A time of change: Suburban office market adjusts as tenants downsize and shift to higher-end buildings

Despite bright spots including the Federal Aviation Administration’s relocation and Culligan’s expansion in Rosemont, the market for suburban office space continued to soften during the last months of 2023, new data shows.

The FAA will move to 108,000 square feet in the O’Hare Gateway Office Center in Rosemont, while Culligan is adding 66,000 square feet at Riverway West, according to Chicago-based Savills’ fourth quarter market report.

The moves reflect an overall trend of tenants looking for higher-quality properties with financial stability, said Savills Regional Research Director Anders Klein.

“For office space tenants, it has become increasingly important to consider the financial health of properties when making decisions about space,” Klein added. “It is critical to know that your landlord is going to be able to meet its financial commitments, including any kind of building or space improvements.”

Throughout 2023, trends saw office tenants move from larger spaces in older and more bare-bones Class B and C office properties to smaller spaces in well-maintained Class A buildings with more amenities.

While vacancy rates reflect spaces not under lease, the usually higher availability rates also include spaces where tenants have expressed an intention to leave.

The 2023 decline in the availability rate in the O’Hare area — which includes Rosemont, Des Plaines, Park Ridge and part of Chicago — contributed to the overall suburban availability rate falling slightly from 31.2% to 31%, Klein said. In part, that’s because there are a number of Class A properties in Rosemont.

“There has not been a significant change in the overall trajectory of the suburban market over the latter half of 2023,” he explained. “There have been pockets of improvement, such as in O’Hare where availability fell from 28.9% to 27.1% over the last six months as tenants like the Federal Aviation Administration committed to spaces in well-located Class A buildings.”

In addition, Klein said there has been a growing push to repurpose “underused and obsolete office stock for industrial and data center purposes.” The trend was seen most recently when NTT Global Data Centers bought two office properties at Hamilton Lakes Business Park in Itasca.

Savills never included the former Sears corporate campus in Hoffman Estates in its analyses of the leasable office market because it was always used exclusively by its owner while operational.

But Dallas-based Compass Datacenters’ purchase of the 273 acres in September for a data center campus erased the 20-month-old question of what impact another 2.4 million square feet of leasable office space might have on the already struggling suburban market.

Schaumburg is a suburb whose daytime office population has historically contributed to its status as the second largest hub of economic activity in Illinois. It’s also where both the current benefits of Class A buildings and the market decline for classes B and C have been strongly felt.

Matt Frank, Schaumburg’s economic development director, is compiling a plan that inventories which office properties might best lend themselves to repurposing.

This includes the 45-year-old, five-story office building near Woodfield Mall at 1699 E. Woodfield Road, which is nearing a formal proposal for conversion to apartments.

The Natraj Investments building is owned by Subbu Iyer, Manen Kothari and Ajanta Talukdar. Their proposal was inspired by both the state of the office market and a survey that demonstrated public interest, Iyer said last year.

Among the factors that have kept village officials open to the idea is the building’s proximity to such amenities as Whole Foods Market and Pace’s Northwest Transportation Center that would benefit residents.

That marks a change to officials’ past resistance to residential property encroaching on the valuable commercial area near Woodfield.

“I just think the market has changed, and residents’ needs have changed, since the zoning code was established,” Frank said. “I think it will open people’s eyes to new opportunities.”

Another opportunity to people in Schaumburg came last summer when Zurich North America announced it would market nearly half of its 783,800-square-foot iconic headquarters for lease by other companies.

Though opened in 2016, the Class A building hasn’t been fully occupied by employees since the pandemic shutdown of 2020. But it’s a new building in a prime location, adjacent to the redeveloping Veridian mixed-use property and across Meacham Road from the village’s forthcoming entertainment district.

“Our leasing efforts are ongoing,” said Clare Fitzgerald, external communications manager for Zurich North America. “We’re pleased with the interest we’re seeing from the market, and we are talking to a few prospective tenants.”

Klein said that while conditions have modestly improved among Class A buildings in some markets, there has been no sign yet of any overall recovery in the suburban office market apart from some diminishing of its stock.

“Outside of O’Hare, availability has ticked lower in some areas as office buildings are targeted for repurposing and available office space is permanently pulled off the leasing market,” he said.