We are all acquainted with the caveat that past performance is no guarantee of future results. According to new research by Newmark Knight Frank, the Chicago office market may be poised for sluggishness, despite some positive indicators during the fourth quarter of 2017.
On paper, there’s much to be optimistic about. Year-to-date absorption in the Chicago market was 2.1 million square feet, resulting in the region’s lowest vacancy rate of the year at 17.4 percent. Rents were also up by a modest 1.1 percent, equating to $27.47 per square foot.
Chicago’s employment growth mirrors that across the country. In the metro area, several sectors have been hiring at a clip, with financial services and information firms leading the way with 4.6 and 2.8 percent growth, respectively, over a 12-month period. This growth should translate into demand for office space.
While these statistics suggest higher tenant demand, much of the leasing activity consisted of consolidations or contractions. Organizations have been retrenching, largely by economizing the office spaces they occupy. In the CBD, newer buildings contribute to this trend as their large, open floor plates allow tenants to be more efficient with their square footage per employee ratios.
Vacancy in the CBD dropped modestly in the fourth quarter to 13.3 percent, but with new office building stock coming online, that number is expected to rise in 2018. The CNA Center at 151 N. Franklin Street and 625 W. Adams Street—both under construction and actively leasing—will themselves add another 1.23 million square feet combined to the CBD. The Old Main Post Office redevelopment, which recently received a $500 million cash infusion, should be completed by early 2019 with its 2.5 million square feet of Class A space.
In the suburbs absorption approached 600,000 square feet, leading to a 22.2 percent vacancy rate—the same level at which the suburbs closed in 2016. New construction in the suburbs will start or come online in 2018. For example, GlenStar Properties will build a 150,000 square foot office building for Central States, Southeast and Southwest Health and Welfare Fund in the O’Hare submarket and the developer is shopping two other sites, ranging between 100,000 and 500,000, for build-to-suits.
Investment in Chicago’s office sector was slow in 2017. The Chicago metro market saw $12 billion in sales at the end of the third quarter, down 23 percent from third quarter 2016. Properties have also been sitting on the market for extended periods. Both 161 N. Clark Street and 225 W. Wacker Drive have been on the market since the early summer and in the suburbs, some buildings have gone under contract several times before closing.
Looking ahead at 2018, investors should expect the office market to see increased vacancy as new space comes online and companies continue to consolidate. However, the Newmark Knight Frank report stresses that this is a plateau in the market, not a downturn.