Office continues to feel the lasting effects of COVID-19, with many companies still deciding when and how to return.
While fundamentals remain in tenants’ favor, some metrics signal stabilization, including increased deal volume and Class-A occupancy gains, according to Transwestern Chicago Research Manager Nick Schlanger and the company’s Q4 Chicago Office Market Report.
The bottom line? There’s a light at the end of the tunnel.
Market conditions have loosened in Chicago since the beginning of COVID-19. Vacancy has remained up and leasing activity, down. Until now.
Leasing activity is, in fact, the market’s largest sign of hope. The second half of 2021 reflected a significant acceleration of leasing velocity, with four million square feet of space leased, compared to 1.5 million square feet in 2020, Schlanger said. This is the largest barometer for future occupancy.
“The economy has come roaring back. We’ve seen year-over-year job growth in nearly every sector, and that’s consistent in Chicago. PBS is the largest driver of office occupancy in this market, and we continue to see jobs added every month for that sector. PVP growth projections are higher than they’ve been in several years. There are a lot of positive signs for the Chicago market,” Schlanger said.
Enough so that, due to lower rents, companies are on the hunt for a higher class of office space. Some, higher than they could afford otherwise. Since about 2009, Class-A has continued to represent the majority of occupancy increases. In a tight job market where companies are competing to attract and retain talent, Class-A space will always remain in demand.
“We saw that in Q4 where there was over 100,000 square feet of positive net absorption for Class-A,” Schlanger said. “The highest quality, best-located space will always be in demand, and I think that’s a trend we’re going to see for the imminent future.”
For companies unable to attain the downtown Class-A space, Schlanger confirmed that tenants are finding a workaround to best suit their needs. Those who have been priced out of the Class-A market are either looking to emerging submarkets (like Fulton Market, that offers brand new, Class-A space at a discount) or taking advantage of the overall discount in rent when you factor in TI and free rent.
“It’s the best time to act if you’re in a Class-B or Class-C space and you’re thinking about Class-A. Before the market stabilizes and rents start to tick up again for the Class-A markets,” Schlanger said.
There’s more good news. Developers are returning to building office space as the metrics point toward recovery. There is 3.2 million square feet currently under construction in Chicago, according to Transwestern, and preleasing has been fairly strong, an encouraging sign to still-hesitant developers.
“We’re going to continue to see new space break ground, and I think that space will do very well,” Schlanger said. “There have been delays due to supply chain issues, but everything under construction now is set to deliver on time, and we will continue to see developers break ground on new office space the next few years.”
