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Class-B Office May Have To 'Reinvent Itself' As Vacancy Hits Another Historic High

Chicago’s downtown office market set another record in Q2, with its vacancy rate hitting 17%, the highest ever recorded and up from 16.2% in Q1, according to Colliers International. And while the economy is recovering and many companies are laying plans to bring employees back to the office after Labor Day, the market seems likely to continue breaking vacancy records for the rest of the year.

Downtown Chicago

“Recovery is slower than expected as the nature of the Covid-19 crisis being health-related rather than purely financial-related has resulted in hesitancy from business leaders to resume immediate and aggressive activity compared to previous historical downturns,” Colliers’ Senior Director of Research for Chicago Sandy McDonald wrote in the company’s latest market report.

The upcoming vacancy increases will mostly happen because new office buildings planned before the coronavirus pandemic will soon open, including the BMO Tower at 320 South Canal St. in the West Loop as well as several towers rising in the Fulton Market neighborhood. A minor factor will be companies deciding to shrink footprints as they ink new deals and bring their workforces back downtown.

“That barely moves the needle compared to the delivery of 1M SF towers,” Colliers’ principal David Burden said.   

Much of the new vacancy is in Fulton Market. The rate for this submarket, the downtown’s hottest before the pandemic, hit 33.3% in Q2, up from 31.9% in Q1. That's by far the highest in Chicago, according to Colliers. Developers completed 320 North Sangamon St. in Q2, one of several mostly empty towers to debut this year, adding another 260K SF of vacant space. Six additional buildings totaling 921K SF are under construction. Three of them are scheduled to be complete by the end of this year, contributing 620K SF.

Even so, activity is perking up. Companies are making plans to return, and that includes exploring alternatives, sending out requests for proposals and launching space planning efforts, according to Burden. 

“I think the market is starting to come back in a strong way,” he said.

The market will not simply return to where it was pre-Covid, Burden added. New Class-A buildings are attracting notice as companies look for ways to make office space as appealing as possible to employees, many of whom may be a bit reluctant to start commuting again after such a long layoff.

“They definitely want to make it an attractive place to come back to,” Burden said.

At the same time, landlords need to fill empty Class-A spaces, and are ready to be generous with tenant improvements and concessions, as well as more flexible on lease terms, he said. Class-B spaces will be seeing more companies exit in 2022, have even higher vacancy rates, and they will have more trouble attracting new tenants.

The impact is already visible. Class-B vacancy hit 19.4% in Q2, according to Colliers, a historic high, compared to a 15% vacancy rate in Class-A.

It all adds up to a big shift toward Class-A and a market that has decisively tilted in tenants’ favor, Burden said.

“Tenants can get great deals, particularly the ones who are looking for deals in the next six months; now is a good time to be shopping in the market.”

And Class-B?

“I think that Class-B has to reinvent itself.”