The Chicago metro area added 63,000 jobs between February 2018 and 2019, according to the U.S. Bureau of Labor Statistics—a 1.4 percent increase. As many of these are high-wage jobs, this employment growth is adding fuel to the fiery downtown office market.
Despite all the headlines underscoring activity in areas such as Fulton Market, Lincoln Park and West Loop, other parts of the core are also performing well.
According to a second quarter market report from Marcus & Millichap, there have been significant office rental gains in Logan Square and its adjacent communities, for example. The reasons for these rising rents are twofold: renewed demand driven by limited supply growth and owners upgrading their properties and adding tenant-attracting amenities.
For the office sector, there’s no denying the powerhouse engine that is the near west portion of the CBD. The average price per square foot in West Loop and Fulton Market stationed near $350 and average initial yields were in the lower-5 percent band, attracting institutional buyers.
Across the entire urban market, average asking rents rose 5.9 percent year-over-year to $32.55 per square foot—$7 above the overall market figure. Despite robust growth in most urban submarkets, suburban rents continue multi-year trend of little change, decreasing 0.4 percent year-over-year and pushing the average asking rent down slightly to $20.23 per square foot.
Marcus & Millichap forecasts rent growth in the whole market to pick up in 2019 but remain at a moderate level. The average asking rent should climb to $26.29 per square foot, a 3.2 percent increase. The company also expects vacancy to fall 160 basis points since 2016 by the end of the year, bringing the market rate down to 15.5 percent.
Most of this year’s urban deliveries are confined to Fulton Market, though there were several completions in and around Goose Island. Downtown Chicago remains the focal point for metro developers, who added more than 6 million square feet of space over the past five years as they tried to alleviate rapidly tightening vacancy.
Downtown, roughly 1.3 million square feet was completed since the second quarter of 2018, nearly all of it in the burgeoning West Loop where buildings such as Twelve01West—developed by McCaffery Interests, designed by Antunovich Associates and built by W.E. O’Neil Construction—came to fruition. In the suburbs, office construction reached just 500,000 square feet year-over-year following the delivery of almost 700,000 square feet in the previous period.
If the 5.2 million square feet of new office space is delivered to the Chicago market by year’s end as Marcus & Millichap predicts, office construction will have more than doubled in comparison with last year’s 1.8 million square feet. Most of this development should occur in and around the core.
The downtown office market has outperformed the suburbs, though there are pockets of steady performance for office product. Employment hubs like Naperville, Oak Brook and Rosemont, for example, continue to support tightening suburban office availability. Parts of the North Shore will experience moderate construction, while Bolingbrook and Romeoville prove that they can do more than warehouses, completing of a couple office developments.
Oak Brook was a top destination for investors seeking office assets outside of the core. The area continues to serve as a primary suburban employment hub. Most of the properties traded here over the past year were Class B, attracting a mix of private and institutional investors. Buyers with similar criteria also scoured Naperville and Schaumburg where cap rates sit in the low- to mid-8 percent range.
The overall suburban trend, however, is dampening rent growth, particularly in areas that lack a strong corporate footprint and thus sizable vacant floor plates. Because of this, some developers remain hesitant to build new space in suburban Chicago as the area is again on track to receive limited supply in the coming months.