Market Reports

By Ryan Foran, Cresa As we approach the three-year anniversary of the start of the pandemic, it continues to affect the commercial real estate industry in many ways, with no asset class impacted as significantly as the office sector. While retail initially stumbled but rebounded, and industrial soared to unexpected heights amid distribution emergencies, millions of U.S. office employees continue a tenuous balance of working from home versus going into the office.  The pandemic wasn’t all bad news for office tenants. Many businesses with simple infrastructure and experienced staff have been so effective with remote set-ups that they have shed office space permanently and eliminated rent from the books. Others have embraced emerging technologies like virtual meetings and chat solutions to reduce the need for face-to-face interaction. In one way or another, most businesses were able to leverage this unique situation to improve their business processes, technology and personnel, and have embraced remote work at some level. But many businesses with younger, less experienced staff have reported ongoing struggles with recruiting, mentorship, culture development and staff retention. Some of these may have been amplified by complex external factors such as an ongoing labor shortage, an unprecedented resignation of our older …

When it comes to which office properties will succeed in the coming years, success may boil down in part to who is minding the store.  Like most big cities, Chicago’s office market has been tested by the pandemic, and office property owners face a far more competitive environment. Year-end 2021 office vacancy rates were nearly 18 percent in the central business district (CBD) and over 25 percent in the suburbs, or 44 percent and 35 percent higher, respectively, than two years prior, according to NAI Hiffman research. Hybrid work is here to stay, and some employers are shrinking or shifting their office footprints. When the pandemic is finally in the rearview mirror, office demand is not going to be the same as it was a couple of years ago, although we are still figuring out just what it will be.  Which office properties survive and thrive in post-pandemic Chicago and nationwide will depend on many factors, including the property’s age or condition, its location and, increasingly, how well the property is programmed and run. That includes satisfying tenants in terms of everything from air quality to event assistance; meeting lenders’ environmental, social and governance (ESG) requirements and other new demands; …

A common question Chicago office brokers are hearing from clients these days is, “When is the best time to start negotiating with my landlord?” In fact, it is also a question brokers are asking themselves, contemplating when they should advise their clients to get into the market. The truth is: 1) it’s very hard to say, and 2) it depends on the situation.  Let’s explore what we do know. This is a historically tenant-favorable office market. Vacancy rates have increased from 13.8 percent to start 2021 up to 17.7 percent currently. Concessions are far over-weighted with construction allowances and free rent packages 20 to 30 percent higher than they were pre-pandemic, and landlords are being more flexible on term lengths allowing tenants three- or five-year leases despite offering full buildouts. On the other side of the coin, gross rental rates (base rent plus real estate taxes and building operating expenses) have not declined. In fact, in the last quarter they increased from $42.34 to $42.57 per square foot. The trends and market conditions surrounding concession packages and rental rates haven’t really changed in the last 12 months or so.  The above touches on what the market is doing, but what …