Chicago's Downtown Office Pipeline At Zero For The First Time Since 2012

All is quiet on the Midwestern front. 

The downtown Chicago office construction pipeline is completely empty for the first time since 2012 after Fulton St. Cos. delivered 919 W. Fulton earlier this year, according to Newmark. It could be some time until cranes rumble to life again, panelists said at Bisnow’s Chicago Office Leasing, Acquisition and Development Summit on May 13.

“It's going to be tough to launch the bigger ones,” said Matt Pistorio, partner at R2 Cos. and founder of Madison Rose Leasing Co. “I think we won't have any new development until 2030, 2031 at the earliest. And I think if something comes in that time frame, it is probably going to be a smaller building.”

New office development in Chicago is constrained by a triumvirate of factors: more expensive debt, escalating construction costs and a premium placed on equity, Hines Senior Managing Director Tom D’Arcy said at the event held at The Drake. Putting aside pandemic years, the city historically delivered a trophy building about every three to four years, he said. 

For those buildings, there was about a $10 per SF difference in net rent between the best existing Class-A properties and new development. Now, that number is closer to $25 per SF, he said, and the equity requirements are higher. 

“​​I really think it's probably a 200-, 250-basis-point premium on equity required for that capital, if you can find it,” D’Arcy said. “That's really the challenge.”

The cap on new supply means overall Chicago office supply and demand dynamics could soon start to reverse course after a sluggish start to the year.  

First-quarter leasing volume in the central business district hit 1.69M SF, dropping 34% from 2.57M SF in the same period last year, according to Newmark. It represented the slowest Q1 leasing figures since the first quarter of 2021. Total vacancy hit 26.7%, a record high, primarily due to tenants downsizing space and extended vacancies in older Loop office buildings, according to Newmark. 

There are also 3.54M SF of planned office-to-residential conversions, of which 71% are in the Central Loop, that will take a bite out of the city’s total office inventory. 

Pistorio said the vacancy rate in the 20 newest office buildings in Chicago is around 8%, and that, with no new inventory coming soon, leasing activity will start to trickle down to the next class of buildings. 

“As those top 20 newest buildings become more and more full, they're going to have to go somewhere,” he said. 

Chicago’s top buildings are seeing strong utilization. On the first Tuesday of March, the city had the fourth-highest occupancy in the country, according to Kastle data reported by Newmark. Trophy office peak day occupancy hit 93.7% on March 3, according to the brokerage. 

Cushman & Wakefield Executive Director Karoline Eigel said, on tours with prospective tenants, many employers are pushing workers to be in the office four days a week but are offering credit for two days of in-office work if they come in on Friday. 

Menashe Properties principal Jordan Menashe, who has been scooping up Chicago office buildings in the past few years, said, even before the pandemic, Friday “was a dead day,” as people left early for other commitments ahead of the weekend. Now, he thinks the in-person schedule for the workweek is moderating and will settle on four days back in the office following a fully remote period during Covid. 

Menashe said he believes the city’s so-called glut of office space will at some point turn into a scarcity of attractive, available space. 

“Eventually, it’s going to come into balance,” he said. 

Getting back to constructing new office buildings is a trend that will take more time than the pace of change in a field like fashion, said Vocon Chicago Studio Director Sophie Bidek. 

“Fashion, you can go from skinny jeans to baggy jeans in a day, and it's done,” she said. “The real estate world, architecture, it's laggy because there's a large institutional capital investment that needs to happen to build a new building … It will take time to see the winds of change manifest in reality.”