The flight to quality? It’s very real in the Chicago office sector.
In its second quarter Chicago CBD office report, Avison Young said that 96% of Chicago office tenants who recently leased a significant amount of space either stayed stayed in or upgraded the class of their office space during the last six quarters.
According to Avison Young, 22% of tenants that leased office space of more than 10,000 square feet in the last six quarters moved to a higher-quality office building. A total of 74% stayed in the same class of building.
Avison Young reported that over half of the tenants that chose to upgrade their building class also expanded their office footprints during this time. Overall, though, a greater number of tenants that moved to new office space during the last six quarters shrunk their footprints.
The flight to quality is mirrored across the country. As Avison Young says in its report, in the second quarter, well-positioned, high-quality Chicago-area office buildings performed well with lower vacancy rates and a higher number of renewals, while lower classes strugled.
What else is happening in the Chicago CBD office market? Avison Young reported that the amount of available sublease space has decreased by nearly 12.5% from the end of 2023. Unfortunately, this reduction is mainly a result of the expiration of underlying leases, which has shifted the space from sublease availability to vacant status. Sublease space is not falling because of an increase in leasing activity.
Only about 16% of the sublease space taken off the market was because of signed subleases. As a result, total availability in the Chicago CBD, which accounts for both vacant and sublet space, continues to increase, now sitting at nearly 39 million square feet.
Another challenge? Office-backed loans have been a hot a topic in commercial real estate, with lender seizures and foreclosure proceedings of office buildings in Chicago making headlines. A total of 43% of office-backed CMBS loans in the Chicago MSA that matured from 2020-2023 defaulted, were seized or were foreclosed. In terms of dollar value, 26% of the total loan value met this fate.
However, the past four years have accounted for almost 70% of the total commercial loan value maturing between 2020-2026. Beyond 2026, there is a much smaller pool of loan maturities, with most being underwritten with more temperate market expectations.
