The Office Market Is Still In The Doldrums, But Properties Around O'Hare Are Beginning To Perk Up
The suburban office market continues to bleed, but one submarket managed to limit the damage from the coronavirus pandemic. Tenants across Chicagoland were reluctant to sign new leases for more than a year, pushing up vacancy rates to historic highs across the region, but the properties around O’Hare International Airport held on best.
It’s the only suburban submarket to keep its vacancy rate under 20%, according to Colliers International. After more than a yearlong shutdown, its overall vacancy rate increased from 16.3% in Q1 2020 to 19.2% in Q2 2021, while the average suburban rate went from 22.4% to 25.4%.
With many users still unsure how — or even if — they will return to the office, experts say O’Hare, which lets suburbanites avoid trips into downtown while being far more accessible to city dwellers than the rest of the suburbs, seems poised to recover faster than others.
“O’Hare in particular is well-positioned to bounce back strong, more so than the other suburban submarkets, primarily because of its proximity to the CTA, the Metra, the airport and the CBD, so it has the ability to pull in employees from the rest of the Chicago metropolitan area,” Colliers International Senior Vice President Jon Connor said.
All of the suburbs lost ground in Q2. The suburban region suffered more than 1.1M SF of negative net absorption in Q2, according to Colliers, the worst quarter since the pandemic began and roughly half of the more than 2M SF lost throughout 2020. The O’Hare submarket saw 269K SF of negative absorption in Q2 2021, compared to just over 300K SF for both the North suburbs and Oak Brook submarkets.
But things are looking up, Connor said. Companies are out touring sites again, and some prospective O’Hare tenants are coming from outside the submarket.
“It’s not uncommon to have a tenant from another submarket going to O’Hare and look around as well,” Connor said.
A full recovery is going to take time, he added.
“I still think we are below the numbers we saw pre-Covid, in terms of the numbers of tenants inquiring about spaces, by about 50%,” he said.
A few key leases are getting signed. Dallas-based Goosehead Insurance more than tripled its space by signing a long-term deal for nearly 18K SF at 6300 River Road in Rosemont, according to Connor. But the pickup in touring by tenants most likely won’t bear fruit until Q3 or Q4, when new leasing deals should stanch the bleeding.
Investors have also started poking around the O’Hare submarket.
Although fully occupied office buildings in the Fulton Market neighborhood of Chicago have continued to sell for big numbers throughout 2020 and 2021, suburban office sales have been thin. Just two suburban buildings of more than 50K SF sold in Q1 2021, both for less than $2M, according to Colliers.
But Denver-based KORE Investments recently plunked down about $7M for the Rosemont Corporate Center at 9501 Technology Blvd. in Rosemont. It’s an optimistic play, especially considering that the 121K SF building has been almost completely vacant since former anchor tenant Cisco Systems moved to downtown Chicago’s Old Post Office in 2020.
KORE officials say they like what they see around O’Hare.
“We believe in targeted Chicago suburban market locations, and we are especially attracted to the O’Hare market,” KORE Investments Senior Vice President Kelli Lind said. “Due to the location and great access to public transit, employers are able to attract talent from downtown, the North market and the East/West corridor. Coming out of Covid, companies will be required to rethink their office locations as their employees have [moved] out of the CBD, and O’Hare is primed to benefit from those decisions.”
Amcraft Construction Co.’s Robert Kozonis also said he hopes O’Hare’s time has come. He has owned for years the 40-acre O’Hare Lake Office Complex site along the Tri-State Tollway on suburban Des Plaines’ south side, about five minutes from the airport, and now he wants to sell.
The right developer could transform it into a mixed-use complex with up to 6.2M SF, he added. His plan calls for five residential towers, several hotels, retail and four office towers, all around the site’s 14-acre lake.
“It’s a good opportunity to do a development in the O’Hare area, since for the last 10 years, even more, we haven’t had any new development,” he said.
Prospective buyers have this week been touring the property, which includes several existing office buildings totaling 353K SF. Bids are due by Aug. 25, and RealInsights Marketplace will sell the property on Sept. 9 in a two-hour online auction. A 239K SF office building on the site was sold in 2013 for $39M, according to a Crain’s Chicago Business report, but Kozonis said the other buildings won’t fetch nearly as much.
“We’re going to let the market dictate where pricing goes,” RealInsights Marketplace Senior Vice President Kevin Lipson said.
Lind said she believes her firm’s bet on O’Hare will pay off.
“O’Hare already boasts the lowest vacancy of all of the suburban markets, and I believe those numbers will only get stronger in the coming years,” she said.