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Class-A Buildings Continue To Be A Bright Spot In Troubled Chicago Office Market

Chicago's office market is continuing to struggle with negative net absorption and record-high vacancy rates, though Class-A buildings are bucking the trend and the suburbs are weathering the storm somewhat better than the city.

Chicago office vacancies continued to rise in 2022, but Class A buildings are still in demand.

“It’s a little depressing with some of these numbers, but I do see a silver lining,” said Aubrey Englund, executive vice president at NAI Hiffman, who specializes in office tenant representation, of a new report from the firm outlining a sometimes bleak picture of the metro's office fortunes.

The city’s Central Business District saw almost 603K SF of negative net absorption in Q4 2022, and office vacancy increased to 19.9%. In the suburbs, negative net absorption was much lower at just over 5K SF, though vacancies remained near record highs at 26%, according to the report.

“Many companies are embracing the employee-driven hybrid model in their long-term real estate decisions, which has created the desire to give back space, and I think this is a huge significant contributing factor to the negative leasing absorption,” Englund said.

“The trend has opened new doors for companies to upgrade, so what we're seeing in Chicago and in the suburbs, companies are taking less office space, but they're realizing that they can move to a higher-end building with nicer amenities while keeping the same monthly rent as before or even saving money.”

In the suburbs, for example, Class-A office saw nearly 100K SF positive net absorption in Q4 2022. In the city, 5.9M SF Class-A space was leased during 2022, equal to 77.1% of all new leases signed. 

“If you look at the stock of Chicago, the way that it typically gets described is that it's probably one of the most overamenitized markets on the planet,” said Ryan Masiello, co-founder and chief strategy officer at VTS, a commercial real estate platform. “I do think that the Class-B market or outdated A market is probably going to struggle more than other markets because of Chicago benefiting from the previous cycle, lots of new development.”

VTS, which tracks in-person and virtual new tenant tour requirements, saw demand for Chicago office space plummet 25% last year over 2021.

The decline has been less steep so far this year. For January and February 2023, demand is down 13% compared to 2021, Masiello said.

Overall, he said, Chicago is in the middle of the pack compared to other major cities in terms of falloff from pre-pandemic demand, sitting at about 40%.

“It's a complicated market," he said. "Despite demand being down and potentially more defaults than any other market, you are seeing developers that are still committed to the market, as well as tenants. I think that's just a really important part of the story."