Suburban office market continues to face challenges, change in 'a time of reset'
The vacancy rate in the suburban office market continues to rise as companies seek smaller, higher-quality space, putting pressure on landlords to repurpose what's no longer wanted.
"It's a time of reset," said Andrea Van Gelder, senior managing director of real estate services firm Jones Lang LaSalle. "It's going to be painful."
While higher-end properties are outperforming less expensive options among the suburbs' 99 million square feet of office space, they still saw a decline in the year's second quarter, ending a yearlong run of gains, according to data collected by the Chicago-based firm.
The data shows a suburban total vacancy rate of 28.9% in the second quarter, up from 28.5% in the first quarter. In the second quarter of 2022 it was 21.5%, and in the second quarter of 2021 it was 18.2%
Suburban office space lost 109,706 square feet of occupancy during the quarter. It has lost 256,875 square feet since the beginning of the year, the data shows.
Of the 54.5 million square feet of Class A inventory in the suburbs - the top level of space - occupancy has fallen by 32,192 square feet this year. In comparison, the 37.9 million square feet of Class B space lost 175,600 square feet, and the 6.6 million square feet of Class C space lost 49,083 square feet of occupancy.
All of the 456,628 square feet of new office space under development in the suburbs is for Class A buildings.
Examples of losses cited in the JLL report include Middough Consulting, which vacated 44,800 square feet in Oak Brook to move to a space about 48% smaller in Downers Grove, and SAP America Inc., which gave up its 31,000 square feet in Downers Grove.
The trend is driving property owners to seek new uses for vacated office sites, including industrial and residential redevelopments.
In Mount Prospect, the former United Airlines headquarters is being redeveloped as a $2.5 billion data center campus, a process that could be repeated in Hoffman Estates, where the 273-acre Sears headquarters is under contract to a data center developer. Near Deerfield, a developer wants to turn the former Baxter campus into a warehouse complex.
Industrial space is in such demand that some companies are moving office staff out of existing sites to open more space for industrial uses, Van Gelder said.
Responding to the trend, insurance firm Arthur J. Gallagher & Co. bought a 10-story story, 270,000-square-foot building near its Rolling Meadows headquarters for $13 million, specifically to prevent its redevelopment for industrial uses, the JLL report states.
More than 482,000 square feet of vacant office space was removed from the suburbs during the second quarter through demolition or redevelopment, according to JLL.
In Schaumburg, Zurich North America just announced plans to lease 360,000 square feet of its 783,800-square-foot headquarters to other companies. Van Gelder said the Zurich space will be the highest quality for lease in the region.
Schaumburg Economic Development Director Matt Frank said the village feels properties like Zurich give it "a leg up" in the current office market. Many office properties in the village have done a good job of investing in their amenities to remain attractive, creating an important component of the village's daytime population, he said.
The village has seen the demolition of Class B and C office space in recent years, either for new residential buildings or for the forthcoming entertainment district on the Schaumburg Convention Center campus.
And the village recently received a proposal to convert a 44-year-old, five-story Class B office building near Woodfield Mall at 1699 E. Woodfield Road to apartments. Though the proposal is still in its early stages, a viable residential development in the heart of the Woodfield commercial district could prove influential, Frank said.
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.
"We know the Schaumburg area very well," he said. "Residential is in very high demand. Woodfield Mall is a big thing. We wanted to invest in the community."
While Schaumburg has a healthy supply of the Class A office space, Frank believes there's still a place in the market for the right amount of other office classes. The village is in the midst of a consultant-assisted inventory of its office space, aimed at evaluating how much may lend itself to repurposing.
"I think all communities have to evaluate their land use," Frank said.