Open Office Sublease Space Surpasses Great Recession
The amount of downtown Chicago office space up for sublease has surpassed the worst days of the Great Recession, opening up holes in the office market and increasing uncertainty even as new coronavirus vaccines spark hopes that conditions could soon return to normal.
There is now more than 5.2M SF of available sublease space, up nearly 1M SF from three months ago and an increase of more than 2M SF since the end of Q1, according to a report just published by MBRE. When the economy hit bottom in 2009, the amount of sublease space on the market peaked at 4.2M SF.
Many of the firms shrinking their footprints are tech-oriented, and that could spell further trouble for downtown landlords, especially in the West Loop, Fulton Market and River North submarkets, where tech firms were responsible for much of the leasing activity before the pandemic shut down the office sector.
“Tech is the sector that is easiest to implement work from home, and so firms are now considering more aggressive policies of allowing some workers to work from home permanently and to begin implementing hoteling,” Savills Vice Chairman Lisa Davidson said.
Facebook was the latest downtown tenant to put a big chunk of space on the market. The social media giant’s 103K SF office at 191 North Wacker Drive in the West Loop is now available, according to a report in Crain’s Chicago Business, which cited marketing materials put out by Cushman & Wakefield. Facebook still occupies a 263K SF office in 151 North Franklin St., where it signed a lease in 2018.
Other tech firms to seek out sublease deals earlier this year include Cars.com for 52K SF at 300 South Riverside Plaza in the West Loop and Groupon for 150K SF at 600 West Chicago Ave. in River North, according to MBRE. Crain’s reported two weeks ago that PayPal wanted to shed nearly 40K SF of the roughly 150K SF it leases in theMART, River North’s giant tech hub at 222 Merchandise Mart Plaza.
The downtown could see a burst of pent-up demand next year if vaccinations curb the spread of COVID-19, according to Davidson. But this shift by downtown tech firms could outlast any recovery.
“Tech was one of the growing sectors pre-COVID, and some companies got ahead of themselves in taking additional space for anticipated growth that is now not necessary,” she said.
In 2019, tech firms leased more than 13.5M SF in Chicago, about double what they occupied four years earlier.
The West Loop and River North contain the majority of downtown’s space for sublease, according to MBRE. The West Loop now has 2.1M SF for sublease, about 40% of the downtown total. River North has 49 sublease spaces available, totaling nearly 600K SF, or about 11% overall.
There are now 17 subleases larger than 50K SF on the market, up from five at the end of the first quarter. That flood of new sublease space into the market may continue. Even many nontech companies have discovered that work-from-home arrangements can boost efficiency, so shedding space may make the most financial sense.
In a June report, Savills said the amount of sublease space on the market could eventually rise to 6.7M SF in 2021 or 2022, more than the 6.1M SF mark set in 2002 after the dot-com crash.
That’s bad news for landlords. But for tenants, especially companies that watched their capital dry up during this year’s economic tailspin, it means more chances to occupy built-out spaces and avoid high construction costs, Davidson said.
“Some tenants feel like this is a window of opportunity, and some are starting to put their toes in to test the market. If you’re looking to conserve capital and if there is this great space out there, you don’t want to miss out on the opportunity.”
