During uncertain, downward-trending times such as these, it’s only natural to grab on to quarterly data in an attempt to detect which direction the winds are blowing. In isolation, however, these figures can be deceiving.
Consider, for example, the -375,000 square feet of office absorption in Chicago’s suburbs during the third quarter, according to NAI Hiffman research. Ending three quarters of positive absorption, this figure erases the nearly 240,000 square feet of office space that the suburbs had absorbed through the first half of this year.
Contrast that, however, with what’s happening in the CBD and the suburbs come out looking much better. Downtown recorded -1.7 million square feet of absorption in the third quarter; much of this can be chalked up to newly constructed office product coming online, but also the 1.89 million square feet of vacant sublet space that came to market during Q3.
With plenty of new supply—dreamed up in a pre-pandemic bull market—scheduled to hit the CBD in the coming quarters, absorption is likely to remain depressed in the city. That’s not an issue in the suburbs. In addition, however, leasing activity has proven to be a little more fluid in the suburbs, especially in core submarkets like O’Hare. There was more than 1 million square feet of leasing activity in the suburban Chicago office market during Q3, a 12 percent uptick over the previous quarter.
“There are opportunities in the suburbs to find space that is built out and ready to go. And people are returning to the office more rapidly in the suburbs than they have been downtown,” said Michael Flynn, COO and managing broker at NAI Hiffman. “That was not the case in the second quarter, when everyone was trying to get their sea legs related to what the pandemic meant, not only to their operations but to their business.”
One significant lease during the third quarter was Newly Weds Foods taking 44,500 square feet at Golub’s International Tower near O’Hare, 8550 W. Bryn Mawr Avenue. Other office tenants are attracted to the single-story properties in the suburbs that provide greater control and safety than in multi-tenant buildings. That’s one of the reasons that Ajinomoto North America leased over 58,00 square feet at 250 E. Devon Avenue in Itasca, Illinois.
“By no means are we out of the woods,” said Flynn. “Were still 30 percent behind what last year’s third quarter leasing activity was. But it’s certainly a solid improvement over what the second quarter of 2020.”
Three of the five suburban submarkets that NAI Hiffman tracked—north suburban, O’Hare and the I-55 corridor—all recorded positive, if not overwhelming, absorption through the first three quarters of 2020. Only the north suburban submarket had positive absorption in Q3, supported by Medline and Valent BioSciences moving into Innovation Park in Libertyville, Illinois.
“Those locations that are most adept at accommodating people coming from different submarkets are the ones that historically have bounced back more quickly in recessions,” Flynn said. “That would mean the eastern part of the East-West corridor, the O’Hare submarket and the near north suburbs.”
There are transit-oriented developments to some degree near O’Hare and in Evanston, but previous studies by NAI Hiffman have shown just how much better office properties perform when they have good access to highways. The vacancy rate in buildings that are within a mile of an exit can be approximately half of the vacancy rate in buildings that are further removed from quality infrastructure.
The COVID-19 situation has caused ever corporate user to reevaluate their needs going forward. On the one hand, the productivity success of employees working from home means that this strategy may stay in place, even if only on a part time basis, even after the virus has been controlled. As a result, tenants may need less space.
On the other hand, most experts agree that this pandemic may continue to be an issue into 2022. Even once a vaccine has been widely distributed, organizations and their employees are concerned about future outbreaks and are therefor leery of returning to the ultra-dense, bench-style layouts that have been so in vogue—and thus they may need more space.
The suburbs may offer a solution to this dichotomy. Office space can be had at a price-per-square foot that is a fraction of downtown. Additionally, less density within properties means that packed elevators are less of an issue.
There are a number of reasons that the suburbs may come out the pandemic as a more attractive prospect than they were going in. Not least of which, organizations are likely to create more satellite offices as a way to alleviate their employees’ need to commute downtown, as well as a solution to the part-time work from home model.
“METRA stats show that 134,000 people took the train to work on a typical pre-pandemic workday. If even just 10 percent of people are now going to be working in the suburbs versus the city, that’s 13,000 people which translates to 2.6 million square feet,” Flynn said. “That kind of influx is really going to help drive occupancy levels in the suburbs over the long haul.”
COVID-19 continued to create adversity for commercial real estate at all levels during the third quarter, and the suburban Chicago office market was no different. To the extent that one can be optimistic of the future, the suburban office market certainly appears to be well-positioned as a viable alternative to downtown.