Downtown Chicago faces an office glut

The latest numbers from Chicago real estate firms differ slightly but tell the same story: Chicago’s downtown office market is hurting from employer cutbacks due to the coronavirus.

With workers staying at home, companies are offering space for sublease in droves, the firms’ third-quarter market reports said. The added vacancy comes as a large volume of new space hits the market, led by the just-finished 55-story Bank of America Tower at 110 N. Wacker Drive.

The tenant advisory firm Savills was blunt, calling downtown leasing demand “largely dormant” and saying the market is liable to be weak until late 2021 at the earliest. Savills said landlords who have held firm on rents while offering record concession packages will be forced to cut prices.

In comparison, trends in suburban offices are less severe and leasing interest is picking up, brokers said. Some analysts expect the suburbs will emerge as a lower-rent alternative for companies eager to spread out their workforce post-pandemic.

NAI Hiffman’s report said the suburban market “experienced expected adversity in the third quarter due to COVID-19, [but] is positioned as a viable alternative to a dense downtown market that was already facing a glut of new supply at the start of 2020 from several high-profile deliveries throughout the year.”

Meanwhile, the industrial market in the city and suburbs continues to hum as companies adjust supply chains to emphasize speedier shipping. The major force has been Amazon, which has expanded throughout the suburbs and on Wednesday is due to open its first Chicago distribution center, a 144,000-square-foot operation at 10500 S. Woodlawn Ave. in the Pullman neighborhood.

NAI Hiffman said industrial property saw brisk leasing activity in the third quarter, especially in the Interstate 80, Joliet and O’Hare Airport submarkets. The overall vacancy rate was a tight 5.47%, down from 5.63% a year ago, its report said.

But for downtown offices, the vacancy rates are generally their highest since 2014. NAI Hiffman placed the current rate at 13.44%, up 0.78 percentage point from a year ago. The suburban vacancy is 20.28%, up 1.73 percentage points, but with new leasing especially in northern suburbs, the firm reported.

Experts cited the growing impact of companies tossing excess space onto the sublease market. Savills cited examples such as Cars.com vacating 53,000 square feet at 300 S. Riverside Plaza and Ronin Capital leaving 72,000 square feet at 350 N. Orleans St.

Aside from the Bank of America Tower, which is 80% leased, examples of more new space hitting the market include 652,000 square feet in the renovated floors above Macy’s at 24 E. Washington St. and five office buildings due to open soon in Fulton Market.