Chicago Office Market Slow to Recover in 2022
Last year, fundamentals in Chicago's office market did not improve much, but there are some signs that the metro is getting back on track.
Image by JaySi via iStockphoto.com
Three years after the start of the global health crisis, the Chicago office market continued to struggle to return to form. Although leasing activity remained low, and Chicago had an elevated vacancy rate (19.4 percent in January), there are some signs that the metro is improving its office market. Development activity picked up again, with deliveries up 73.3 percent year-over-year as of January.
READ ALSO: What’s Ahead for the Office Sector in 2023
Office sales totaled $2.6 billion in 2022, 58.3 percent more than in the previous year, with 22.5 million square feet of space trading. The average price per square foot was on a downward trend, from $213.8 for sales in the first quarter, to $154.4 in the fourth quarter.
Deliveries up year-over-year, below U.S. average
Salesforce Tower Chicago. Image courtesy of Hines
At the end of 2022, Chicago had 3.5 million square feet of office space under construction. That’s 1.0 percent of existing stock, 130 basis points lower than the national rate. Although with a greatly diminished office construction rate, Chicago still saw some large projects come online in 2022, with several others on the way.
Among other gateway metros, Chicago’s market had the smallest pipeline as a percentage of existing inventory, followed by Los Angeles at 1.1 percent of stock underway, Miami with 3.0 percent and San Francisco with 4.0 percent. Austin led the nation with space underway accounting for 7.2 percent of existing office inventory.
Still, the rate of new construction picked up—in 2022, 1.1 million square feet of office space broke ground across eight properties in the metro, up 54.9 percent over the previous year. Construction starts gradually increased throughout the year, with the first quarter recording only 78,200 square feet breaking ground, while the third quarter had the most space—759,891 square feet.
The largest property under construction in the metro was the 1.2 million-square-foot Salesforce Tower Chicago, taking shape in the CBD. The 60-story building is developed by Hines Interests and Salesforce, and was recently topped out. Salesforce will occupy approximately 500,000 square feet of office space upon completion later this quarter.
In 2022, 2.6 million square feet of rentable office space came online in Chicago, 0.7 percent of existing stock—10 basis points below the national rate. New deliveries increased 73.3 percent year-over-year.
320 South Canal. Image courtesy of Clark Construction Group
The largest property completed in 2022 was the 1.5 million-square-foot tower at 320 South Canal, located in the metro’s CBD. Developer Riverside Investment & Development Co. obtained a $503.4 million construction loan for the project in 2019, CommercialEdge data shows. The building is LEED Gold certified and is anchored by BMO Harris Bank.
Vacancy did not improve in Chicago
Last year, office leasing activity continued at a slow pace in Chicago, and the metro started the new year with one of the highest vacancy rates in the nation—at 19.4 percent as of January, 280 basis points higher than the national average.
Chicago had the highest vacancy among all gateway markets. It was followed by San Francisco (18.8 percent vacancy), Manhattan (15.4 percent) and Los Angeles (14.7 percent).
Last year, the flight to quality continued, and tenants in general sought Class A space in central locations. Leasing activity was focused along these parameters, along with large legacy tenants also offering sizeable amounts of sublease space.
Chicago office sales increased in 2022
In 2022, a total of $2.6 billion in sales were recorded in the Chicago market, with 22.5 million square feet of space trading across 136 properties. Year-over-year, sales volume grew by 58.3 percent in the market. The average price per square foot in 2022 was $169, 32.6 percent lower than the U.S. figure.
The largest sale of 2022 occurred in February—Opal Holdings acquired the 1.1 million-square-foot the Leo Burnett Building in Chicago’s CBD, for $415 million. The LEED Gold building traded at roughly $317 per square foot.
Building 3 of the planned 10-building logistics park, The Logistics Campus. Image courtesy of Dermody Properties
In October, Dermody Properties paid $232 million for the Allstate Plaza North and South pair of buildings, approximately $321 per square foot. The new owner plans to demolish all five buildings in the 232-acre campus and construct a 3.2 million-square-foot logistics park, estimated to cost $500 million.
A total of $1.4 billion in office sales was recorded in the first quarter alone, while the second quarter had $446 million, the third $377 million, and the fourth quarter, $426 million. On a quarter-by-quarter basis, the average price per square-foot decreased in the past year, from an average of $214 to $154.
Coworking initiatives grow
The coworking sector has seen a continuous rise in popularity as hybrid work became more commonplace, over the past three years. Among large U.S. office markets, Chicago sits on the third spot in terms of shared office space offered. In 2022, the metro had more than 3.7 million square feet of shared space across more than 230 locations—a total of 2 percent of the total office space in the market. Only Los Angeles (2.3 percent) and Manhattan (2.7 percent) had more, rounding up the top three markets which had 2 percent or more office space dedicated to coworking.
In September, WeWork launched its global return-to-work program, to help companies better implement hybrid solutions for employees. Besides expanding to new cities, the company is also refreshing its incentives for partnerships in Chicago, New York, Miami, Washington D.C. and San Francisco.
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