CHICAGO—The metro region's office market ended the quarter with a big jump in its vacancy rate, a striking contrast to the last six quarters of positive growth, according to a new report by commercial real estate firm Newmark Grubb Knight Frank. One year ago, the rate stood at 16.2%, before falling to 15.7% by the end of the third quarter, but now stands at 17.1%. Net absorption was a negative 2.4 million square feet during the fourth quarter, wiping out gains earlier in 2016 and bringing the year-end total for the region to negative 744,000 square feet. That's a big change from 2015, when the market absorbed around two million square feet.

But although the overall numbers don't look good, researchers say demand remains steady, and attribute the declines to long-awaited changes in both the suburbs and the CBD. Zurich North America, for example, vacated its one million square foot campus in Schaumburg in favor of a new headquarters nearby with 783,800 square feet. In addition, developers finished 444 W. Lake St., adding 1.1 million square feet of trophy space to the CBD's inventory.

“We've been expecting all of it,” Joe Klosterman, research manager for NGKF, tells GlobeSt.com. The office market has, quite recently, been in a similar position. In 2010, developers added about five million square feet to the region's inventory, and it took several years for tenants to absorb that space. “This time around, we will have less new space to absorb, and this time, I hope, we won't have a great recession to deal with.”

And with several more trophy towers opening up in 2017 and early 2018, bringing the total of new space up to 3.5 million square feet, Klosterman also expects that we will see lots of ups and downs in the absorption numbers as office tenants shuffle around the CBD. “After that, it will probably take another two years to get back to where we were.”

But he is confident that the empty spaces, at least in the CBD, will get absorbed. For one thing, the downtown will continue to benefit from the migration of suburban firms. And other big spaces that hit the Chicago market recently, such as 1KFulton and several floors of the Merchandise Mart, were occupied relatively fast. Tenants have already absorbed 130,000 square feet at 444 W. Lake, and will take an additional 696,000 in the next few quarters.

There are signs that demand for high-quality office space will stay high. Chicago-area employment is passing its pre-recession level, and Moody's forecasts a 5% growth by the end of 2019.

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The suburbs, of course, are another story, and far more complex. Absorption in the fourth quarter was negative 2.1 million square feet, and unlike the empty spaces downtown, finding tenants for these openings, such as Zurich's former home, will not be easy. “They are looking for a big whale to fill those in,” says Klosterman. More likely, however, “it's going to take patience and creativity.”

Still, he points out that many places in the suburbs remain healthy, especially when it comes to class A space. The fact that Zurich chose to stay in Schaumburg, and design its own new trophy space, shows that many companies, especially insurance firms, feel comfortable in suburban offices. “We want to look at the suburbs as one market, just like the CBD,” he says, but it's really a vast region with areas of weakness and strength. The I-94 corridor, O'Hare, Oak Brook and downtown Evanston, in particular, have remained highly popular.

And even though it's hard to discern now, Klosterman thinks the suburbs may have a brighter future. “When all of those 25- to 30-year-olds have a second kid, are they going to want to stay in a two-bedroom condo in the city?” And if not, “will employers follow them?”

There are signs that demand for high-quality office space will stay high. Chicago-area employment is passing its pre-recession level, and Moody's forecasts a 5% growth by the end of 2019.

Zurich North America

Instant Insights /

Metro Office Market Sees Big Jump in Vacancy Rate

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