Chicago's Office Ownership Shuffle Is Spurring Leasing

A wave of new Chicago office bargain hunters is resetting property values and sparking leasing activity, even with vacancy still near record highs. 

Lower prices on quality assets are drawing new buyers into the market. Distressed sales and maturing loans are fueling momentum as first-time Chicago owners renovate outdated space and use a new capital stack to fund leases.

“Our concern always when a new owner comes in is are they truly going to build out [spec] spaces? Do they know the capital they have to give to do deals in this market?” Colliers Executive Vice President Steven Bauer said. “Generally, with these new owners that have come in, the answer has been: Yes, they have.” 

Many of the new buyers have been family offices and other small groups that can act quickly, Bauer said. That is helping reset the market faster.

Five Chicago office buildings traded in Q3, led by the sale of 2 N. Riverside Plaza in the West Loop. Voya Investment Management sold the 650K SF Class-B property for $27.9M to a joint venture of Blue Star Properties and The Wolcott Group. The second-largest deal was for 500 N. Michigan Ave., a 324K SF Class-C building that Commonwealth Development Partners bought for $5.1M.

The acceleration in sales is happening even as Chicago’s vacancy numbers continue to creep up. 

Following three quarters of tenant move-outs and consolidation of space, total office vacancy hit an all-time high of 24.5%, up from 24.3% in the second quarter, according to a Q3 Colliers office report. The brokerage doesn’t expect the vacancy numbers to continue to climb significantly but also doesn’t see vacancy decreasing significantly over the balance of the year. 

Though some smaller buildings might be pulled out of supply via conversions, for vacancy to drop significantly, new tenants need to come into the market or grow. That is happening in small spurts but not at a large scale. 

“There's a whole lot of buildings that make up that [vacancy] that just simply cannot do deals right now, and they're off on the sidelines,” Bauer said. “But if you have the money and you can fund deals, especially in the West Loop, there's surprisingly good activity.”

About 614 office leases of at least 1K SF were signed in Chicago in the year to date. Financial services firms led the large leasing activity, with many tenants relocating to upgraded properties while consolidating space. 

Among the largest deals were Bain & Co.'s 173K SF relocation and expansion to 131 S. Dearborn in the Central Loop, Wolverine’s 83K SF sublease at 433 W. Van Buren in the West Loop, and PPM America’s renewal of its 76K SF lease at 225 W. Wacker.

There are as many large tenants looking for 25K SF or more as there have been on average over the last 10 years, Bauer said. The total square footage they are looking for is slightly down from historical norms. 

There is more diversity among companies seeking space than there was four years ago, which is a healthy indication for the market, Bauer said. Of the 20 largest tenants in the market he tracks, seven are financial services companies and three are law firms. There are also some companies in the manufacturing space, while technology companies have been the slowest to seek out space. 

All in all, it is a return to normalcy.

“The list doesn't look that much different than it did in 2014 or 2016,” Bauer said. “Slightly smaller overall in terms of the amount of space tenants are looking for, but it looks very comparable.”

When looking toward the market next year, Bauer expects to see a continuation of this year’s trends: slightly more demand from tenants as new owners scoop up buildings and reset their bases. 

“As these buildings trade hands, it creates opportunities,” Bauer said. “Investment sales activity has some velocity right now, more than it did a year ago, and certainly more than two years ago. 

“If that continues into next year and you have another handful of these Class-A buildings trade hands, that's going to be more buildings that aren't really marketable right now for tenants that are going to get back on the market,” he added. “You're going to continue to see tenants upgrade.”