In the greater Chicagoland metro area, the last several years had been marked by a trend of notable legacy corporations moving back into the city while out-of-state businesses also looked into setting up outposts within Chicago’s central business district.
But will the pandemic lead to a reversal of this momentum as aging millennials and downtown dwellers trade their Chicago apartments for more spacious homes and yards in the suburbs?
It still may be too early to say for certain, but one thing that companies have always done was follow demographic trends, says Colliers broker Steve Kling, whose career has focused on office leasing in the Chicago suburbs over the last three decades.
“When I first started, businesses were leaving the city and moving into the suburbs,” Kling says of his early experience. “Sears, Ameritech, BP Amoco and other large employers were saying that the demographic we’re trying to attract — the baby boomer demographic that we need — all live in the suburbs so we need to have offices out there.”
And while those from the Gen X, Millennial, and Gen Y cohorts have been given credit for helping to revive urban cores across the country, if enough move back to the suburbs, then the businesses who followed them into the city may have to consider following them back out. Or, at the very least, companies will have to offer some kind of satellite office space to the growing number of newly minted suburban employees, Kling suggests.
While there was most definitely a slowdown in leasing activity during the summer and autumn season last year, there’s finally been a noticeable uptick in tenant interest in the last couple of months, Kling indicates. However, one major change that has come from the pandemic is the flexibility on length of lease terms and enhanced concessions, primarily tenant improvement allowances, for tenants either signing new leases or renegotiating an expiring one.
But there is still a lot of space to fill.
A Q1 2021 report on the suburban office market from Colliers assess the health of five different submarkets — O’Hare, the northwest suburbs, the north suburbs, Lisle-Naperville, and the Oak Brook area — while also offering some predictions for what we can expect to see for the remainder of the year.
Overall absorption is down by 500,000 square feet in the first quarter of 2021, which while perhaps still concerning, is a huge improvement over the 2,000,000 square feet of negative absorption during the same period last year. Vacancy has increased slightly in the last year, hedging towards 25%. In 2017, the total suburban vacancy figure was just over 20%.
The submarket with the largest inventory and highest level of vacancy is the northwest suburban region with nearly 30 million total square feet of office space and an overall vacancy rate of 33%. Year to date absorption in the northwest submarket was negative 45,839 square feet.
The north suburbs currently has 21% office vacancy with 164,446 square feet of negative absorption, Lisle-Naperville has a vacancy of 22.2% and negative absorption of 189,000 square feet and Oak Brook claims a 21% vacancy rate with 114,169 square feet of upside down absorption.
The lone suburban submarket bucking the negative absorption trend is O’Hare, which has a year-to-date number of 8,511 square feet. However, the total office vacancy around O’Hare is hovering at just over 17%.
Class A rental rates hardly budged across the five submarkets. O’Hare’s Class A office space is getting the highest rent at an average direct asking rate of $35 per square foot while the northwestern suburban market’s Class A trails the group at $26.
The Colliers report also indicates that across the Chicago suburban market, eight leases — both new and renewals with expansions — for 15,000 square feet or more were completed in the first quarter of 2021. On the flip side, office sales were very slow, with only two deals for 50,000 square feet or more being finalized earlier this year.
As for the near-term future, the report suggests that the suburbs can expect to witness an uptick in subleasing activity, continued concessions from landlords, and further flexibility in lease terms for smaller to mid-sized tenants. Properties with growing debt that continue to experience upside down revenue could be in for more trouble, and possible foreclosure.
But there are still a lot of unknowns right now, Kling says of the suburban office market.
“There’s uncertainty in the market as far as what the ultimate footprint and configuration of tenant spaces are going to be — it hasn’t really come out formally yet what the future is going to hold for office space,” Kling says about the current state of the market.
Just as the COVID-19 virus was novel, meaning it was an entirely new viral strain that humans had not experienced nor built a tolerance to, the economic fallout from the pandemic is novel in a similar way.
“Nobody truly knows the state of the market right now, like, are we going to rebound? It’s truly a recessionary time,” Kling says of the uncertainty caused by the pandemic. “It’s been like any recession in the past, but with the exception that it’s a pandemic related cause that we’ve never dealt with before.”
At this point, it’s crucial to remain optimistic, Kling says, but also be ready and willing to adapt to what permanent changes come as a result from the pandemic.
In hindsight, some of the major Chicago-area corporations that stayed in the suburbs, despite the last decade which led many others to move back into the city, could come out of this ahead. A notable example was Zurich, which doubled down on its suburban presence by moving out of its twin towers in downtown Schaumburg and into a brand new, architecturally striking campus only a couple of miles away.
So, Zurich wasn’t foolish for building a new campus in Schaumburg when other corporations were making the move back into downtown Chicago?
“No, they were right on,” Kling says of Zurich’s footprint in the bustling suburb. “And maybe McDonald’s move down into the Fulton Market district was a mistake.”
This article also appears in the April 2021 issue of Illinois Real Estate Journal.