Tenants looking for office space have a lot more options than they did last year, and projects currently under construction continue to test the boundaries of Chicago’s central business district.
The second quarter was the market’s first negative net absorption in more than a year, and even with the increased vacancy, tenant demand and the labor market remains strong, according to Colliers International. The market softened as 1.5 million square feet of shadow space was created by the movement of tenants into the recently completed developments at 444 W. Lake St. and 150 N. Riverside. While rental rates spiked due to these deliveries, it is now beginning to flatten amidst a vacancy rate of 12.7 percent—the highest it has been in nearly two years.
If all projects under construction are completed as expected, Chicago’s downtown office sector will have added about 8.8 million square feet of space between 2015 and 2020. The previous five years only saw about 7.1 million square feet, according to Colliers.
While 444 W. Lake and 150 N. Riverside added a lot of space, they also helped inch the CBD boundaries further. Although still close to the Loop, it allows construction further out in West Loop and Fulton Market to be considered more favorably.
Construction is near complete for the 35-story office tower at 151 N. Franklin St. in the West Loop. The John Buck Company development secured major tenants earlier this year that include CNA Financial and the law firm Hinshaw & Culbertson. The building is about 53 percent leased and so JBC will continue to look for another major anchor tenant, according to Colliers.
Also under construction is a project by White Oak Realty Partners, Vanderbilt Investment Properties and CA Ventures at 625 W. Adams St. a bit further west in the West Loop. The 20-story office tower was built entirely on spec, and still doesn’t have any major anchor tenants. Although it is scheduled to deliver around the same time as 151 N. Franklin St., it’s unlikely that they’ll be competing for the same tenant pool, according to John Dempsey, who serves as the CEO of CA Senior Living and Principal of CA Office.
Dempsey, who’s worked on the spec project since the beginning, said, “151 was always on our radar, but we viewed ourselves as being a different type of building with a different price point. It’s good that they’re out there because it breeds activity. To some extent, if you’re out there all by yourself, it’s a little more dangerous.”
Where Dempsey does see competition, and didn’t expect to, is the Fulton Market area. He said a few potential leases had been lost to that area, but he’s not too worried. In fact, it could be helping 625 W. Adams get more attention and possible higher rental rates. When starting the project, Dempsey had the concern that they’d be far too west, but Fulton Market has expanded what areas tenants are considering. Since the building has gotten out the ground, there’s been a lot of interest. Some buildings can sell off a rendering, Dempsey said, but with our location we knew that would be challenging.
It’s clear that boundaries are being pushed, and with all the project announcements coming out lately as Chicago tries to chase Amazon, the central business district is changing significantly, Dempsey said. Looking down the distant pipeline, there will be plenty of development. The renovations at the Old Main Post Office is scheduled to deliver 2.5 million square feet of space in 2019. Then a joint venture between Riverside Investment & Development and The Howard Hughes Corporation will deliver a 1.35-million-square-foot tower at 110 N. Wacker in 2020. That project will be the fifth new office tower in the submarket since 2016 and bring the total of newly constructed office space to 4.9-million-square feet, according to Colliers.
“The question is—how far will people push the boundaries of the office market? You have Finkl Steel, Tribune—those projects will be a test. There are more people living here but will they want to go there? And what happens if they don’t,” Dempsey said.