Downtown Space Running Out for Companies
The City of Chicago is experiencing a dramatic change in the availability of commercial real estate. The landscape is in flux due to the improving U.S. economy. Real estate typically lags the economy which leads to a very intriguing cycle of office space availability. Because of the interconnected nature of all of these issues, many of these trends could reverse in just a couple of years. However, for the foreseeable future, businesses and landlords can expect low availability due to the following issues.
Lack of New Buildings/Class C Space
One of the key indicators of a tightening of available space is that there are no new buildings coming online in the city anytime soon. Alongside this, Class C Space, which are considered buildings at rents below the average for a particular area, are being converted to hotels and residential spaces. As these two factors proceed concurrently, the supply of office space will continue to decrease.
Many suburban companies are moving into offices downtown in order to get closer to their workforce. Companies already at home in the city are actively expanding due to a recovering economy. Most companies are feeling more confident about their 5 and 10 year outlooks, which allows for growth or migration to the big city. Both of these forces at work combine to increase the demand for additional office space in Chicago.
Increasing Net Absorption Rates
Due to the previous two factors, over the next few years, net absorption rates, which measure the change of leased and occupied space, should continue to increase. This is especially considering there are no new buildings scheduled to open in the next 1.5-2 years. During this time, companies will continue to grow and end up bidding over the same spaces, therefore continuing the upward pressure on rental rates. As net absorption rates climb, the supply of office space continues to shrink.
Because real estate lags behind economic trends, as landlords and developers recognize this upward pressure on rental rates, they will then start building more properties to offset this fresh demand and lack of supply. However, as is the case with every cycle, the economy will eventually turn, the developers will have over built and we will resort back to increasing vacancy rates and reducing rental rates. Striking this balance is difficult, but proficient real estate agents must manage these cycles to find the best space for their client.