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Chicago CBD Continues Great Run, But West Loop Could Swing In Tenants' Direction

333 North Green St., a new Sterling Bay property in Fulton Market.

The downtown office market is about to see a massive amount of renovated space hit the market, but for now, after years of steady progress, conditions remain stable.

The overall vacancy rate downtown shrank another 30 basis points to 12.5% in the first quarter, according to an analysis from Colliers International.

Class-A properties continue to outperform other assets, the firm said. Class-A vacancy decreased by 70 basis points from last quarter to 10.99%, and has declined 129 basis points in the past year. As tenants flock to more efficient space in new developments, Class-B landlords have felt the pressure. Although Class-B vacancy decreased by 17 basis points from last quarter it increased by 173 basis points in the last year. On average, over a five-year time span, Chicago’s CBD Class-B vacancy has decreased by 9 basis points per quarter.

Overall, downtown landlords reported about 329K SF of positive net absorption, with 291K SF attributed to Class-A assets and 102K SF from Class-B assets.

Downtown landlords have a diverse set of potential tenants to draw from, and that should serve them well in the next few years as new product opens up.  

“With a finite amount of suburban tenants to move downtown, Chicago’s CBD may see fewer suburban migrators as the time goes on,” the Colliers report said. “Conversely, it is expected that more tech firms from the coasts may look to Chicago as a cost-effective, yet valuable, option for talent.”

Fulton Market will continue growing its reputation as Chicago’s top emerging submarket, Colliers said. In the first quarter, Mondelez International became the latest suburban firm to lease downtown space when it decided to occupy 94K SF at 905 West Fulton, which will deliver later this year.

Available blocks of space in CBD's West Loop

The company joins McDonald's, Google, WPP, WeWork, Dyson, Glassdoor and others that in the past four years have relocated or announced plans to relocate to the once industrial area, which now offers a range of office choices, including renovated Class-B structures and newly built Class-A properties.

Developers created roughly 1.6M SF of Class-A office space in Fulton Market within the last four years and have about 1.5M SF under construction, according to Colliers. But more than 4M SF of absorption since 2015 has kept the market tight, and landlords should continue enjoying a good balance between supply and demand.   

“The Fulton Market submarket is unlikely to be flooded with space at any one point, allowing landlords to control rental rates in their favor, which is already evident as landlord’s pre-leasing of Class-A space have been asking for base rents between $45 and $50 per square foot gross, making the submarket’s Class-A space as expensive as some premier office space in the West Loop,” according to Colliers.

Annual absorption and vacancy in Fulton Market

Conditions in the West Loop, downtown's largest submarket, will probably swing more in tenants’ direction in 2019 and 2020. Tenants there absorbed about 2.6M SF since 2017, but developers delivered nearly 2.5M SF of Class-A space over the past four years. About 89% was occupied or leased, Colliers said, but much more is on the way.

After a $500M renovation, for example, 601W Cos. will open another 2.5M SF in its renovated Old Main Post Office this year. The developer found several tenants including Walgreens, its anchor, but by the end of the first quarter, still had 2M SF available, Colliers said.   

“The influx of supply coupled with the delivery of an additional 1.35M SF from 110 North Wacker in 2020 will likely ensure that the submarket’s tightest window of this cycle has likely passed.”