West Loop leasing and new office buildings are bright spots in Chicago’s ailing market

One of the few bright spots in Chicago’s office market is the West Loop and its Fulton Market, where a lot of development has been taking place for several months. Overall, however, the city’s vacancy rate is still much higher than it was before the pandemic.

Available office space across Chicago hit a record 23.3% last quarter, compared to 22% in the same period last year, as companies drastically reduced their office space after the pandemic led to remote and hybrid work schedules, according to commercial real estate firm Colliers. Experts say it could be a few more years before the city sees a turnaround.

Colliers said there was positive net absorption of 123,598 square feet in the second quarter, which hasn’t happened since the second quarter of 2023. This means that for the first time in at least a year, companies in the city occupied more office space at the end of a three-month period than they did at the beginning. This is significant because it shows there is demand for office space after months of retreat across Chicago.

But Nick Schlanger, head of research at commercial real estate firm NAI Hiffman, says this is largely due to the large number of new buildings.

The company reported that there were over 38 million square feet of office space on the market and vacancy rates were still up year-on-year, but demand for top-tier, Class A office properties had barely abated.

“Rentals were relatively steady,” said Schlanger. “We recorded 1.6 million square meters of new leases in the quarter, which is 6% less than in the same period last year.”

According to Colliers, although more leases were signed in the second quarter of the year, companies are still looking for smaller spaces.

Office leasing in the West Loop is picking up speed

The emerging office markets of Fulton Market and West Loop have two of the lowest vacancy rates in Chicago.

It has become a growing hub for technology companies and other businesses looking to attract young talent. In March, video software maker Vyond moved into a 6,000-square-foot office in the West Loop at 401 N. Morgan St. after rapidly expanding its workforce from three to 43 employees. That same month, NanoGraf announced plans to open a new manufacturing and research facility in the West Loop, at 455 N. Ashland Ave. The company makes advanced lithium-ion batteries for the U.S. military.

All Chicago submarkets, such as Fulton Market and North Michigan Avenue, saw positive absorption last quarter, except for the East Loop, where two major tenants moved to newer, prime space. Insurer Blue Cross Blue Shield moved from 225 N. Michigan Ave. to new, consolidated space at the Aon Center, according to Colliers, while the second tenant was not named. The East Loop is bounded by East Wacker Drive, Lake Shore Drive, State Street and East Ida B. Wells Drive.

“With the inventory we have (in East Loop), it’s just difficult to attract … these large and influential top tenants,” he said.

While leasing in Fulton Market is showing a positive but slowing trend, the West Loop as a whole is “an absolute boom,” said Dan Arends, head of Colliers.

“It seemed like everyone moved to Fulton at some point,” Arends said. “The West Loop … is certainly the biggest advantage.”

He said the buildings driving the market are the Bank of America Tower at 110 N. Wacker Drive, River Point at 444 W. Lake St., 150 N. Riverside Plaza, the BMO Tower at 320 S. Canal St. and the Salesforce Tower.

With the exception of 320 S. Canal – the newest building among the towers – all of the properties are 98 to 100 percent occupied, he said. The activity has driven up rents, with prices in those buildings increasing as much as 7 percent over the past 12 to 15 months, Arends said.

According to Colliers, asking rents have increased year-on-year and currently average $43.07 per square meter.

Schlanger of NAI Hiffman said the market is starting to soften due to high vacancy rates, which could lead to falling rents.

“This is the first time in a very long time that I’ve seen a decline in asking rents – (in the central business district) or in the suburbs,” Schlanger said.

Looking for something new

Chicago is one of many cities in the U.S. where there is still a “flight to quality,” Arends said. Companies prefer newer buildings, and unique amenities like a hidden room with duckpin bowling are helping to bring workers back to the office.

The majority of office demand continues to be in Class A – the highest-quality properties on the market with the correspondingly highest rents. But they may not need as much space as they once did, Schlanger says.

The contractions have left the number of vacant sublease spaces at nearly an all-time high as fewer workers flock to the office. Colliers has found nearly 650,000 square feet of vacant space. Landlords continue to upgrade the amenities of their buildings to attract new talent and fill the empty spaces. Others, like the one on La Salle Street, are being converted to residential space to boost foot traffic in the predominantly commercial corridors.

However, some significant leases were signed last quarter. Chicago-based food delivery app Grubhub relocated and consolidated its headquarters, moving from the Burnham Center at 111 W. Washington St. and subleasing space at the Merchandise Mart, reducing its office space from 164,000 square feet to 108,000 square feet, according to Colliers.

Arends said the tipping point – from which the office market as a whole could experience positive development – is probably still one to two years away. The surplus of sublet space is a major hurdle the market must overcome to get there.

“The market is starting to stabilize,” Arends said. “I think it’s growing pains, and I think you’re going to see a lot of that.”

Anthony Vazquez/Sun-Times