• Office Demand in Downtown Chicago Is Greatly Outperforming the Suburbs

    Office Demand in Downtown Chicago Is Greatly Outperforming the Suburbs

    But Similar to Recent Multifamily Trends, Public Health Crisis Could Nudge Tenants Outside the City

    Chicago office space largely sat idle in the third quarter as more than 75% of Chicago’s office-using employees remained working from home.

    But though the coronavirus pandemic has shifted many trends, one thing it hasn’t affected is the bifurcation of demand between the central business district and the suburbs.

    Total demand in the central business district greatly outperformed suburban Chicago as of the third quarter, with net absorption totaling nearly 800,000 square feet over the first three quarters of 2020. In the suburbs, 933,000 square feet of negative net absorption recorded during that same time period.

    One reason for the divergence in demand between Chicago’s downtown and suburban sectors is an onslaught of new supply, which has largely occurred in the central business district. Over the past 12 months, the Chicago metropolitan area recorded about 5.4 million square feet of new completions, with an additional 6 million square feet underway.

    While a supply-heavy third quarter translated into positive quarterly net absorption for downtown, it also caused challenges among landlords. Owners were met with rent declines and a record amount of space availabilities, as employers and employees largely avoided returning to the office during the quarter.

    As of the third quarter, the flurry of new office supply in the central business district translated into rent declines of negative 2.7% year over year, while the suburban office sector witnessed rent losses of negative 1.7% during the same time period.

    While an uptick in office leasing hasn’t happened in the suburbs, it could head in that direction.

    With an abundance of low-density, low-rise floor plates, along with lower asking rents for Class A space compared to downtown, the suburbs of Chicago are well-suited to meet the social-distancing measures that are likely to become the new norm for office space.

    Additionally, an aging millennial population could prove to be a boon to suburban Chicago office leasing activity as this demographic cohort begins starting families and buying houses.

    Recent housing data from Illinois Realtors show a 38.7% increase in home sales in Chicagoland from September 2019 to September 2020. That is more than a 10-point jump from a 28.1% increase during the same time period in the city of Chicago.

    With its stronger school systems, lower housing costs and abundant parking, companies could benefit from a suburban “hub and spoke model" where small satellite offices in the suburbs complement a diminished downtown presence. That would provide flexibility to employees and a more cost effective alternative.