Net Effective Rents Drop To Single Digits For Some Chicago Buildings Thanks To Record Concessions

The chasm between Chicago's Class-A office buildings and the rest of the lot continues to grow, both in terms of asking rent and availability.

Overall asking rents downtown ticked up 1.8% year-over-year and settled at $41.16, according to Savills' second-quarter downtown office report. Class-A downtown asking rent per SF in Q2 was $51.44, compared to $39.09 for Class-B and C properties, according to data provided to Bisnow by Savills.

But an uptick in asking rates doesn’t paint the full picture of the office landscape. Landlords are forking over “record level” concession packages to nab tenants, driving down net effective rents, Savills Chicago Region President Robert Sevim said.

“The value of tenant improvement dollars and rent abatement packages we've never seen, certainly in the Class-A arena, ever being higher,” Sevim said. “There are buildings that, depending on the structure of the deal, are very close to single-digit net effective rents per SF, and there are some outliers that are negative net effective rents. Negative. Below zero.”

Sevim said in those latter instances, building owners look at the lease’s value as one they will monetize on the back end if and when they sell or recapitalize the building.

Those owners are prepared to absorb negative income on an annualized basis in the interim, betting that once that building can be sold, refinanced or monetized, a lease's new value will come with an associated cap rate that makes it worthwhile, Sevim said. 

“It's like a hurdle race,” he said. “Landlords need to jump over certain hurdles that the tenants are putting up. Some of them they can control, and some of them they can't control. You can't control where you're located and how close you are to the trains. You can't control how the ownership structure was originally assembled in many ways.”

Grubhub inked the largest deal of the quarter, subleasing 90K SF at The Mart from PayPal. The company’s relocation from the Burnham Center is a 45% footprint reduction and a decline in its real estate spending, according to Savills.

Office availability ticked up 210 basis points year-over-year to another record high, from 27.2% in Q2 2023 to 29.3% in Q2 2024, according to Savills. And the divide between availability for Class-A and Class-B properties was stark. Class-A office buildings posted a 24.4% availability rate, while Class-B properties recorded a 34.4% availability rate. 

The rent gap between Class-A and Class-B and C properties was even starker. In Far West Loop/Fulton Market, the divide between Class-A and Class-B and C buildings was nearly $27, or $59.60 for top-shelf properties versus $32.92 per SF for the rest. In River North, the gap between more desirable properties and their lower-tier counterparts was more than $18 per SF, $59.02 versus $40.75.

There are some encouraging return-to-work trends detailed in a June Placer.ai report. Chicago office visits were up 8.3% year-over-year, though they are still down 33% from June 2019.

But across the office landscape, tenants are still holding most of the cards, Moody’s economist Nick Villa said.

“The power is still with the tenants right now,” Villa said. “Maybe once the interest rates potentially start to go down a little bit, maybe there's some more leeway there on the landlord side. But … I just don't see that power dynamic switching back to the landlords in the near term at all.”