Office market weakens
Office market conditions in the Chicago CBD continued to worsen in 2023. The year ended with a total of 1.6 million SF of negative absorption. While significant, this was less than the negative absorption that occurred in 2021 and 2022. Leasing activity over the year was 62% of pre-pandemic averages, less than the leasing activity in 2021 and 2022. Despite business leaders’ emphasis on returning to the office, tenants continue to significantly reduce their space requirements. As they trade in quantity for quality of space, the highest-quality buildings benefit while older buildings decline further.
Rental rates rise for prime properties
Market rents continue to hold firm despite elevated vacancy, up 0.8% year over year to $42.06 PSF at the end of 2023. As tenants prioritize quality over quantity and seek out newer, well-located properties with ample amenities, rents for these prime properties have seen strong growth. Rents for older properties have held steady after declining in 2020. These rents are not expected to increase and may see more declines over the next two years.
Office investment market nears rock bottom
The limited number of investment sales transactions that occurred in 2023 demonstrated a significant decrease in value.
The majority of buildings currently on the market are likely to be worth less than the existing debt on the property. It is difficult for buyers, sellers, and lenders to know what the current value of a property is when there have been so few recent sales for comparison. Meanwhile, there are a significant number of buildings in various levels of financial distress, particularly in the Central Loop. In 2024, buyers waiting for the market to hit rock bottom may begin to take advantage of opportunities in the distressed market.
