Impact of the COVID-19 on Lease Characteristics in the Greater Chicago Office Market
In mid-2024, the office market is well into its fourth year of rapid changes in work and office space use, yet many companies are still figuring out the future. The market has faced significant negative impacts, with daily unflattering headlines. While one might expect dramatically depressed effective rents, the gross effective rent for commercial office buildings has decreased post-COVID-19, but the situation is more nuanced than it appears. The pandemic induced shift to remote work significantly reduced the demand for office space as many companies adopted hybrid or fully remote work models. This decrease indemand has led to higher vacancy ratesand increased tenant incentives, such as rent-free periods and fit-out contributions,which have impacted gross effective rents. Furthermore, economic uncertaintyand cost-cutting measures have made businesses hesitant to commit to longterm leases, putting additional downward pressure on rental prices. Landlords, in response, have had to become more flexible and competitive to attract and retain tenants, further contributing to the decline in gross effective rent.
While this latest period of shifts in the office market may be the most impactful, it also occurs within a longstanding debate about the optimal workplace locations that balance attracting talent and efficiently spending corporate resources. The past two decades have seen many companies moving to city centers as the fight for talent led organizations to locate closer downtown.
Many notable moves in Chicago during the 2000s and 2010s have shown this trend with companies such as McDonalds, Motorola, and Walgreens all abandoning large suburban campuses in search of greater concentration of talent downtown. With remote work forcing companies to rethink their footprints, it might be surprising that the suburban office market has fared better from a vacancy perspective than in the city center. Downtown office vacancy has increased more than 400 basis points over its suburban counterparts from 2017 to today. This may be driven by a suburban occupier community that was already“right-sized” as a result of a more balanced user base, compounded by downtown occupiers that overleased space during arobust economic growth period.
To verify the impact of gross effective rents post-COVID and compare urban and suburban markets, we have analyzed two Chicago submarkets: the West Loopin the Central Business District (CBD) and O’Hare in the suburbs. The data was further separated into Class A and Class B asset types, as there has been a noticeable trend in occupiers moving to higher-quality assets in the hopes of luring employees to the office. In this joint report from Cresa and CompStak, leasing data was analyzed from 2017 through the first half of 2024. The pre-COVID period is considered to be from 2017 through 2019, while the post-COVID period is from 2020 through 2022. The ‘new normal’ refers to 2023 through the first half of 2024.
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