 2022, is evolving and recovering. The office vacancy rate in the U.S. is 15.4%, and Chicago is considerably higher than that.
However, several major factors are influencing a downturn, including:
- Space-shedding that’s outpacing new leasing activity.
- There is a decrease in YOY average asking rent of -2.84%.
- The average asking rent in Chicago is $37.56 per square foot.
Rent prices are low right now, which can be beneficial for companies looking to expand and grab up available space.
However, demand for space is still on the lower side, making it difficult for investors to justify high-dollar investments at the moment: More commercial tenants are leaving Chicago than are entering, according to Crain’s Chicago Business.
Long-Term Changes in Chicago Office Space Rent
Chicago is experiencing a downturn in commercial office space rent due to several factors.
Major companies have left the city and Chicago was hit hard by the pandemic. Because of this, there is office space available alongside low demand for that space.
This means office rent will stay low until available space is taken, despite a vacancy rate below the national average.
The most notable change in rent will likely come from premium office space development.
Companies are looking to renovate with rumors that companies like Google are interested in high-end office space in the city.
Healthcare offices and similar specialized spaces are in development, raising this demand for premium options.
Short-Term Changes in Chicago Office Space Rent
Chicago is experiencing a downturn in short-term rent prices.
Because of the struggles to get employees back in offices, as well as many major companies leaving the city, office space is still widely available despite the lower vacancy rate.
This is driving down the price of office space.
In the short-term, demand for said office space coupled with development projects is expected to, at least, keep commercial office space prices down.
However, there are companies looking to develop or renovate space within the city.
Over time, this may be an advantage for those companies looking to create premium office space.
Office Space Sales in Chicago
Now, in Q3 2022, Chicago is seeing an increase in activity thanks to the easing of pandemic restrictions and companies pushing to bring employees back to offices.
Here are some notable acquisitions and sales of commercial office space in the Chicago area.
Notable Acquisitions So Far
In early 2022, Nightingale Properties, LLC purchased commercial Chicago office space using a crowdfunding campaign that generated $130 million.
Twenty-five million dollars of the $130 million total was raised from online investors with experience in real estate investing.
The office building is in downtown Chicago and the seller was undisclosed.
Notable Sales So Far
In 2022, the construction of McHugh Construction’s newest office building continues.
It is a five-story building that includes medical offices for Howard Brown Health, one of the largest healthcare organizations in the midwest. The building will have a mix of medical facilities, offices, and retail space.
The cost of construction is undisclosed, but the building was commissioned by a joint venture between Inland National Development Co. and Howard Brown Health.
In mid 2022, the Thompson Center will be sold for $70 million to Michael Reschke, a well-known Chicago-based developer.
His firm plans to spend more than $300 million renovating the building to include retail, commercial, and hotel space.
Google, Blackstone, and Saving Chicago’s Downtown Area
However, there are unconfirmed rumors that Google is attempting to buy the building for an undisclosed amount.
The sale of the Thompson Center would be a major move in saving the downtown area that has been heavily affected by the loss of major companies.
In late 2021, the sale of the Allstate campus was finalized for $232 million.
The purchase was made by Dermody Properties, which is an industrial space developer from Nevada that is looking to create more industrial facilities.
The working plan is to demolish the office buildings and build 11 industrial warehouses.
In late 2022, the real estate development firm Blackstone will finish the sale of an 11-story office building.
The building is located at 9550 West Higgins Road, and the price or a buyer have yet to be determined.
However, industry experts familiar with the product predict a $40 million asking price.
Blackstone is in the middle of a renovation of Willis Tower. The renovation cost $500 million so far and should be completed within the next few months.
Market Forecast for the Rest of 2022
Chicago faces a somewhat uncertain future when it comes to the office sector for commercial real estate.
Some landlords have defaulted on their loans and may face bankruptcy. It is too early to tell how this will impact the rest of 2022.
General Investor Activity: Where is the most money flowing?
Investors are putting their money into Chicago’s industrial sector at the current moment.
Investors will be looking for companies that can command premium rents and have a solid plan for recovering their investment despite office rent prices being low relative to where they once were.
Takeaways for Office Space Investors
Major companies leaving Chicago make it difficult to find tenants for available office space.
In fact, this is one of the biggest risks that you may face when investing in major office spaces within Chicago.
Do due diligence, don’t rush into a bad deal, and consider working with an experienced commercial real estate broker.
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