Downtown Chicago office vacancies near 15-year low

Downtown Chicago is currently experiencing its highest levels of office occupancy since 2001, and landlords believe this trend shows no signs of abating. As a result, the average rent has increased by over 6% in the past year to reach $37.22 per sq ft.

Downtown Chicago office vacancy has fallen to its lowest level in nearly 15 years, and landlords appear confident the good times will continue.

Overall vacancy dipped to 11.8 percent in the first quarter, down from 12 percent in the previous period, according to CBRE. That is down from 13.3 percent a year earlier.

Rents and occupancies are rising as some companies expand their downtown offices and others move there from the suburbs and other cities.

Building owners are demonstrating confidence such moves will continue, with the average asking rent up more than 6 percent in the past year, to $37.22 per square foot.

“The rental rate growth is real, and it's strong,” said broker Sara Spicklemire, a senior vice president at CBRE who represents landlords. “It also helps that we've seen a flight to quality, which increases the rents.”

Many older, Class C buildings have been converted to other uses in recent years, such as hotels and apartments. Meanwhile, Chicago developer John Buck recently began work on the future Loop headquarters of CNA Financial, which will be the third new office tower of this development cycle.

While new towers create vacancies that need to be filled in existing buildings, landlords so far have seen little impact from the first development cycle since the recession, Spicklemire said.

“This market has been so starved for so long, I don't think (new construction) will be a sky-is-falling event,” she said. “Some of the spaces being vacated for those (new) buildings are already being filled.”

Although the decrease from the previous period was relatively small, it pushed vacancy to the lowest level since second-quarter 2001, when it was 11.6 percent. The post-crash peak was 17.3 percent in 2010, according to Los Angeles-based CBRE.

Downtown has been boosted by a trend of companies moving downtown from the suburbs or outside the market, as well as suburban companies creating satellite offices in the city.

During the first quarter, Northbrook-based sports data provider Stats completed a 76,852-square-foot lease to move its headquarters to 203 N. LaSalle St. in the Loop, while Allstate—also based in Northbrook—leased 45,000 square feet at the Merchandise Mart, where the insurer said it would move 400 technology jobs from the suburbs.

Meanwhile, Oak Brook-based fast food behemoth McDonald's is taking a second look at a potential move downtown, after pulling the plug on a large deal at Prudential Plaza last year.

Landlords also have benefited from growth among existing tenants, Spicklemire said.

“There's a lot of activity you don't notice overtly,” she said. “There are a tenants adding a half-floor, and that's happening across downtown.”

Echo Global Logistics more than doubled the size of its headquarters at 600 W. Chicago Ave. in River North, to 224,678 square feet, while co-working space provider WeWork continued rapid expansion in Chicago by taking 43,200 square feet in the former Amalgamated Bank headquarters building on State Street.

Leases don't affect figures until tenants move in. In deals reflected in first-quarter numbers, packaged foods giant Kraft Heinz moved into 169,696 square feet at the Aon Center, from Northfield, and Bannockburn-based biopharma firm Baxalta moved into 83,200 square feet at 540 W. Madison St.

Among downtown submarkets, the lowest vacancy remained in River North, at 9.9 percent, although it rose from 8.9 percent in the previous quarter. North Michigan Avenue's vacancy remained highest of all downtown submarkets, at 15.1 percent, up from 15 percent one period earlier.