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Chicago Is Looking Better To Investors, Especially Outside Downtown Core

Investors are slowly but steadily regaining confidence in the Chicagoland office market despite recent high-profile relocation announcements and record vacancy rates.

Transaction velocity for Chicago-area office properties during the 12 months up to April 2022 surpassed the number of trades recorded in 2019 before the pandemic hit, according to Marcus & Millichap’s second-quarter office market report.

Over the same time span, the average sale price reached $199 per SF, crossing the year-end 2019 level for the first time since the pandemic’s onset.


Not only did more office assets change hands in 2021 than before the pandemic in 2019, but sales activity in the first quarter of 2022 was also above average for that time of the year, according to John Chang, Marcus & Millichap senior vice president and national director of research and advisory services.

“The investment landscape for office properties in Chicago is already moving in the right direction in many respects,” Chang said. “Returning investment demand has translated into rising sales prices that are exceeding the 2019 mark on average. These trends speak to investors’ positive long-term outlook for the metro as property fundamentals are now beginning to turn the corner.”

Crain’s Chicago Business reported net absorption, or the amount of leased and occupied space, was up by nearly 290K SF in the second quarter, according to CBRE. Positive net absorption over the past nine months hit more than 900K SF.

But with a slow return to the office and many employees still working from home, subleasing has become increasingly popular as companies work to downsize their spaces and stave off high rents. This, combined with new market supply, kept vacancy rates high, though trending in the right direction. 

According to the Marcus & Millichap report, availability rose to 19.6% at the end of March, marking the first time since the first quarter of 2020 that vacancy climbed by fewer than 100 basis points year-over-year. Though this is the smallest rise since the pandemic began, rates are nearly unchanged from record highs set in Q1.

“Office has been slow to recover after Covid-19’s blow to occupancy. However, many investors still do have guarded long-term confidence in the Chicago office market despite near-term hurdles,” Marcus & Millichap Senior Vice President of Investments John Abuja said.

Abuja cited problems unique to Chicago that could keep office investment sales lower than in other markets around the country, including high Cook County taxes and fear of ongoing and random criminal activity in the downtown area. 

Since many downtown buildings are also in need of modernization and repairs, employers are looking to make upgrades to lure tenants. That is paying off in areas like Logan Square and Lincoln Park, where vacancy rates are falling as firms leave downtown for North Side neighborhood offices in close proximity to employees' homes. 

In neighborhoods like Fulton Market, where many residents work within walking distance of their homes, investor interest is consistent. Availability has plummeted 900 basic points in the past year to 24.2%, according to Savills’ Q2 report.

Interest is also ramping up in the less-expensive Hyde Park and South Shore neighborhoods, where vacancies were well below the market average. The University of Chicago creates a pipeline for new hires in the neighborhood, according to Chang, who cited it as a long-term driver of tenant demand and appeal to investors.  

Chang added that buyers are also looking toward other northern and western suburbs, including Naperville and Joliet, where vacancies are contracting and entry costs are below the market average.

The report reveals cap rates in these areas are in the high 7% to low 8% range on average but can swing 150 basis points in either direction based on building quality.

“Suburban A-Class office buildings in choice locations are doing better than older, less improved, inferiorly located B and C-Class suburban buildings,” Abuja said. “Better-located suburban office buildings [that] are closer to where many workers actually live are faring better so far than many older-generation central business district high-rises.”

While construction has taken a massive hit, with new starts falling short of the totals registered in 2019 and 2020, the report also predicts substantial growth this year, with builders set to more than double the number of completions in 2022.

And while high-profile move-outs from CaterpillarBoeing and Citadel have also come as hard blows for the city, announcements from Google about a possible purchase of the James R. Thompson Center and Abbott coming to Willis Tower are proof that nonlocal investor interest still exists in Chicago.