About one-third of suburban office purchases destined for another use amid a broader flight to quality, according to Bradford Allen

Bradford Allen, a national full-service real estate firm, today released its Q2 2023 CBD Office Market and Mid-Year 2023 Suburban Office Market reports. Driven in part by return-to-office mandates, absorption in the CBD improved to 64,000 square feet in the second quarter, compared with negative 1.8 million square feet the previous quarter, with companies continuing to show a preference for newly developed and renovated space.

Meanwhile, suburban office asking rents were unchanged between Q1 and Q2 2023, at just below $27 per square foot while the direct vacancy rate dropped from 28.3 to 26.9% in the second quarter, but still above pre-pandemic levels.

“CBD office absorption showed improvement, although we’re seeing increasing pressure on some office building owners with high taxes and operating costs, and an inability to refinance in the higher interest-rate environment,” said Neil Bouhan, senior managing director, research and communications. “Meanwhile, in the suburbs, functional space is being used more regularly, either because companies came back sooner or because they never left, than offices in the CBD. One-third of suburban office purchases this year are likely to be converted to alternative uses.

“In short, the Chicago CBD and suburban office market are not monoliths, and we continue to see pockets of strain and opportunity throughout the area.”

Q2 2023 CBD Office Market:

The Chicago CBD showed mixed results, with signs of slight improvement – including the positive net absorption – as well as challenges, including a leasing volume of just 1.3 million square feet, down from 2.2 million square feet in the first quarter.

High property taxes and rising operating costs are putting increasing pressure on CBD office owners, but not all lenders are responding uniformly; some are working with owners to improve properties and attract tenants.

• The Q2 2023 CBD office vacancy rate was 19.2%, unchanged from the first quarter.
• Average gross asking rates slightly increased to over $44 per square foot versus just under $43 per square foot in Q1 2023.
• Absorption in Chicago’s CBD improved to 64,000 square feet from negative 1.8 million square feet in the first quarter. But Q2 2023 leasing volume was just 1.3 million square feet, compared with 2.2 million square feet in the first quarter – the lowest quarterly leasing activity since Q4 2020 and tracking well behind the annual total of 13.6 million square feet in 2019, the year preceding the pandemic.
• Watch for increasing special servicing and foreclosures as higher interest rates preclude refinancing and/or landlords can’t service their loans because of low occupancy levels. However, not all lenders respond to distress in the same way; some will put properties up for auction and take a loss, while others will work with owners to do what it takes to attract tenants.

See the report here: https://bradfordallen.com/research/marketreport-cbd-q2-23.pdf

Q2 2023 Suburban Office:

Most office sales in the suburbs this year have been vacant buildings poised for redevelopment, and more than a third of all office purchases this year are likely to be converted to an alternate use. The most notable buyer of distressed suburban office product so far in 2023 is Aligned Data Centers, which purchased four office sites for more than $78 million.

• Leasing activity remained robust, with nearly 2.6 million square feet leased through the first half of 2023, compared with 2.5 million square feet in first-half 2019, prior to the pandemic. Yet that wasn’t enough to push net absorption into positive territory, with the suburbs losing 332,000 square feet of tenants through June.
• The O’Hare submarket continues to outperform and has the lowest vacancy rate (21.5%) and highest rental rate ($29.56 per square foot) of any suburban office submarket in the Chicagoland area.
• Sales volume slowed year-to-date, with deals totaling only $237 million compared to $740 million transacted through the first half of 2022. Rising interest rates have sidelined many investors.

See the report here: https://bradfordallen.com/research/1H-23-chicago-suburbs-office-market-report.pdf

About Bradford Allen:

Bradford Allen (BA) is a commercial real estate firm based in the heart of downtown Chicago. Founded in 2003 by principals Jeffrey Bernstein and Laurence Elbaum as an office brokerage, the firm has grown into a vertically integrated commercial real estate company, offering a full array of services and expertise across multiple U.S. markets to entrepreneurial, corporate and not-for-profit clients, including strategy, marketing and transaction execution for occupiers, investors and owners. For more information, visit bradfordallen.com.