Moderate market activity amid high uncertainty
In Q3/23, Chicago’s CBD occupancy levels and gross asking rates remained relatively unchanged from the prior quarter. The office market’s direct vacancy rate was 19.8%, while the average gross asking rate held at $44 p.s.f. Absorption levels turned negative this quarter at -432,000 square feet, resulting in year-to-date absorption levels at -933,000 square feet.
Hybrid work has propelled vacancy rates higher as companies balanced their office space needs with incremental overhead costs, like rent. Many companies were early to adopt remote work policies, allowing employees to collaborate virtually with no net decrease in productivity. Yet as more time passes, data increasingly reveals the challenges of fully remote work. Stanford’s Institute for Economic Policy and Research concluded working from home actually led to a 10%–20% decrease in productivity. Seeing these effects first-hand, companies across many industries are bringing their employees back into the office.
Even the iconic work-from-anywhere facilitator, Zoom Video Communications, is emphasizing the value of in-person collaboration. Zoom’s business grew significantly during the pandemic but has struggled as the effects of COVID wind down. As a result, in an effort to resuscitate growth, Zoom is developing a wider suite of software tools for big businesses, including in-office collaboration products. Even though hybrid work is here to stay, companies will still need office space to promote in-person collaboration and increase worker productivity. More than half of pre-pandemic office leases in the U.S. have yet to expire, so as companies face the decision to renew or relocate, productivity concerns may mean employers place a greater emphasis on returning to the office. Meanwhile employees will continue asking for high-quality, well-located, fully amenetized spaces.
Leasing Activity
Leasing volume in Chicago’s CBD remains modest. Only 1.7 million square feet was leased in Q3/23. With approximately 5.3 million square feet leased year-to-date, total leasing volume in 2023 is at levels not seen since 2010. It’s also barely half the amount of the 10.5 million square feet leased through the first three quarters of 2019. Despite the slow leasing environment, some companies continue to solidify their presence downtown. Most notably, Winston & Strawn signed a new lease to occupy 150,000 square feet at newly renovated 300 N. LaSalle beginning in 2026, a move from their long-time home at 35 W. Wacker. The decision echoes the trend of other companies right-sizing their office space, as the Chicago-based law firm is reducing their overall footprint by more than 40%.
The owner of 300 N. LaSalle, the new home of Winston & Strawn, made what many called a gamble by investing an additional $30 million to renovate their property in hopes of signing new tenants. However, the landlord made a calculated risk based on the building’s favorable location and amenities while taking advantage of tenants’ flight-to-quality across the market. This trend remains a pillar of Chicago’s office market, and owners who reinvest in their buildings and improve their properties will increase the chances of signing new tenants while retaining existing ones.
Investment Sales
Sales activity remained at record-low levels with only one transaction in Q3/23—the sale of 230 W. Monroe. Oregon-based Menashe Properties purchased the building for $45 million, less than $65 p.s.f., which is a massive discount compared to the previous purchase price of $122 million ($173 p.s.f.) in 2014. This is the first major office sale in
Chicago’s CBD in more than a year.
Occupancy struggles coupled with unfavorable financing conditions have caused many investors to wait on the sidelines, resulting in only $102 million invested into existing office buildings year-to-date. The only recent year which saw as little transaction volume through the first three quarters is 2009, after the great financial crisis. Even though office property sales have drastically slowed, some owners are still actively marketing their downtown assets for sale.
For example, JLL is marketing 175 W. Jackson, a distressed 1.4 million square-foot building, in hopes of resolving the owner’s foreclosure lawsuit without an auction. Brookfield originally purchased the building in 2018 for $306 million and spent an additional $24 million on renovations. However, ratings agency KBRA Analytics pegged the building’s valuation at $170 million. If Brookfield is unable to find a buyer in time, the lender may force them into foreclosure—something we recently saw at 161 N. Clark, which was being marketed at a significant discount until the lender, Societe Generale, decided to officially foreclose on the building.
