Research - JULY 24, 2017

Chicago office demand wanes as supply increases

by Andrea Waitrovich

Chicago’s overall office vacancy decreased 10 basis points to 16.8 percent with a total negative net absorption of 62,832 square feet during second quarter 2017, according to Transwestern.

CBD net absorption during the second quarter 2017 was only slightly positive at 16,006 square feet. Suburban net absorption during the second quarter was negative 78,838 square feet. CBD and suburban markets did see new activity in some pocket areas of the market but the majority of movement was preleased migrations to new construction.

Companies are exiting existing space for new properties downtown. Landlords are pressed to fill direct space while competing with significant subleases in their buildings. The office market will continue to absorb preleased tenants until the end of the year, but activity is pointing to a down shift by early 2018.

The first half of 2017 has seen more than 1.6 million square feet (1.37 million in CBD) in completed office constructions in Chicagoland. As expected, new constructions were significantly preleased, resulting in 22.1 percent of currently vacant space in these buildings.

Many tenants occupied preleased space during the second quarters 2017. Absorption was tempered, however, by the large blocks of space left behind. As a direct result, there are presently five existing quality class A and three class B availabilities of 200,000-square-feet-plus of contiguous space.

All buildings currently under construction are located in the CBD office submarkets of the West Loop, River North and River West.

Some domestic buyers have tapered off, looking for opportunity in secondary office markets and alternative product types, such as industrial and multifamily. But foreign investors are still willing to invest in high-quality CBD assets in gateway markets as they tend to be long-term, patient investors. According to Real Capital Analytics, acquisitions by cross-border investors in Chicago have increased from 12 percent of total deal volume in 2016 to 29 percent currently.

Overall, Chicago office transactions completed during the second quarter 2017 totaled approximately $275.9 million.

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