Commercial Real Estate News / General CRE / Q3 2022 Office Space Report: Chicago, IL

Q3 2022 Office Space Report: Chicago, IL

Published: 01-16-23 Category: General CRE

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

At first glance, the current state of Chicago office space looks positive…if you’re a prospective tenant.

Currently, owners of commercial office space in Chicago’s Central Business District (CBD) are struggling due to a shrinking business population.

During the third quarter of this year, office vacancies set a new record of 20.3%, with 25.1% of tracked office space currently available.

This trend didn’t happen overnight. Here are just a few of the reasons why some Chicago CRE owners are suffering.

An Overview of the Windy City

The third-largest city in the United States, Chicago is home to corporate food giants like McDonald’s, ConAgra Foods, and Kraft Heinz. Baseball fans flock to historic Wrigley Field.

However, the last decade has not been kind to investors. Aeronautics giant Boeing moved to new global headquarters in Virginia while Caterpillar recently headed south to Texas, citing a 26% lower cost of living.

These and other facts, such as Illinois being the nation’s state with the highest combined state and local taxes, have led to a steadily declining population.

This report takes a deep dive into Chicago’s current office vacancy rates and why local investors are buying office and office/retail properties.

Chicago Office Space Performance in Q3 2022

Q3 2022 Office Space Report: Chicago, IL

The current vacancy numbers didn’t appear overnight. Instead, they result from a two-year trend of negative net absorption.

The only winners during Q3 were Class A buildings, whose total vacancy numbers decreased to 16.8% — a slight improvement over Q2 2022’s 17.2% numbers.

Class B office space assets took it on the chin, racking up the highest increase in vacant space. This number grew to 24.4% during Q3 2022, rising from the previous quarter’s 23.6% vacancy rate.

Brokers and analysts both predict that Class B space will not trend into positive space during 2022 as long as Class A assets are offered at competitive rates.

Even though Class C buildings don’t offer the same amenities as Classes A or B, these spaces still outperformed Class B buildings, rising to 22.1% from 20% instead of Class B’s 24.4%.

Not only did Class A building owners come ahead on vacancy numbers, but they were the only ones who managed a slight rent rate increase.

Office Space Rents Reward Class A Investors

While Chicago asking rents took a slightly downward trend, Class A office buildings managed a slight increase.

Average gross asking rents decreased by seven cents during the third quarter of 2022, going from $42.13 to $42.20 quarter-over-quarter.

Class A rates increased from $48.52 per square foot (PSF) to $48.96.
Class B rates sank by 12 cents, ending up at $40.34 PSF.
Class C rates decreased from $29.27 PSF to $28.74.

Potential investors should factor in the increased property taxes that were added to gross rates.

While some investors will avoid areas with high vacancies, others will seek bargain-priced commercial office property, like Andy Farbman.

Local Buyers Downsize for Smaller Tenants

Depending on whether you’re a seller or buyer, Chicago’s CRE market is offering happiness or heartbreak. Here are details of a happy buyer.

The Farbman Group recently purchased the 117,000 sq. ft. property at 600 West Jackson Boulevard for $11 million. Seller Stockbridge Capital Group took a painful loss, as it had paid over $23 million in 2017 and spent $8 million more on renovations.

Another 25-story, Class B building in Chicago’s Central Loop submarket was picked up by the Farbman Group for half of its 2016 $32.8 million selling price.

According to CEO Andy Farbman, his company is focusing on smaller, Class B properties to rent to smaller companies that are transitioning back to offices.

While Andy waits for tenants, a few major properties welcomed new tenants or arranged expanded renewals.

Notable Leasing Activities During Q3 2022

Over 240 office leases were signed during Q3 2022, which was a slight increase from the previous quarter. Most new tenants were traditional law and financial firms, insurance companies, and investment/trading firms.

Credit rating agency DBRS Morningstar signed the largest lease of the third quarter: a renewal of their 22 West Washington Street premises within the Central Loop. The renewal was for Floors 6 to 14 (just under 265,000 sq. ft.).

Other Notable Leases

Cook County signed a new lease at the 50-story 161 North Clark building. Staff will occupy over 106,000 sq. ft., representing one of the Central Loop’s largest recent lease signings.

Trading firm Headlands Technologies signed a relocation and expansion contract for around 47,000 sq. ft. inside the Bank of America Tower at 110 North Wacker Drive.

Even with office space in Chicago going spare, this hasn’t put the brakes on new CRE development.

New Office Space Deliveries for 2023

While no new office constructions were completed in Q3, five buildings are listed as currently under construction.

Four of these are planned for a 2023 delivery date, adding 1.5 million sq. ft. of new inventory.

One new building, 333 West Wolf Point, aka SalesForce Tower, plans to deliver 1.2 sq. ft. during 1Q 2023 and is already 96% preleased. Tenants may access a fitness center and a variety of retail businesses.

Next Year’s Forecast for Chicago Office Space

Instead of sinking into despondency, many landlords are playing the current market by keeping future office space availability a secret.

While tenants are taking more time to sign deals, more have signed contracts during the summer and fall months of 2022 than before. However, overall office vacancy rates are expected to continue to rise.

Brokers expect Class A rents to stay competitive, continuing to attract the majority of new leases in the year ahead. Class B and C spaces may take more time to recover.

The Last Word for Chicago Office Space Investors

Investors looking for bargains — especially those who are looking for a long-term investment — may do well by purchasing Chicago office space. Those hoping for quick turnarounds and immediate passive income may want to reconsider.

As in every transaction that depends on future change, investors and buyers should take a close, lingering look at their ideal levels of risk and complete due diligence before approaching a seller.