Chicago’s Resilient

Suburban Office Market

In Chicago’s suburban office market, the prevailing narrative is that historically high vacancy rates and distressed ownership mean rental rates should be at historical lows. This narrative is inaccurate. A deeper dive into the data shows that the actionable portion of the market is much more competitive than headline figures suggest.

VACANCY CONCENTRATION

The current overall vacancy rate is 25% in Chicago’s suburbs—that’s roughly 23 million square feet sitting empty. Of this, about 17.2 million square feet (75%) of vacant space is concentrated in approximately 20% of suburban office properties. If these largely vacant properties are removed from the data, the remaining 80% of suburban offices—properties which generally are actively being marketed—have an average 10% vacancy rate. The pandemic clearly affected demand for office space, but most suburban Chicago office properties remained healthy despite the ever-changing market conditions.

In the decade prior to the pandemic, the overall suburban Chicago office market vacancy rate averaged 18%. The pandemic drove that rate higher, to nearly 25% as of May 2024 according to our data. But, that rise in vacancies was not evenly spread across the market. That same 20% of properties where 75% of vacant space is concentrated today, were responsible for nearly two-thirds of the increase. Like it did in many industries, the pandemic amplified a trend already in place: the weakest suburban office properties became less competitive.

THE REAL COMPETITIVE LANDSCAPE

Second only to location, space size is the most essential characteristic in a tenant’s search. And today’s suburban tenants are generally interested in small footprints. In 2023, 92% of leases signed in the Chicagoland suburbs were for spaces less than 10,000 square feet. Only 6% of the vacant space currently on the market are units of between 1,000 and 10,000 SF. So competition is exceedingly high for these limited vacancies. ¹

Tenants are often surprised to learn, after reading countless headlines promoting a weak market narrative, that there is such limited availability for suites that meet their criteria. In reality, the market’s high vacancy rate doesn’t reflect the true underlying demand for the office space that most tenants in the market are seeking.

Additionally, much of the vacant space on the market isn’t being actively marketed, toured, or leased. In fact, the percentage of listings on the market for three or more years is just over one-third, indicating a large portion of this space isn’t truly leasable. Regardless of the location, floor plan, debt status or any other factors, if a suite is on the market for more than 36 months, there’s usually a good reason.

Source: CoStar

SUITE CONDITION MATTERS

In today’s market, most tenants are seeking spaces 10,000 SF or less. They also have a strong preference for move-in ready spaces. In fact, nearly 30% of square footage leased in 2023 was for move-in ready suites, a significant increase compared to 11% in 2019. So, landlords with large blocks of vacant space need to be willing to carve up and build out these blocks of space on a speculative basis if they want to remain competitive among these smaller tenants. In general, smaller tenants don’t leave enough lead time for extensive buildouts, so they have a strong preference for move-in ready space.

Owners who are unable or unwilling to reinvest in their assets have faced record levels of distress, leading to a higher rate of short sales and foreclosures. These largely vacant properties comprised most of the suburban office sales in the past year. In fact, more than half of all office sales in 2023 were for planned industrial redevelopments.

Source: CoStar

Chicago’s suburban office market is undergoing a period of intense transformation. Large corporate campuses have become obsolete, with many being torn down for industrial uses. But focusing exclusively on these changes misses some crucial truths at the heart of the market. There have always been geographic locations the market has deemed more desirable, and others less desirable. To succeed, ownership has always needed the ability to invest in its asset. The pandemic has done little to change these two fundamental truths. And as a result, the macro statistical data often obscures the true market dynamics.

¹ Leases on the market 12 months or less.