Downtown Chicago office space: Pockets of demand amid sluggish market

At this time of year, analysts in various fields of business publish opinions on the state of their markets and what they see for the coming months. Understandably, many try to find a unique theme or “grab” of a title to dress up what can be a dry theme.

When looking back to 2022 in office real estate trends, the folks at Cushman & Wakefield resort to Yogi Berra’s approach, “It’s déjà vu all over again.” You can hear their frustration in this line. It was a way of saying that almost three years after the pandemic turned this part of real estate upside down, they’re still scratching their heads over the same questions.

Will companies change the way they use or design offices? Will employee lounges, free food, private outdoor space, and other assorted perks drive a return to everyday travel? Or, as some employees may wonder, will my boss fire me if I don’t show my face anymore?

If it seems like the market is kind of stuck and soft, it’s anything but, said Mason Taylor, Cushman’s executive managing director. He sees many future movements of companies gravitating towards a more modern space. Some will change addresses for employee convenience or to save money. He even used the term “exciting” for some changes, like Google’s upcoming move into the Thompson Center and what that could mean up and down La Salle Street.

“You have to look at what the employees want. Priorities have shifted,” he said. “One of the priorities is that access to commuter rail is now paramount.” Taylor said an easy commute helps people maintain work-life balance, another expressed goal of today’s workforce.

That could bode well for a pickup lease in the Loop and near Metra stations. Perhaps in time there will be less focus on Fulton Market and the Near West Side, although those markets are still the hottest spots. Cushman’s analysis says Fulton Market’s median rent has reached $67.65 per square foot, while most of the Loop is somewhere around $40.

Cushman reported the end-2022 office vacancy rate in the central business district — pretty much everything from Oak to Harrison streets and from Lake to Ashland avenues — was 22.3 percent, compared with 20.3 percent 12 months ago. Leasing slowed dramatically in 2022, and the report said that for two years in a row, more vacant space has come on the market than has been absorbed through leases.

The space that is given for subletting, whether it is occupied or not, is a big factor in the center. Cushman said 6.9 million square feet are available for subleasing, which equates to one and a half Willis Towers. This is the highest number ever recorded by Cushman.

The situation is different when it comes to a new so-called Class A building, so called because it has modern amenities and mechanics and can offer individual floors for large tenants. Examples of such towers completed in 2022 include the home of BMO Harris Bank at 320 S. Canal St. and 345 N. Morgan St. of developer Sterling Bay, anchored by Havi Group and Wellington Management. There are more in the works.

Developer Related Midwest likes the new offices enough to reject plans for an apartment building at 725 W. Randolph St. Now he wants it to be 1 million square feet for offices and fitness space. It will have a pool on the roof, among other lures to force workers to leave the house.

Interest in the new buildings is so strong that one developer, speaking on condition of anonymity, said there are really two distinct markets now — the Class A buildings coveted by tenants with strong credit, and the older stuff categorized as Class B or C , which need work or expensive conversion to housing to remain viable.

These places are where the interesting possibilities lie.

“We have heard a lot of talk about the flight to quality. We think flight to value will be a new trend,” said Matt Garrison, CEO of developer R2 Cos. “The rent delta from Fulton Market to the Loop has become mispriced, making the Loop a relative value. Google has recognized this, and others are likely to follow suit.

Garrison’s company is hired to figure out what to do with the Chicago Board of Trade building, a statue symbol of the central chain’s dilemmas.

Taylor said many of the classic downtown buildings will find new office users once landlords start making improvements. “Indeed, companies will continue to value Chicago for its rich and diversified talent pool,” he said.

Any guesses as to which alleged Berraism is being used in next year’s commercial real estate reports? I’ll continue with, “When you come to a fork in the road, take it.”

A new building at 345 N. Morgan St. is an example of strong demand for office space in Fulton Market.

A new building at 345 N. Morgan St. is an example of strong demand for office space in Fulton Market.

Tyler Pasciak LaRiviere/Sun-Time

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