Suburban office is thriving. And Downtown Chicago? It’s getting there. But things seem to be changing, leaving many wondering how long the suburban rebound will continue.
Uncertainty is ever-present as we enter a period of what some are considering a recession, causing businesses to reevaluate their workplace strategy. And one of the biggest trends experts are seeing? Quality over quantity.
Many businesses are downsizing and relocating to better quality properties like Class B, Class B+ and Class A, in part, to entice people to go back to work. Companies like Cresa have seen an increase in leasing velocity of 3,000- to 15,000-square foot buildings. Buildings with more square feet are still being leased, but the large-deal market is not as active as it was prior to COVID-19.
Cresa Senior Vice President Rick Morris said companies that don’t have leases rolling in the next few years, and have excess space, are putting space on the sublease market. In fact, there’s been a total of about 20 blocks of sublease space of 20,000 square feet of more that have come on the market within the last 90 days, which means negative absorption. Overall net absorption ended 1H2022 with negative 155,666 square feet.
Smaller, private companies, of course, can make these decisions easier than public companies, but the trend of negative absorption is expected to continue for the foreseeable future as businesses continue to reshape their footprint.
“We’re seeing some companies go completely hybrid,” Morris said.
But there’s no one-size-fits-all game plan, and firms are working to help clients navigate the appropriate course of action, including the right time to pull the trigger.
The ongoing battle to get employees back to work (at least part-time) lends itself to an interesting question. Is there a correlation between property type and the number of employees returning to the office? Are businesses occupying Class A having greater success getting people back than those in Class B or Class C?
Yes, according to Morris. Well-located and well-amenitized Class A buildings are leading the market in terms of occupancy. Many proactive landlords are looking at ways to draw tenants back to the office by upgraded amenities like lounges, cafés, health clubs and outdoor space. The Shuman (263 Shuman Boulevard) in Naperville, for example, was one of the most active buildings during the pandemic, he said, due to the complete renovation of the building.
Concerning the lower-class buildings, ownership is doing what they can to upgrade, but there’s no certainty it’ll be enough to attract users.
“You can’t make the windows bigger or make the floor plate more efficient,” Morris added. “They can upgrade the amenities, but that might not be enough to compete with the newer product.”
Jon Connor, Senior Vice President with the Colliers | Chicago Suburban Office Advisory Group held the same opinion and added that these decisions differ from building to building and their specific location.
“Some of the more challenged Class B and Class C assets need to see significant capital infusions in order to make them more competitive in the market or you’re looking at a race to the bottom in terms of economics and rental rate,” Connor said. “If there’s nothing setting a building apart from the competition, price is the only thing that will drive activity.”
There are also several office buildings that have been redeveloped and converted for a different use: a seemingly preferable investment.
With the way the office market is looking now, Chicagoland might hit a bit of turbulence heading into 2023. We might start to see more company layoffs, considering companies have already started to cut their workforce in anticipation of a future recession, but that’s not to say the forecast is entirely bleak.
Rents have started to decrease and will continue to do so as more vacancy hits the market and landlords try to attract users, and Connor is “cautiously optimistic”—Colliers has seen an increase in activity in terms of the number of tours and letters of intent within the last month to month and a half, which will hopefully continue through Q4 2022. And if businesses continue to rent space in the market—regardless of size—a chain reaction of leasing activity is anticipated into 2023.
“I’m optimistic that we’re starting to dig our way out of the pandemic era,” Connor said. “It will be a slow grind, but things are improving in the market.”
This article originally appeared in REJournals. See it here.