Downtown Chicago office vacancy back up to record high

The biggest culprit inflating the amount of available office space in recent months is surging sublease inventory. Companies have looked to offload unneeded space to save cash, and those in the market for space have gravitated toward move-in-ready offices to avoid dealing with ballooning construction costs and delays for new office buildouts.

Close to 500,000 square feet of offices have hit the sublease market downtown over the past two months, pushing up the amount of available space on the secondary market to a record high 6.7 million square feet, according to CBRE. That is more than double the sublease inventory at the beginning of the pandemic.

Among the recent sublease listings: Marketing software company ActiveCampaign is offering nearly 102,000 square feet at its 1 N. Dearborn St. office, and another 120,000 square feet of sublease space recently hit the market at 222 N. LaSalle St. from online consumer lender Avant and its tech spinoff Amount.

On the bright side for landlords, move-ins outpaced move-outs over the last three months, the fourth consecutive quarter that has occurred. Net absorption, a key demand metric that measures the change in the amount of leased and occupied space compared with the prior period, was up during the third quarter by 530,000 square feet, according to CBRE. That was the best quarter of demand since the end of 2019 and brought the total net absorption over the past 12 months downtown to more than 1.4 million square feet.

Office buildings owners also got a staggeringly positive dose of good news in late July when Google announced a plan to revamp, occupy and buy the James R. Thompson Center. That move—which came with the bonus of the state of Illinois renovating and planning to move its downtown office to a mostly-vacant building on LaSalle Street—took out a big chunk of would-be new office supply and could help draw more companies to the pandemic-gutted Central Loop.

Still, new office demand isn’t being shared evenly among landlords. The newest and most-recently renovated buildings are winning more of the new leases as companies capitalize on the soft market and seek amenity-rich space that will help them get more employees to want to work from the office rather than remotely.

Over the past year, average vacancy at top-tier, or Class A, office buildings dropped to 14.7% from 17%, CBRE data shows. Vacancy in Class B buildings downtown increased over that span to 22% from 19%.

“If a tenant is looking for a sizable block of space or (offices in) a high-quality, Class A building, you only have so many options,” Serot said. “Tenants in the market and rethinking their real estate strategy and philosophy of getting people back to the office . . . they’re willing to pay more for a better experience for their employees than ever before.”

Mayor Lori Lightfoot is hoping to help remove some of the outdated office supply and revitalize the Loop in the process, recently dangling incentives like tax-increment financing to developers who will turn vacancy-ridden office buildings along LaSalle Street into apartments.

But there is still new office supply coming to the market that could poach tenants from existing buildings. CBRE is tracking seven buildings totaling 3 million square feet of offices under construction today, 59% of which has been pre-leased. That figure includes 801 S. Canal St., a vacant 700,000-square-foot former Northern Trust office building that New York developer 601W recently landed $215 million in financing to transform into a modern, multi-tenant office building.

The precarious leasing landscape has already taken a toll on the value of downtown office buildings. A California firm that paid $23.5 million for the loft office building at 600 W. Jackson Blvd. in 2017 and spent another $8 million renovating it sold the property this month for just $11 million. Nearby, the office tower at 200 S. Wacker Drive recently hit the market and is expected to fetch bids of around $170 million, a big drop from the $215 million its owner paid for the building in 2013.

Other downtown office landlords are facing imminent loan problems. The owners of office buildings at 216 W. Jackson Blvd., 19 S. LaSalle St., 10 S. LaSalle St. and 1 N. LaSalle St. all had their mortgages transferred to special servicers in recent months, signals that the owners could default on the debt or need to restructure loan terms to avoid doing so. All those loans were packaged with other mortgages and sold off to commercial mortgage-backed securities investors, making much of their financial performance data publicly available.