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Chicago Office Real Estate Ends 2017 With Higher Vacancy Rate, Rising Rents

A rendering of John Buck's 151 North Franklin
A rendering of John Buck's 151 North Franklin

The arrivals of trophy buildings 150 North Riverside and River Point resulted in higher vacancies and an increase in rents last year in the central business district and the suburbs. According to Newmark Knight Frank's Q4 2017 Chicago market report, the metro Chicago area's office vacancy rate ended the year at 17.4%, thanks to 2.1M SF of positive net absorption. It was a drop of 40 basis points from Q3 and the lowest the vacancy rate was all year. The vacancy rate between Q4 2016 and Q4 2017 remained unchanged.

The increase in vacancy and the new Class-A inventory is having little effect on rents, however. Average rents rose 1.1% to $27.47/SF, while asking rents are now at a record-high $35.44/SF. Asking rents have increased 4.1% in just two years. The expected arrivals of 151 North Franklin and 625 West Adams are expected to push vacancy rates and rents higher.

US Cellular Plaza, Chicago
US Cellular completed its headquarters expansion near O'Hare and now occupies 120K SF at US Cellular Plaza.

The suburban office market continues to be a tale of bifurcation and steady recovery. The strongest performing submarkets like O'Hare, the eastern half of the East-West Corridor, and I-294 from Lake Cook Road north to Route 60 have the lowest vacancies and most interest from investors. Overall, suburban vacancy ended 2017 at 22.2%, while average rents increased to $21.51/SF, a post-recession high.

And there are even signs of new office construction in the suburbs. GlenStar Properties signed a deal with Central States, Southeast and Southwest Health and Welfare Fund to build a new 150K SF office building along the Kennedy expressway at the Cumberland interchange. GlenStar has two more sites available for 100K-150K SF build-to-suits in the area. The former headquarters of the American Academy of Orthopedic Surgeons at 6300 North River Road is undergoing an overhaul.

Investor interest was tested last year. While trophy assets like Prudential Plaza sold for high-nine figures, other trophy assets like 161 North Clark have been on the market for months. But Sterling Bay's pending $500M purchase of 600 West Chicago and Ascentris' $102M acquisition of 120 North LaSalle may be votes of increased investor confidence in the market moving forward.

CORRECTION, JAN. 25, 8:40 A.M. CT: Sterling Bay is buying 600 West Chicago for $500M, and trophy assets like Prudential Plaza sold in the high-nine figures.