It Could Be Lights Out For Older Chicago Offices As Vacancy Spikes To Highest Rate On Record
Chicago office vacancy rose to a record high in the first three months of 2022 despite demand ticking up as the impact of the pandemic begins to lift.
Downtown vacancy hit 21.2% in March, according to CBRE, up from 19.7% at the end of last year and 20% in Q3 2021 — the previous high-water mark for emptied-out offices. The city’s central business district vacancy rate was at 13.8% when the pandemic began but has shattered records in four of the past five quarters, as reported by Crain's.
The CBRE report points to new supply, including the just-completed 1.5M SF BMO Tower, which remains half-empty, as the main cause of the uptick. But the record also comes as tenants reassess their workspace needs in light of new hybrid work policies, with some reducing their footprints by as much as half.
Downtown Chicago now counts 27M SF of unoccupied office space, an 8% increase over Q4 2021, per CBRE. That makes it a good time for tenants to seek out flexible lease terms and incentives to refurbish space but an inopportune time to own older, lower-quality properties.
"I can think of four of five [buildings] that have tenants competing for spaces, and on the flip side, there are a lot more buildings that will do anything to attract and retain tenants," CBRE Senior Vice President Mark Cassata told Crain's. "I think as the market continues to develop, the have and have-not [gap] continues to expand."
The gap is already making itself visible, with the 55-story 110 North Wacker Drive fetching more than $1B in December 2021, Crain's reported, while 225 West Washington St., a 40% vacant property a block away, sold for about $83M in February — $2M less than the loan on the building.
The Brookfield Asset Management-owned 175 West Jackson Blvd. was taken over by its lender after falling delinquent in November on the $258M loan backing the 1.4M SF skyscraper, according to Trepp. And after releasing a warning in December on a $100M loan for 135 South LaSalle St., the special servicer for the 1.3M SF tower said in March the most likely outcome was a deed in lieu of foreclosure.
Although downtown landlords have so far largely avoided a wave of foreclosures tied to the pandemic, those distressed properties could herald a wider problem for downtown office, which is struggling with the rise of hybrid work, shrinking floor plans and companies moving to greener pastures offering features and amenities they believe will lure workers out of their homes.