Chicago's Office Market Shows Signs Of Life, But Tariffs And Capital Crunch Cloud Outlook
Chicago's office market is showing evidence of a pulse on the leasing side, though tariffs and capital markets disruption could throw a wrench into some of the positive momentum.
Overall vacancy rate ticked up 10 basis points to 23.4% to kick off the year, according to a Colliers Q1 office report. But the muted increase in vacancy doesn't tell the full story of potential leasing activity as the year progresses, one office tenant representative told Bisnow.
Owners who have had trouble capitalizing deals will likely be able to do more of them this year, said Dan Arends, principal and vice chair at Colliers. Several have been able to work through lending issues and either recapitalize or get good news money for tenant improvements.
“There's five, six buildings that I know off the top of my head that last year had pencils down, and all of a sudden, when I talked to the brokers, they're like, ‘No, absolutely. We're open for business,’” Arends said.
Arends said his team now does more research than ever before on the debt structures of certain buildings. He tries to understand the situation of each owner to glean which buildings can deliver on deals with the tenants he represents.
This is especially important with tariffs throwing pricing for things like tenant improvements into question. It's too early to discern the impact of tariffs on interior build-outs, but price increases on steel and other materials loom, Arends said.
Arends hasn't seen anyone pull back from office deals as a result of tariff-related uncertainty. But further turmoil could make them that much harder to execute.
“It's one more complexity, a little bit more uncertainty,” Arends said. “That might drive construction pricing up a little bit, which is going to make deals tougher to be done because of the shortage of capital.”
Citing his team's research, Arends estimated there are 35 office buildings in the market where tenants can sign a lease with confidence because they have good debt and equity in place and the owners want to do deals.
On the flip side, about 48.4M SF out of the 157M SF either on the market or likely coming to market are saddled with an impaired capital stack or located in buildings going back to the lender.
Owners are still being selective with deals. Landlords might have five deals under consideration but the capital to pursue just two or three, Arends said. They are moving forward with transactions that add the most value to a building.
About two or three years ago, if a tenant wanted to be in an office building and the building would have them, a deal would happen that day, he said. That is no longer the case.
“You don't know which owners can make decisions and which ones can't,” Arends said. “Sometimes you find out, you think you're going to get a deal done, and all of a sudden [find] that you're in a backlog for a period of a month waiting for an answer to get back to you on a proposal or something because they just can't make a decision."
As far as the sluggish construction pipeline in Chicago, developers will need to see a couple of things to get a new office building in the works.
Some of the risk in the market will need to subside, and there will need to be more clarity around interest rates and financing, Arends said. Developers will also need a tenant committed to prelease about 400K SF to get a building off the ground.
But even if someone committed to a project by the end of this year, the city probably wouldn't see that building until 2030.
“It takes three years to build it,” he said. “Now your client moves in in ’29 and he needs nine months to build it out, do construction inside the space. If it's a 300K SF user, he might need eight, nine months. So, I mean, that's the timeline they're using right now.”
