Getting worse? That’s a good way to sum up office leasing and sales activity in Chicago’s central business district as 2023 came to an end.
During the fourth quarter of 2023, office market conditions in the Chicago metro area continued to worsen, according to the latest Chicago CBD office report from Transwestern.
Last year ended with a total of 1.6 million square feet of negative absorption Chicago CBD office secor. While this is a significant amount of negative absorption, there is some positive news: 2023 saw less negative absorption in the Chicago Central Business Disrict than did both 2021 and 2022.
Transwestern reported that the West Loop submarket experienced the most negative absorption in 2023, largely because the Chicago Mercantile Exchange vacated 188,285 square feet of office space at 550 W. Washington Blvd.
Office leasing activity in the fourth quarter was sluggish, too, reamining about 1 million square feet lower than the Chicago CBD’s pre- pandemic averages. Total office leasing activity over the year was even less than the leasing activity in this market in 2021 and 2022.
According to Transwestern, tenants leased 1.5 million square feet of office space in Chicago’s CBD during the fourth quarter of 2023. That brought the year’s total to 6.4 million square feet. This is significantly less than the yearly average of 10.3 million square feet of office space leased in the Chicago CBD in the 10 years prior to COVID-19.
The raw numbers tell the story: The direct office vacancy rate for the Chicago CBD stood at 20.2% in the fourth quarter. That’s up from the rate of 18.6% in the fourth quarter of 2022 and is significantly higher than the 15.6% vacancy rate that the Chicago CBD office market has seen on average during the last five years.
The average market rent for an office space in the Chicago CBD was $42.06 in the fourth quarter of last year, according to Transwestern. That is up from the same quarter in 2022, when this rental rate stood at an average of $41.71.
The office downsizing trend didn’t slow in the fourth quarter, either. A good example? Mesirow renewed 110,000 square feet at 353 N. Clark St. but gave back about 165,000 square feet. Transwestern predicts that the CBD here will see more negative absorption this year thanks in part to these types of contractions.
Despite business leaders’ emphasis on returning to the office, tenants continue to significantly reduce their space requirements, Transwestern reported. As tenants trade quantity for quality of space, the highest-quality office buildings in the Chicago CBD will benefit while older buildings decline further.
The limited number of investment sales transactions that occurred in 2023 demonstrated a significant decrease in value. In 2024, buyers waiting for the market to hit rock bottom may begin to take advantage of opportunities in the distressed market.
