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Transition in Chicago's Downtown Office Space: Sublets Become Direct Listings

A significant shift has occurred in downtown Chicago's office space market over recent months, with a large volume of office sublease agreements expiring. This transition has resulted in these spaces moving to the direct market, adding to the already substantial total available office space.

In the last two decades, many tenants in downtown Chicago have opted to sublease their office spaces, a strategy influenced by various factors. Economic considerations often lead tenants to sublease to reduce their real estate liabilities. Others reserve adjacent space for potential growth or aim to upgrade to better premises in the future.

Both sublessors and sublessees have traditionally found value in the secondary market. Sublessees, in particular, have been attracted to subleases for the cost savings, the quality of available spaces at reduced rates, and the opportunity to occupy built-out, move-in-ready offices.

However, the post-pandemic landscape has altered traditional patterns. Current tenants are increasingly eager to decrease their financial commitments, and potential tenants are less enticed by discounted sublease opportunities, resulting in a general decline in office space leasing.

Anticipating these changes, landlords in Chicago proactively listed spaces alongside sublessors on platforms like CoStar, aiming for direct leases. They recognized that once sublease terms ended without renewal, responsibility for the unleased spaces would revert to them.

Previously, economic downturns and market recessions, such as those in the late '80s, early 2000s, and during the Great Recession, saw spikes in sublease activity as tenants sought premium spaces at lower costs. The period between 2016 and 2019, characterized by an abundance of Class A office space, also saw a surge in secondary market listings as tenants aimed to relocate to new, prestigious locations in areas like West Loop and Fulton Market.

Despite increased leasing activities, the supply of office spaces continued to grow, contributing to a larger inventory that included both direct and sublet availabilities.

Recent observations might suggest an increase in subleasing, but the reality is different. Over the past four years, sublease activity in downtown Chicago has remained below the decade's average, especially when compared to periods of economic stress or market overflow.

The decline in sublet availability rates is attributed to these spaces now being classified as direct vacancies. In a recent quarter, while 842,000 square feet exited the sublet market, thereby reducing the sublet availability rate by 500 basis points, only a fraction of this space was re-leased. Concurrently, the direct market saw an addition of nearly 2.5 million square feet.

This pattern is not new; similar trends were observed in past market downturns, typically followed by a gradual recovery in availability rates. Yet, as the downtown Chicago office market sees its availability rates grow for the fifth consecutive year, stakeholders are keenly observing to see how this trend will evolve.

Source: MMCG, CoStar Analytics, The Gurdarian

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