Downtrend in downtown office market to continue for months as Covid blocks typical recovery

The coronavirus pandemic may have calmed down a bit so far this fall, but the pain and damage done to the downtown office market is not over. Aside from a few bright spots, the vacancy continued to increase in the third quarter and the delay in returning to the office caused by the delta variant most likely means that a real recovery cannot take place until next summer, experts say. .

It’s another sign that the pandemic has placed the office market in uncharted territory. Unlike the usual boom and bust business cycles of the past, any forecast can be shattered by bad news from public health officials, leaving stakeholders in the office largely in the dark.

“The current market downturn has not followed recovery trends typical of previous downturns, where the recovery has occurred within four quarters of its onset,” said Sandy McDonald, senior director of research at Colliers International Chicago. in the company’s third quarter report. “Six quarters after the start of the pandemic, the increase in the vacancy rate and further negative absorption will continue until the end of 2021. The office market is starting to show signs of life with new transactions and expansion signatures, but these transactions will not reverse the downward trend until mid-2022. “

Bisnow / Brian Rogal

Chicago skyline

Businesses leasing downtown office buildings continued to lose space in the third quarter, pushing the vacancy rate to 17.7%, according to Colliers. That’s a jump of 70 basis points since June, down from 13.8% a year ago. The market has experienced nearly 4 million square feet of negative absorption since the start of the year.

That’s a disappointing set of statistics given the optimism many had at the start of the summer. Illinois Governor JB Pritzker and Chicago Mayor Lori Lightfoot had dropped numerous restrictions on businesses as coronavirus infections and hospitalizations fell to record levels, and downtown businesses began to formulate plans to bring many employees back to their offices after Labor Day. But the surge in the delta variant brought back masks and other restrictions, and ambitious early summer plans were scrapped.

“The recovery did not follow the path that everyone expected,” said Amy Binstein, director of research at Newmark. “There were so many companies planning to return to the office after Labor Day, but many pushed it back after the holidays or in the spring.”

Newmark also found that the downtown vacancy rate rose to 17.7%, the highest since the Great Recession of 2010. Another cloud hanging over the central business district is the 6 million square feet sublet space put on the market.

But the outlook is not all bleak.

“The [vacancy] statistics only tell part of the story, ”Binstein said.

The number of office workers going downtown each day has increased after declining slightly in late summer when the Delta variant hit Chicago.

Chicago office use amounted to 32% in October, after falling to 28% in the last few weeks of August, according to data from Kastle Systems, a company that manufactures contactless access systems and tracks office usage across the country.

And while large publicly traded companies generally remain cautious about signing new deals, leasing activity has also picked up in recent months, mostly driven by smaller companies ready to test the waters. Binstein added.

“Rental activity has obviously not reached pre-pandemic levels, but it is stronger than it was earlier in the year, and this has been largely driven by businesses. technological, ”she said.

SMS Assist, a technology company that provides cloud-based software to residential and commercial properties, signed a new third quarter lease for 114K SF in One Two Pru of Sterling Bay at 130 East Randolph St. in the East Loop. This was the third largest lease of the quarter, and 20,000 square feet more than SMS Assist at 875 North Michigan Ave.

Other big tech deals in the third quarter included Hazel Technologies’ decision to lease 53,000 square feet to Tishman Speyer at its 320 North Sangamon St. in Fulton Market. Founded in 2015 by a group of students from Northwestern University, Hazel develops technologies that help companies reduce waste in their supply chains.

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Courtesy of Newmark

Newmark Research Third Quarter 2021 Chicago CBD Office Report

This and other offerings from Fulton Market show the area could regain its reputation as Chicago’s hottest submarket. The opening of several nearly empty towers during the pandemic sent its vacancy level into the stratosphere, peaking at 33.3% in the second quarter, but besides River North, rich in technology and creativity, Fulton Market was the only sub – CBD market to see positive absorption in the third quarter, Colliers found, and its vacancy rate fell to 28%.

River North had the most notable third quarter lease. Kirkland & Ellis signed for 662K SF in the Salesforce Tower, currently under construction at Wolf Point. The law firm plans to relocate from 300 North Street LaSalle when the 1.2m SF tower is completed in 2023. Most of the buildings in River North are smaller renovated brick and lumber warehouses or otherwise. loft-style buildings, and their managers also see reason for optimism.

“For almost three months, we’ve seen a dramatic increase in the number of tenants applying for space,” said Candice Murphy, Urban Innovations leasing broker. “Sizes vary from small startups to large, well-funded companies and everything in between. “

Urban Innovations was founded in the 1980s when it began transforming River North from an industrial warehouse district to a sleek loft office market.

Many tech companies have taken advantage of what remains a tenant market and swapped their Class B spaces for more upscale Class A buildings, Colliers added. That doesn’t mean the pain is over for Class A homeowners, who saw 278,000 square feet of negative absorption in the third trimester, but Class B has seen worse, with 770,000 square feet of negative absorption and a vacancy rate of 20.6%.

According to Colliers, around 245 downtown leases were signed in the third quarter, about 100 more than those signed in the third quarter of 2020.

Binstein said the start of vaccinations for children ages 5 to 11, which U.S. public health officials say could start in the the next weeks, will strengthen the confidence of many parents in the end of the pandemic. This will help businesses get their plans back on track and hopefully increase rental activity further.

Murphy agreed.

“We took inspiration from our tenants and the last goal for a full comeback was Labor Day 2021 and most companies didn’t follow through on my advice,” she said. “However, I am confident that the market will continue its slow and steady recovery and that the summer of 2022 will see a boom as companies that have hired during this time and allow people to work from home enter the market for more. space.”

But the road to recovery will last beyond next summer.

“Six million square feet of sublet space isn’t going to disappear overnight,” Binstein said. “We will see the impact of the last 18 months for years to come.”

Jose C. Birney