14 Jan Chicago downtown office market 2019 best year since 2007
The move-ins in 2019, he noted, totaled 640,000 square feet more than the annual average since 2015. “That’s clearly a sign of not only robust leasing activity, but (also) solid jobs growth and solid prospective jobs growth,” he said. “We’re all encouraged by this news.”
Still, some landlords have their work cut out for them. Office vacancy downtown actually jumped to 13.7 percent at the end of the year from 12.5 percent at the end of the third quarter. That’s the largest share of empty space in the market since 2014.
Some of that is a statistical quirk. CBRE’s numbers were drastically shifted by the opening of the 2.5-million-square-foot Old Post Office in October. CBRE counts inventory when it has opened, but only counts tenant absorption when companies have actually moved in. Only three tenants have set up shop so far in the massive property anchoring a renaissance in the southwest Loop. Large tenants including Uber Technologies, Walgreens Boots Alliance, PepsiCo and others are slated to move in this year, and the building has around 75 percent of its available office space leased or in final negotiations, according to Chicago leasing firm Telos Group.
But the Post Office is plucking big tenants from other buildings. So has the new 55-story skyscraper set to open late this year at 110 N. Wacker Drive and a new 1.5-million-square-foot tower next to Union Station.
Those tenant departures from elsewhere downtown are leaving big gaps in some buildings that need major updates to compete for tenants.
Dobry points to a handful of cases where space was successfully back-filled, including business and technology consulting firm West Monroe Partners’ recent lease at 311 W. Monroe St. almost five years after it was left almost empty by BMO Harris Bank. And Northern Trust will soon fill most of the space left behind by insurer CNA Financial at its former 333 S. Wabash Ave. headquarters.
Both of those buildings required some significant overhauls to land new tenants and serve as examples to other properties that tenants will come to high-quality buildings.
But landlords losing tenants also face a lot of new competition from the thriving Fulton Market District. Construction bills are spiking, too, from a skilled labor shortage and escalation of material costs. That’s making it tougher for building owners to pull off big renovations or shell out enough cash to tenants to help them pay to build out new offices.
Dobry said rising construction costs are giving his clients anxiety these days, as is uncertainty about property taxes as Cook County overhauls the way it values properties. Downtown commercial properties are likely to see property tax hikes in the next couple years based on other parts of the county that have recently been re-assessed, and office landlords typically pass those costs along to tenants.
“No one knows what that will look like” when downtown is re-assessed next year, Dobry said, but added he doesn’t expect the city’s competitive advantage over many other major metro areas—cheaper labor and real estate costs—will erode. “On a relative scale, Chicago still looks affordable.”
Leading the way to the huge quarter in net absorption was Google, which moved into 132,463 square feet at 210 N. Carpenter St. in Fulton Market. Three tenants at the Post Office—Ferrara Candy, Home Chef and 84.51—moved into more than 200,000 square feet combined, according to CBRE.
Recently embattled co-working provider WeWork also moved into more than 91,000 square feet at 625 W. Adams St.