As far as economic indicators go, the real estate industry is more tortoise than hare—it’s a solid and reliable metric of economic health, but it by no means responds swiftly to outside influences. It is only just now, for example, that the effects of the pandemic are starting to be felt across Chicago’s downtown office sector.
According to new research from CBRE, the Chicago CBD saw its direct vacancy leap to 15.5 percent in the fourth quarter of 2020—a high-water mark going back to 2007. While total annual absorption notched 468,879 square feet last year, that figure was negative 9,227 square feet in Q4.
This couldn’t be happening at a worse time for the Loop and environs, with numerous recent deliveries to the market as well as other projects underway. There were 2.2 million square feet of new office product that came online during Q4 such as Bank of America tower, which added 1.5 million square feet in the near West Loop, and 167 N. Green, which brought 570,000 square feet to the burgeoning Fulton Market District.
Prior to the pandemic, demand was high for office space in the CBD, driving up asking rents and, in turn, elevating activity in the development pipeline. Once COVID-19 hit, virtually every office tenant was forced to experiment with the work-from-home model. Now the results of those experiments are coming in and, at least in the short term, users are opting to shed space.
In addition to direct vacancies, the availability of sublease space is on the rise. At the end of 2020, there was 5.2 million square feet of sublease space available in the CBD. Accounting for 3.5 percent of inventory, that’s a level of sublease vacancy not seen in the market for 15 years. According to CBRE, sublease availability shot up by 60 percent between April 1st and the close of the year.
Most of these subleases are being marketed as fully furnished. If and when office users decide to re-sign a new office lease and come back downtown, sublet spaces will be stiff competition for spec suites and other vacant blocks.
As leases begin to expire, or as businesses eye the future with trepidation, the hot office demand of pre-pandemic times is on hold—even if development continues. Real estate being the laggard that it is, projects that broke ground during the previous cycle are still underway. There is now over 4.6 million square feet of office space under construction within the Chicago CBD, a third of which should deliver this calendar year.
There were some notable leases in the fourth quarter that helped to ease the negative absorption. Bank of America took occupancy of 17 floors within their new, namesake tower at 110 N. Wacker Drive. The financial giant has yet to vacate their other offices, which aided absorption figures this quarter. That space will soon be given back to the market, however, including over 600,000 square feet just at 135 S. LaSalle Street.
Other leases include Whirlpool Corporation and Imagination Publishing each renewing for 53,142 and 23,597 square feet, respectively. Simplex Trading expanded its space to more than 25,000 square feet at 230 S. LaSalle Street. New leases saw Portal Innovations take 34,125 square feet at 400 N. Aberdeen Street, Kids’ Work Chicago take 30,635 square feet at 2718 W. Roscoe Street and Illinois Workers’ Compensation Commission take over 23,000 square feet at 69 W. Washington Street. Of the 10,000-square-feet-plus transactions that CBRE tracked in the fourth quarter, many were short-term extensions as tenants took a wait-and-see approach.
Investors were a bit quicker to hit the pause button. CBRE only tracked six major office building sales in the Chicago CBD for all of 2020. Totaling $1.3 billion, this sales volume is a 59 percent drop-off from the five-year average. There were no notable sales at all in the fourth quarter.
With multiple vaccines now available, there is hope that we will soon be able to rein in this terrible virus. But again—real estate being real estate—even if society largely reopens by the end of this year, the office market may not begin to recover for several quarters thereafter.