There is likely to be further economic fallout as a result of the COVID-19 pandemic. Even so, development and leasing activity within Chicago’s office sector suggests that investors remain confident in the market’s ability to perform despite any headwinds.
In the past 12 months, according to data gathered by Cawley Chicago, there have been 5.3 million square feet of office space delivered to market. Despite this new product and the hurdles created by the pandemic, the market still encountered 340,000 square feet of net absorption during that time.
“For Chicago’s urban market, there are many dynamics and idiosyncrasies in play right now, and to characterize the market with any broad stroke statement would just be inadequate,” said Zach Pruitt, principal at Cawley Chicago. “Specific to the urban office sector, we have started to see an uptick of activity over the past 30 to 45 days with tenants in the market. Many of the tenants in the market today were in the market three to six months ago, but they hit the pause button with news of the pandemic.”
Current uncertainty in the market doesn’t erase the fact that some tenants have existing lease expirations coming up. Other users may look to reduce space because of the pandemic, though some actually need to expand. Regardless of each tenant’s particular situation, there has been perceptible activity in the city’s office sector.
“Many of these tenants are businesses that need to maintain a presence in a physical location, and there is a need driving their search,” Pruitt said. “Because of that need, these groups are relaunching their process.”
However, Pruitt and his Cawley colleagues have observed many tenants taking a few steps back from where they left off pre-pandemic. These office users are not only reevaluating the options they were originally considering, but their organizational needs as a whole.
“In doing so, these businesses are now considering options that may have been excluded, overlooked or alternative solutions that were not originally considered,” said Pruitt. “Based on where we are today and the uncertainty that still is ahead, we feel strongly this trend will continue, and emerging submarkets around Chicago will see an upward trend.”
The largest office lease in the past 12 months was Citadel Enterprise’s renewal for 533,889 square feet at Citadel Center in the Loop. Closed during the first quarter, JLL represented the hedge fund tenant and The Telos Group represented the owners—a partnership between Hines, Dearborn Capital Group and Angelo, Gordon & Co.
The largest new lease during this period was the blockbuster transaction that saw rideshare firm Uber take 463,000 square feet in the redeveloped Old Post Office. The Telos Group again represented ownership, the 601W Companies, with CBRE brokering the deal on behalf of Uber.
Cawley tracked 843 sales in the market over the past 12 months. Among these, the average price per square foot was $171 with a 9.2 percent cap rate. The average vacancy at sale was 10 percent. (The overall market currently holds a 12.5 percent vacancy rate.)
The top sales include the 967,000-square-foot 500 W. Monroe Street, which sold to Spear Street Capital for $412 million at a 7 percent cap rate. Beacon Capital Partners came in with the next-largest acquisition, scooping up the 798,782-square-foot 190 S. LaSalle Street for $230 million.
The CBD has fared far better than two suburban submarkets that Cawley tracked. During the past 12 months, the East-West corridor saw -287,000 square feet of absorption, with no new properties delivered. The area has seen a modest 1.5 percent rent growth and currently has 14.9 percent in vacancy.
The situation was more dismal in the Schaumburg area. Currently holding a 22.5 percent vacancy rate, the submarket recorded -582,000 square feet of absorption, also without any new properties coming to market. Rent growth here was 0.7 percent during the past 12 months.