Office Continues to Decline
The office market conditions in the Chicago CBD have continued to deteriorate in the first half of 2024. Large-scale move-outs and downsizing by tenants have resulted in a negative absorption of two million square feet year-to-date. The direct vacancy rate has risen to 21.9%, a significant increase from the 20.2% at the end of 2023. Although leasing activity has remained lower than pre-pandemic levels, there is a sense of cautious optimism in the market. It seems that many tenants, who had been postponing decisions while reassessing their space needs, are now ready to implement their new office strategies. Even though a significant number of these tenants are expected to reduce their space usage, the transition beyond this prolonged period of uncertainty is seen as a positive development.
Rental rates rise for prime properties
Despite the overall distress observed in the office market, rents for prime properties have continued to ascend, marking a 1.7% increase from the end of 2023 to $71.83 PSF at the conclusion of the second quarter of 2024. As tenants shift their focus from quantity to quality, and show a preference for newer, well-situated properties with abundant amenities, the rents for these prime properties have experienced robust growth. On the other hand, rents for older properties have generally remained stable, with some buildings experiencing rent decreases. It is anticipated that rents for these less desirable will not see an increase and may face further declines over the ensuing two years.
Office Investment Market Nears Rock Bottom
So far this year, there have been seven investment sales in the Chicago CBD office market, all reflecting significant value losses. The number of completed transactions has started to rise in 2024 as values have plummeted. Investors who had been waiting on the sidelines are now making their moves, as lenders become more motivated to clear distressed properties from their balance sheets.
