The office market is in freefall in Chicago’s suburbs, right? Vacancies are soaring and showing no signs of falling. Outdated office buildings are sitting mostly empty. And companies are slashing their office-space footprints as their employees continue to embrace working from home.
Well, sort of. Yes, Chicago’s suburban office sector continues to face challenges. But the latest research from Bradford Allen shows that Chicago’s suburban office market is resilient, too, and that there is hope for a brighter future in this sector.
As Bradford Allen says in a CRE Pulse report released in mid-May, a deeper dive into the numbers shows that the suburban office market is much more competitive than headlines suggest.
Vacancy concentration
It’s true that office vacancies in the city’s suburbs are on the rise. Bradford Allen reports that the current overall office vacancy rate sits at 25% in Chicago’s suburbs. That’s roughly 23 million square feet of office space sitting empty.
Of this, about 17.2 million square feet (75%) of vacant space is concentrated in about 20% of suburban office properties. If these largely vacant properties were removed from the data, the remaining 80% of suburban offices—properties that generally are actively being marketed—have a lower average vacancy rate of 10%.
What does this show? The COVID-19 pandemic clearly affected demand for office space, but most suburban Chicago office properties remain healthy despite the ever-changing market conditions.
In the decade prior to the pandemic, the overall suburban Chicago office market vacancy rate averaged 18%. The pandemic drove that rate higher, to nearly 25% as of May 2024, according to Bradford Allen’s data. As Bradford Allen’s research shows, though, this increase in office vacancies has not been evenly spread across the market. That same 20% of properties in which 75% of vacant space is concentrated today are responsible for nearly two-thirds of the increase in unoccupied space.
As Bradford Allen writes in its report, the pandemic amplified a trend already in place: The weakest suburban office properties became less competitive.
The real competitive landscape?
Second only to location, the size of an office space ranks as one of the most essential characteristic in a tenant’s search for a new office location. And today’s suburban tenants are generally interested in small footprints. In 2023, Bradford Allen reported, 92% of leases signed in the Chicago suburbs were for office spaces of less than 10,000 square feet.
Only 6% of the vacant space currently on the market are units of between 1,000 and 10,000 square feet, according to Bradford Allen’s research. Competition is strong for these limited vacancies.
Bradford Allen reported, too, that much of the vacant office space in the suburban Chicago market isn’t being actively marketed, toured or leased. The percentage of listings that have been sitting on the market for three or more years is just over one-third, indicating that a large portion of this space isn’t truly leasable.
“Regardless of the location, floor plan, debt status or any other factors, if a suite is on the market for more than 36 months, there’s usually a good reason,” Bradford Allen writes in its report.
Quality matters, too
The flight to quality is real in today’s office market. A growing number of tenants are moving to higher-quality, Class-A office buildings and leasing a lesser amount of space in them. This way, they can spend about the same amount of money but boast a higher-quality office space. Their hope? That this quality space helps entice employees to come into the office at least on a hybrid basis.
Bradford Allen reported that most tenants today are seeking office spaces of 10,000 square feet or less. They also have a strong preference for move-in ready spaces. Nearly 30% of office square footage leased in the Chicago suburbs in 2023 was for move-in ready suites, a significant increase compared to 11% in 2019, according to Bradford Allen.
“Owners who are unable or unwilling to reinvest in their assets have faced record levels of distress, leading to a higher rate of short sales and foreclosures,” Bradford Allen wrote in its report. “These largely vacant properties comprised most of the suburban office sales in the past year. In fact, more than half of all office sales in 2023 were for planned industrial redevelopments.”
The bottom line? Bradford Allen says that Chicago’s suburban office market is working through a tumultuous period. But at the end of this rocky time? There is plenty of hope that the suburban office market will once again showcase its resilience.
“Chicago’s suburban office market is undergoing a period of intense transformation,” Bradford Allen wrote. “Large corporate campuses have become obsolete, with many being torn down for industrial uses. But focusing exclusively on these changes misses some crucial truths at the heart of the market.
“There have always been geographic locations the market has deemed more desirable, and others less desirable. To succeed, ownership has always needed the ability to invest in its asset. The pandemic has done little to change these two fundamental truths. And as a result, the macro statistical data often obscures the true market dynamics.”