JLL’s Andy Strand On the Challenging Chicago Office Market

According to a second-quarter report from JLL (JLL), the office leasing volume of roughly 1.5 million square feet in the city during the first six months of the year represented a 75 percent annual decline from the same time in 2023. The news is somewhat brighter for owners of Class A property, as they secured 63 percent of those leases, and an anticipated decline in supply should keep them in good fortune for the remainder of the year.

For a deeper examination of Chicago’s office market, Commercial Observer spoke with Andy Strand, a managing director for JLL in Chicago focused on the segment. 

This interview has been edited for length and clarity.  

Commercial Observer: Give us a general overview of the health and status of Chicago’s office market right now.
Andy Strand: We are challenged by a high vacancy rate at 23 percent. Leasing activity, as measured by absorption, is negative, which you don’t want to see. We’ve had an increase in vacancies going back to 2020 post-pandemic, and that has continued to move upward. 

Part of that has been driven by a lot of subleases that went on the market — 8 million square feet at one point, which has now decreased to 7.3 million square feet. In other words, vacancies continue to rise. 

However, we are seeing some bright spots in the market. When you look at the data, it’s always a little behind in terms of what we’re actually seeing from a tenant representation standpoint. We are seeing quite a bit of activity. I’ll bet it’s smaller than it was pre-pandemic, but we’re starting to see people really buy into the office, including requiring employees to be in office a few days a week.

So we’re seeing activity that is not showing up yet in our data.

Can you go a bit deeper into reasons for optimism in the Chicago office market?
We have two ends of the spectrum in the market. Some of our Class B and C properties are at all-time-high vacancy rates. 

Then, on the high end of the market, you have buildings in close proximity to public transportation that have good light and views, and the demand for those is very strong. There’s actual competition for those spaces because there are so few options. West Loop high-rise space is currently at an all-time low in terms of a vacancy rate. 

Are there any other factors outside of the expected — interest rates, the office crisis, the economy in general — weighing on Chicago’s office market right now?
No. A lot of the perceived issues involving politics or crime aren’t what we’re hearing from tenants as far as what’s causing them to decrease their office space or look at other markets. That’s not something we’re hearing a lot of right now.

What’s happening with office-to-residential conversions there?
We’re in the early innings of it. The current administration announced plans for four buildings in the central Loop to be converted to housing. [Editor’s note: The city announced support in April for converting four office projects in the Loop’s financial district to more than 1,000 new apartments.] 

One thing people are optimistic about is that those buildings are located near where Google has planted their new flag in Chicago. They’re not planning to move in for a few years, but it’s something that could be very beneficial to the central Loop long term that is maybe not priced into the market yet. 

How are owners of Class B or C office properties in Chicago faring right now?
Unfortunately, a lot of them are in an area of uncertainty. A lot of them have debt on their buildings. If your debt outweighs the value of the building, which in many cases it does, it’s not an easy decision to say, “Well, we’re going to demolish the building, or we’re going to convert it.” It requires additional equity or capital to be infused into the property.

Do you think a lot of those buildings will be given back to the lenders?
I do. We’ve seen banks be flexible and say, “We’re going to do some shorter-term extensions on the mortgages,” or certain owners have been willing to put in additional equity and extend their terms. But I do think we will continue to see that. That’s been consistent over the last 18 months.

Here in New York, we’ve seen a pronounced flight to quality among office tenants. Are you finding that in Chicago as well?
Absolutely. Everything we’re seeing in Chicago is very consistent with what you’re seeing in New York or other major markets. Well-located buildings with good light and good views are seeing tremendous demand. We just don’t have a lot of those options left, and we only have one building that will deliver in 2025. Those buildings are all essentially under around 3 percent vacant. They’re very well leased and have strong, long-term leases in place.

It sounds like Chicago is about to face a serious supply crunch.
Yes, and one of the positives of this is that as those buildings continue to stay well-leased, it should inevitably trickle down to some of the buildings that were built in the early 2000s, for example. But, in general, in Chicago, most buildings built from around 2003 on are all under 10 percent vacant. So those have continued to do well in the market. 

I think what will happen is that you’ll continue to see strong demand on that side of the market, because while companies are taking less space, they want to upgrade. They want to go to the nicest buildings. I think we’ll see a better market 18 months from now than we’re in right now, and I think the benefit will be for Class B-plus or A-minus buildings that are now starting to pick up a little bit. As options start to dwindle, it will be to their benefit.

Do you find that owners of these B-plus and A-minus office properties have been making a lot of improvements and renovations, trying to scale up as best they can?
Yes. We saw a lot of that earlier, even pre-pandemic. We saw a ton of investment being made by Class B building owners to bring them up to A level, such as amenities that would help offset the lack of views or lower quality of the building. 

We’re seeing that now, but I also think owners are more cautious about investing capital into things they may not see value in. So we’re not seeing as many of those amenity improvements as we saw 24 months ago and beyond.

In Chicago, most of these office buildings have excellent amenities, so it’s more about, “We need to do something to improve this, but we don’t need to invest all of our money into amenities. Let’s focus on giving tenants better deals and getting them into the building.” Tenants are more focused on being in an area that is easy to get to, and having a space that has the light and views they want in a building. 

What has been JLL’s office strategy through all this?
We have an excellent workplace strategy team that helps our clients align with the right amount of space and makes sure that all of their business decisions are justified, which really helped differentiate us coming out of the pandemic. 

When people aren’t sure what they need, they really need to pressure-test every decision. So that’s been first and foremost in terms of helping our clients through that process, and it’s been a huge value-add. We help our clients with whatever they need — it could be disposing of some space, or a need to expand — but it’s just being the problem solver for our clients.

Are you a Chicago native?
I’m from central Illinois, from around Peoria, about three hours south of Chicago. I’ve been in Chicago since I graduated college. I’ve lived here more than I’ve lived anywhere else — I’ve been here for 20 years. 

I worked for a residential developer for about a year and a half, and then got into commercial real estate in 2007, and you can track what that time coincides with [the Global Financial Crisis]. It was a very challenging time to get started, but I think also the best time to get started, because a lot of people who started then are still here today. It was a very tough time, but those who made it through are better for it. 

Are you married?
I’m married, and we have triplet 11-year-old boys. That’s also made me work a little harder. [Laughs] I’m kidding. I’m very, very lucky.

 What do you do for fun?
I coach cross country. I’m very into my kids’ activities, and spending time with friends as well. I also still play a little basketball here and there. I try to stay very active.

How has a life in commercial real estate contributed to the person you’ve become?
What’s cool about commercial real estate is that you can determine your own success to some degree. If you work hard and do the right things, you should be successful. And I think that’s something that can translate over to life … or maybe it’s vice versa. I work hard for my clients and try to do the right thing, and I think there’s a lot of intersection there that benefits both sides.