Growth of downtown office rental rates has moderated in Chicago, but market dynamics still generally benefit ownership. In fact, asking rents are surging in the hot Fulton Market and River North neighborhoods.
According to new market research by Savills, the overall availability rate in Chicago was 15.9 percent in the first quarter of 2019, down 70 basis points quarter-over-quarter. Class A availability also declined from the previous quarter, falling 180 basis points to 14.8 percent.
Two-thirds of all leasing in Q1 2019 took place in the West Loop, though two transactions combined for much of this. United Airlines renewed its lease in Willis Tower, keeping the world’s second-most profitable airline in the noted high-rise until at least 2033; JLL and The Telos Group brokered the 850,000-square-foot deal. Cushman & Wakefield and The Telos Group facilitated a separate, 220,000-square-foot deal that saw USG Corporation signing a 10-year lease extension for their global headquarters at 550 W. Adams Street.
Overall asking rents in the CBD averaged $41.01 per square foot gross, according to Savills research, representing a 4.1 percent increase year-over-year, though merely a 0.6 percent rise from last quarter. Class A asking rents performed better quarter-over-quarter, increasing 2.7 percent to $46.52 per square foot gross.
Tenants on the lookout for quality, efficient space options have kept the construction pipeline active. Of the 18 largest deals completed in the first quarter, eight occurred in new downtown construction. Co-working providers snapped up large blocks of space at new developments—Convene took three floors totaling 95,000 square feet at 333 N. Green Street in Fulton Market, while No18 leased nearly 58,000 square feet on two penthouse floors at 110 N. Wacker Drive.
Rightsizing tenants also accounted for much of the first quarter’s activity. For example, AbelsonTaylor signed on to be the fourth committed tenant in the redeveloping Old Post Office, where it hopes to grow its headcount in a smaller, 85,000-square-foot space; The Telos Group and Cushman & Wakefield brokered that deal. Likewise, Mondelez will contract its headquarters by 17 percent when it relocates from the suburbs to 77,000 square feet at 905 W. Fulton Market Street in a deal facilitated by CBRE and Cushman & Wakefield.
With all of this demand, there is more than 5 million square feet of new office product set to deliver downtown by the end of 2020. This doesn’t even include the combined 2.8 million square feet that will be available once BMO Tower and Salesforce Tower come to market in 2022 and 2023, respectively.
Many of the firms planning to occupy space in these developments will leave behind millions of empty square feet of shadow space, forcing older, Class A-minus properties to upgrade shared amenities to compete with new downtown office buildings. According to Savills, new office space might lead to a softening of the market—although predictions of more tenant-favorable conditions were largely unrealized following the recent deliveries of three West Loop office towers.
Looking forward, rents may soon turn in tenants’ favor, and not just because of added Class A supply. There will likely be downward pressure on net rents once upcoming tax increases are levied on downtown office properties. And with 3.2 million square feet of sublease space available downtown, tenants large and small will continue to have ample sublease options offering below-market rents and the option for shorter lease terms.