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Downtown Market May Swing In Tenants' Direction

Big office users are signing a lot of deals in downtown Chicago, but that doesn’t necessarily mean a bonanza for landlords. All this leasing activity will leave a number of holes in the market, as tenants abandon their current spaces for new Class-A offices, and with developers readying even more space, especially in the West Loop, experts say users may have an abundance of options in 2019 and 2020. That will swing conditions in tenants’ favor.

167 Green
167 North Green St. in Fulton Market

Rental rates in the Central Business District have already started to flatten, according to a second-quarter report from Savills. Overall downtown asking rents did increase 3.3% year over year, to $40.96, but rents also slid by 0.1% from the first quarter.

The overall availability rate in Chicago finished the second quarter at 16.3%, increasing by 60 basis points year over year. However, tenants continue to snap up the market’s Class-A space, according to Savills. Availability in that sector declined by 40 basis points year over year, falling to 14.5%, and Class-A asking rents inched up 0.2% quarter over quarter to $46.61.

The West Loop remains the city’s most active submarket. Over the first half of this year, the CBD saw about 948K SF of net absorption, with West Loop tenants accounting for 648K SF, according to a new report from Newmark Knight Frank.

Seven of the 10 largest second-quarter transactions occurred within the West Loop, according to Savills. These deals included EY’s 191K SF lease extension at 155 North Wacker Drive, and Perkins Coie taking 102K SF across four floors at 110 North Wacker Drive.

The new developments rising in West Loop and Fulton Market had another healthy quarter as tenants seek upgrades. Six of the 14 largest transactions completed in the second quarter occurred in new construction, Savills found. WeWork played an outsized role in filling such space; it signed for 140K SF on three floors at 167 North Green St., which developers Focus and Shapack Partners began building in April. In addition, WeWork leased 90K SF on three floors at 625 West Adams St., another new building. 

Downtown Market May Swing In Tenants' Direction

Perhaps the biggest change in 2019 has been the softening of overall fundamentals in the East Loop, once one of the CBD’s tightest submarkets, according to Savills. The overall availability rate rose to 18.4%, up 310 basis points year over year.

“New space opportunities have been created by tenants giving back space or relocating from the submarket, including Walgreen’s forthcoming departure at Sullivan Center and Sargent & Lundy’s shedding of space at 55 East Monroe St.,” the firm said.

And with developer Brookfield Asset Management recently starting an office conversion of the upper half of the Macy’s building on State Street, which it purchased for $30M in 2018, tenants will soon have a new 650K SF opportunity to consider.   

Filling that renovated space, and the millions of square feet in new construction, may depend on the growing strength of Chicago’s tech market. Developer 601W Cos. has already signed leases for about 600K SF in its 2.5M SF Old Main Post Office redevelopment, and may be on the verge of inking several other significant deals, including one with Uber for 450K SF, according to NKF.

The company said San Jose-based Cisco is also rumored to be in negotiations to take 130K SF to consolidate workers from an office in Rosemont and at 525 West Van Buren St.

“Regardless of where these tenants end up, the growth is what is important for the market, since many other industries are shrinking their footprints,” the firm said.