West Loop, new office building rentals are bright spots in Chicago's struggling office market

One of the few bright spots in Chicago's office market is the West Loop and its Fulton Market — where a lot of development has happened for several months. But overall the city's vacancy rate is still much higher than it was before the COVID-19 pandemic.

Available office space throughout Chicago reached a record high 23.3% inthe last quarter, compared to 22% for the same period last year, according to the commercial real estate firm Colliers, as companies slashed their office footprint after the pandemic spurred an in crease in remote and hybrid work.

And experts say it could be a couple of more years before there's a turnaround.

According to Colliers, there were 123,598 square feet of "positive net absorption" in the second quarter, a figure that hasn't been seen since the second quarter of 2023. This means that companies in Chicago occupied more office space at the end of a three-month period than they did at the beginning. Which is significant because it shows a demand for office space across Chicago after months of pullbacks.

Nick Schlanger, who's the director of research services for the commercial real estate firm NAI Hiffman, cautions, though, that this is largely due to new construction.

The company reported that more than 38 million square feet of office space is on the market, with vacancy still up year over year. But demand to move into top-tier, so-called Class A, office properties hasn't wavered much.

“Leasing has been fairly consistent,” Schlanger said. “We saw 1.6 million square feet of new leasing during the quarter, which is down 6% from what we saw at the same time last year.”

More leases were signed in the second quarter, according to Colliers, but companies are continuing to seek smaller spaces.

West Loop office leasing heats up

The burgeoning Fulton Market and West Loop office markets have two of the lowest vacancy rates in Chicago.

This area has become a growing hub for tech companies and other businesses looking to attract young talent. In March, video software maker Vyond moved to a 6,000-square-foot West Loop office at 401 N. Morgan St. after quickly growing its staff from three to 43. The same month, NanoGraf announced plans to open a new manufacturing and research facility in the West Loop at 455 N. Ashland Ave. The company makes advanced lithium-ion batteries for the U.S. military.

All of Chicago’s smaller "submarkets" — such as Fulton Market and North Michigan Avenue — had positive absorption last quarter, except the East Loop, where two major tenants left for newer Class A spaces. Insurance giant Blue Cross Blue Shield moved from 225 N. Michigan Ave. to a new, consolidated space at the Aon Center, according to Colliers, while the second tenant was undisclosed. The East Loop is bordered by East Wacker Drive, Lake Shore Drive, State Street and East Ida B. Wells Drive.

“With the inventory that we have [in East Loop], it's just difficult to … attract those top, large, impactful tenants,” he said.

While leasing in Fulton Market is showing a positive trend but slowing, the West Loop is “absolutely on fire,” Colliers principal Dan Arends said.

“It seemed like everybody was moving to Fulton at one point,” Arends said. “The West Loop … is certainly the largest positive.”

He said the buildings driving the market are the Bank of America Tower at 110 N. Wacker Drive, River Point at 444 W. Lake St., 150 N. Riverside Plaza, BMO Tower at 320 S. Canal St. and the Salesforce Tower.

With the exception of 320 S. Canal — the newest construction among the towers — those properties are 98% to 100% occupied, he said. The activity has pushed up rents, with those buildings seeing rates rise as high as 7% in the past 12 to 15 months, according to Arends.

Asking rents are up year over year, at an average of $43.07 per square foot, according to Colliers.

Schlanger said the market is starting to soften due to high vacancies.

“This is the first time I've seen a dip in asking rents — [Central Business District] or suburban — in a very long time,” Schlanger said.

Looking for something new

Chicago is one of many cities across the United States still seeing a “flight to quality,” Arends said. Companies are preferring newer buildings, and unusual amenities like a hidden room with duckpin bowling are helping to bring workers back to the office.

The bulk of office demand continues to be for Class A space — the highest quality property on the market, with the highest rents. But they might not need as much space as before, Schlanger said.

Contractions have created a near all-time high in vacant sublease space, as fewer workers trek to the office, with Colliers finding nearly 7 million square feet of available space. Landlords are continuing to refresh their building amenities to attract new talent and fill the empty space. Others, like those on La Salle Street, are being converted to residential to spur foot traffic in predominantly commercial corridors.

But there have been some significant leases inked during the last quarter. The food-delivery app Grubhub relocated and consolidated its headquarters, moving from the Burnham Center at 111 W. Washington St., subleasing space at the Merchandise Mart. It reduced its office space from 164,000 square feet to 108,000 square feet, according to Colliers.

Arends said the tipping point at which the office market could see positive movement is likely still a year or two away. The excess in sublease space is a major hurdle the market would have to surpass.

“The market's starting to stabilize,” Arends said. “I think that it is growing pains, and I think that you're going to see a lot of that.”