On January 16, REJournals hosted its 22nd annual Chicago Forecast Conference at the Chicago Marriott Downtown Magnificent Mile. After providing remarks on behalf of the SIOR Chicago Chapter, I was pleased to join a panel of experts for the Suburban Office Market Update breakout session. All panelists agreed that while the Chicago suburban office market is experiencing a transformative landscape – influenced by remote work trends, corporate preferences, vacancy rates and absorption, and city versus suburbs dynamics — all agreed that there are some promising opportunities on the horizon.
Joining me during the session was Moderator Lisa Skolnick, partner, SVP and content chief of Purpose Brand; Julia Klairmont, EVP of Imperial Realty Company; Alissa Adler, SVP of Colliers; Chris Landis, VP and managing broker of Calamos Real Estate; and Steve Chrastka, EVP of NAI Hiffman.
Ryan Moen, Versa Real Estate Services
(Photo courtesy of Versa Real Estate Services.)
Navigating Vacancy Rates
In analyzing vacancy rates in the North and Northwest markets, Klairmont discussed the cyclical nature of the broader picture. While the current rates are not at their peak, they are certainly not the lowest ever recorded. Despite this, Klairmont said there has recently been considerable improvement, noting that Imperial Realty, for one, is in a much stronger position than it has been in the past, with a 90% renewal rate across the firm’s properties. She explained that this achievement is significant when considering the various challenges associated with lease renewals, such as retirements, sales, closures, relocations, and downsizing. However, she cautioned that not every renewal comes easy, often requiring more flexibility than in the past.
Chrastka provided a comprehensive perspective on suburban vacancy rates, indicating an overall 25% vacancy when considering all classes. But when considering the single-story office space segment of the market, the vacancy rate drops to 15%. Class B properties show varying performance, with some markets outperforming others. For instance, in Schaumburg and the Northwest market, the vacancy rate is around 30%, rising to nearly 40% for buildings in the 100,000- to 250,000-square-foot range.
Adler also weighed in on the challenges from a capital markets perspective, pointing out the negative investor sentiment looming over the office market as a primary hurdle. The unpredictability of when the market will rebound makes it challenging for both investors and lenders, Adler said.
Promising Opportunities in Smaller Tenants
The ample availability of big block space is a significant factor influencing the current statistics. Depending which market reports you read, you will find varying figures for total blocks of office space greater than 20,000 square feet that are up for grabs in any given submarket. Presently, the market is not experiencing historically normal levels of absorption, leading to higher vacancy and availability rates. However, with these challenges, there is a silver lining when shifting attention to smaller buildings — particularly Class B buildings ranging from 50,000 to 75,000 square feet or less, catering to average tenants occupying 2,000 to 5,000 square feet. There is a noticeable leasing momentum in this size range, and in overall occupancy, these buildings tend to outperform their larger counterparts.
It is also worth noting that the Class B market constitutes about 40% of the overall marketplace. While industry attention often gravitates towards Class A and larger blocks, there are promising opportunities by targeting smaller tenants—a segment that has exhibited significant activity, suggesting that exploring these opportunities could yield positive outcomes.
The Business Park Debacle
I’ve had numerous discussions regarding the future of the office campus with my clients and colleagues. Many of the single user campuses are functionally obsolete, characterized by older blocks of space lacking modern amenities or burdened by costly renovations. A notable exception is Bell Works in Hoffman Estates, which is an example of successful revitalization. However, the demand for large blocks of space, such as 200,000, 300,000, or 400,000 square feet, has diminished, and the extended lead time to find suitable tenants for this kind of space profile further complicates the situation. Many of these properties are being sold at a substantial discount based on their land value rather than the value of the office buildings.
Developers are stepping in to repurpose these outdated structures, with examples like Allstate and Nokia undergoing adaptive reuse. The market is witnessing a shift, whether through demolition or transformation into alternative uses beyond offices such as data centers. This trend not only addresses the current excess inventory but also contributes to the revitalization of the suburban office market.
It is also worth noting that new office buildings are not being constructed in the suburbs, so reducing existing inventories may positively impact the overall market dynamics over time.
Adler agreed with my perspective and noted during the panel that when selling vacant or significantly vacant office buildings, clients often inquire about the feasibility of conversion to multifamily, industrial, or data center usage. Unfortunately, Adler said that many of these buildings face limitations, restricting their adaptability to alternative purposes. However, for those willing to take risks and acquire these properties at a low basis, holding them as strategic land investments can offer potential opportunities that may materialize in the future.
City vs. Suburbs
The city versus suburbs dialogue is nothing new, but it is certainly heightened in a time with so much uncertainty. Adler emphasized that there is a rental rate competition between urban and suburban areas, noting that concessions play a comparable role. However, she said that when considering rent as a factor, companies are notably leaning towards suburban options.
Chrastka brought attention to the hub-and-spoke model of downtown and suburban office locations and pointed out that current activity is not as robust as was initially anticipated during the COVID era. At a broader level, Class A suburban spaces are priced in the middle to low $30s per square foot, varying across different markets, and Class B spaces tend to hover around the high teens to low $20s.
The complexity, according to Chrastka, comes from the challenge of categorizing buildings, especially when dealing with A+, A, A-, and B classes. The key distinguishing factor among these structures lies in the landlord’s profile, the type of capital they possess, and their access to capital for building improvements. Essentially, this aspect dictates rental rates.
The session concluded with panelists highlighting the Federal Reserve’s unexpected shift towards considering a rate drop. Initially, there was speculation about a significant rate decrease, but as job reports emerged, the Fed seemed to reconsider. All panelists agreed that it appears that initial enthusiasm for substantial rate reductions may have been overly optimistic and encouraged the audience to instead focus on raising cash, identifying opportunities, and positioning themselves as early movers to capitalize on capturing market share.
Ryan Moen is vice president of the SIOR Chicago Chapter. He is also principal and co-founder of Oakbrook Terrace, Illinois-based Versa Real Estate Services.