Chicago Metro's Office Market Humming Along

CHICAGO—The Chicago region’s office market has gotten off to a good start in 2018. The opening of several new trophy towers since 2016 has not had an adverse impact on the overall vacancy rate, which continues to fall. It now stands at 16.9%, a drop of 50 bps since the end of 2017, according to a new report on the first quarter by Newmark Knight Frank. And metro net absorption hit nearly 620,000 square feet, a significant jump over last year’s first quarter total of 462,000 square feet. Furthermore, average asking rent increased from $27.42 to $29.09.

“The metrics are all pointing to a strong 2018,” Amy Binstein, research manager of NKF, tells GlobeSt.com. “We’re seeing signs already.” The metro area’s investment sales, for example, reached $1.2 billion by the end of February, according to Real Capital Analytics. Last year, the market did not cross the billion-dollar threshold until May.

A handful of major deals that just closed account for the high investment volume. Starwood Capital Group bought 1 S. Dearborn from Olen Commercial for $360 million, and Sterling Bay purchased 600 W. Chicago, the home of Groupon, from Equity Commonwealth for $510 million.

Binstein adds that McDonald’s is nearly ready to make its move from suburban Oak Brook to its new headquarters in the West Loop, a property developed by Sterling Bay. And that will probably pull other tenants and businesses into the submarket. However, the market may not see many more gigantic moves of this kind.

“It’s definitely slowing down,” Binstein says. “But many companies are looking at establishing split operations,” typically by opening satellite offices in the city as they keep main offices in the suburbs. That way, tenants can tap into the widespread desire of younger workers to live in the city but keep a suburban option that will grow more important as millennials age and buy suburban homes.

The loss of McDonald’s does point to a long-term problem for the suburbs. Binstein says areas with such campuses and class B office spaces are falling behind those with class A buildings. Quarterly absorption in the Northwest suburban submarket was negative 397,000 square feet, but I-88 East, where the vacancy rate stood at just 16.7%, was in positive territory with 150,000 square feet absorbed. And the suburban class B vacancy rate now stands at 24.5%.

Class A landlords in the suburbs can now command rents of $24.00 per square foot, enough to fund the addition of amenities now common in downtown Chicago offices. “There are a lot of properties undergoing renovation, including ones in Bannockburn, and in Schaumburg around Woodfield Mall,” Binstein says, and that means the suburban divide is not likely to disappear in the near future.