• As More Employees Return to the Office, Companies Increase Lease Size Across Chicago

    There is a truism in commercial real estate that states nothing kills a deal like uncertainty. When times are bad, companies downsize and look to sell or sublease their spaces. When times are good, they expand and acquire more space. Yet when a Black Swan event such as a global pandemic paralyzes the market with indecision, businesses sign short-term leases or opt to “kick the can” and postpone long-term real estate decisions for a later time. Or, they do nothing, and allow their leases to expire, leaving a glut of vacant and available space on the market.

    Such is the case of Chicago’s overall office market, where the vacant and available rate hit a new high of 21.9% at 2022’s end —an increase of 750 basis points from 14.4% at the end of 2019. In addition, overall leasing volume plummeted in 2022 as well, dropping to 15.9 million square feet of transactions. A marginal decline from 2021, when 16.1 million square feet of office space was leased, and a substantial decrease from the leasing volume set in 2019 of 23.4 million square feet.

    Despite the less-than-stellar performance, there is recent evidence that Chicago's office market may be uniquely poised to rebound. First, the average office lease signed in 2022 were generally larger across the region than they were in 2019. In addition, select submarkets are recording increased gross leasing velocity than their pre-pandemic levels.

    New Lease Signings Increase Average Size

    Analyzing new lease signings only and omitting renewals signed and comparing the number of new office leases signed in 2022 with deal volume in 2019, reveals that while overall lease volume was drastically lower in 2022, the average amount of office space leased increased by just over 2% while the median size was 17% larger. Supporting these findings further, on a count basis, 19% of these completed deals measured between 10,000 and 30,000 square feet in 2022, while only 10% of 2019’s signed leases were in that size range.

    These findings support the results of a recent Crain’s Chicago survey of 190 business executives with fewer than 500 employees. In all, 67% of respondents said they were planning to increase their office footprints in the next five to 10 years to accommodate employee growth, find a better configuration of space or be in a better location.

    Tenants Want More Parking, Better Ventilation and Mass Transit Access

    According to the Crain’s survey, the top three amenities sought by office tenants looking to expand were improved parking availability, at 73%, better ventilation/HVAC, at 49%, and access to public transportation, also at 49%. The dominant request for more parking is a nod toward suburban properties. Albeit marginally, suburban offices were able to increase their overall leasing share of inventory over the past four years in both Class A and B assets, by 20 to 30 basis points, a sign that suburban properties’ leasing velocity is improving. Conversely, downtown Chicago Class A and B office assets saw overall leasing volume fall by approximately 40% and 60%, or 400 and 330 basis points, respectively, from 2019 to 2022.

    The request for improved HVAC systems and public transportation access reflects area companies' desire for new construction near transportation arteries. Predictably, Fulton Market, with its exponential office inventory growth over the last 10 years, almost doubled its overall leasing volume during this period. Yet North Michigan Ave. was no slouch, adding almost 30% more square footage. Here, despite its dominance of Class B properties, the ample supply of medical office with attached parking and mass transit access propelled it to the second-biggest increase in office leasing volume in Chicago.

    It is expected that Chicago's Eastern East/West Corridor will do well, increasing its overall leasing volume by 15% after adding new inventory such as the remodeled former McDonald’s headquarters in Oak Brook and well-placed properties along major highway arteries. Despite experiencing almost 900,000 square feet of negative net absorption in 2022, Chicago's Schaumburg Area increased office leasing volume by 14% from 2019 to 2022. City and village officials from this area are pursuing development at every turn, creating place-making environments at the revamped Woodfield Mall and surrounding area and securing a commitment from the NFL's Chicago Bears to relocate its stadium to Arlington Heights from downtown Chicago.

    Where office leasing transactions dropped the most is the biggest surprise. The West Loop’s overall volume dropped 66% from 2019 to 2022. This area contains an ample supply of new office inventory and is located near Union Station and the Oglivey Transportation Center. Yet two-thirds of its office inventory was built before 1996. That’s 45.6 million square feet of office space that is over 25 years old, with antiquated ventilation systems and a lack of modern perks that have been brought to market since then. As a result, even the highest quality Class A assets in the West Loop posted a 36% decline in square footage leased during this period. The East Loop, with its majestic vistas of Lake Michigan and Millennium Park, also suffered from the negative consequences of its vintage inventory, with overall leasing volume dropping by 59% from 2019 to 2022.

    Flight to Functionality, Quality and More Personal Space

    As the new year unfolds, more workers are coming back to the office. Kastle Systems is reporting a roughly 15% increase in office occupancy from early December 2022 to mid-January 2023 for the Chicago metropolitan area. Local commercial real estate professionals agree that about 80% of employees are back in the office, compared to pre-pandemic norms. Cube farms with exterior offices grabbing natural light have fallen out of favor with returning employees. The most popular office layout is to allow natural light into those common areas, while offices for senior-level employees flank interior walls.

    While every landlord wants to land a mega-lease from a large, financially strong business, it is the relatively small businesses that are showing their strength and commitment to Chicago's office market in greater numbers than they did before the onset of the global pandemic. It behooves office property owners to pursue this cohort in earnest and upgrade their buildings to satisfy the needs of today's modern office space occupier.

    Source: www.CoStar.com