Chicago's downtown office market continued to struggle in the first half of 2024, with vacancy rates at an all-time high and office employment declining. But it's not all bad news: Recently constructed or renovated top-end skyscrapers are booming as companies lure employees back to downtown with prime office space for lease.
“The old adage that success begets success is true,” said Robert Sevim, Chicago region president for commercial real estate firm Savills.
Employers leased more than 2 million square feet downtown in the second quarter, well below the pre-pandemic average and with a record 29.3% of office space available, according to Savills' second-quarter report. But landlords raised rents for Class A buildings, particularly along the Chicago River in the West Loop and in new office towers in Fulton Market, by nearly 3% over the past year.
“This highlights that the market is vibrant and by no means dead,” Sevim said.
Many companies significantly downsized their office space. The quarter's largest lease was by Grubhub, which took 90,000 square feet in the renovated Merchandise Mart, down 45% from the space it occupied in the Burnham Center at 111 W. Washington St. in the Central Loop. The Federal Deposit Insurance Corp. inked the third-largest deal, expanding its offices at 300 S. Riverside Plaza.
The Central Loop, home to older office buildings, has the highest vacancy rate of any downtown district, with a third of its office space vacant, according to Savills, while the Far West Loop and Fulton Market districts have vacancy rates below 25%.
With so much space on the market, many workers assume their employers will be able to get great deals for luxury offices, but Sevim said it might not be that easy: Even well-used buildings can be saddled with heavy debt, and with many office occupants looking to sell off their space, landlords might not have enough income to pay off mortgages and add new amenities.
“In theory tenants have a lot of options, but in reality they don't,” Sevim said.
Companies should look for buildings with a strong financial outlook, preferably one with little or no debt and strong cash flow. Sevim pointed to 1 S. Wacker Dr., a 40-story office tower in the West Loop owned by New York-based 601W Cos., as a good example. The company was recently able to extend financing on the property and has just begun a nearly $30 million renovation of several floors.
“Every business should understand that who you're negotiating with matters more than ever,” he said.