CHICAGO—The suburban market office saw absorption and rental rates tick upward in 2017, especially among class A properties, and investors also showed more interest than in the previous year, according to a year-end report from Colliers International. And in 2018, the firm believes suburban landlords and developers will continue transforming the region by renovating well-located class B properties into class A assets, and tearing down even more of the obsolete class C offices.
Those moves will go a long way toward reducing the elevated vacancy rate seen in many submarkets outside the city. Overall, the suburban vacancy rate dropped to 20.9% in 2017, down from 21.5% at the end of 2016, according to the report from Colliers' Ronna Larsen, senior research manager.
“While the North market continued to struggle at the end of 2017, the rest of the suburban office markets witnessed improvement,” she writes. Despite being the smallest suburban market, O'Hare remains quite desirable due to its many links to highways, public transportation and O'Hare airport. It witnessed the strongest decease in vacancy, dropping 350 bps from year-end 2016, when it stood at 18.6%.
“Vacancy will continue to decline heading into 2018 as larger tenants such as Abbott, American Academy of Dermatology and NEC Display Solutions, begin moving into their new spaces,” the report says.
Overall net absorption ended 2017 at positive 790,303 square feet, a vast improvement from negative 1,127,314 square feet reported in the previous year. While both class A and B product witnessed improvement, class A properties were the strongest, ending with positive 668,123 square feet.
Average class A asking rents increased in 2017, rising to $29.22 per square foot gross, up from $28.69 per square foot gross at year-end 2016. The average asking rent for all classes in suburban Chicago ended 2017 at $20.81 per square foot gross, up from 2016's rate of $20.51 per square foot.
A brighter outlook for the suburban market may have helped drive greater sale velocity. Eight assets traded hands in the fourth quarter of 2017, Colliers says, and buyers have another four under contract. Notable transactions of the fourth quarter included Blackstone Group's 622,287-square-foot sale of Central Park of Lisle to Lincoln Property, Long Warf Real Estate Partners' sale of the 525,422-square-foot One Pierce Place and 450,614-square-foot 500 Park Boulevard in Itasca to Balfour Pacific Capital and Blackstone Group's 256,143-square-foot sale of One Parkway North in Deerfield to North Parkway Investments LLC.
Developers have not delivered any speculative construction since 2010, and Colliers does not expect any in 2018. But build-to-suit activity continues. Projects include Central States Funds' 150,000-square-foot build-to-suit development at 8655 W. Higgins Rd. in Chicago, and McShane Development Co. / MetLife Real Estate Investors' Huntington 90 development, a build-to-suit business park in Hoffman Estates. In addition, American Academy of Pediatrics' 193,000-square-foot build-to-suit property in Itasca was completed in the fourth quarter of 2017.
And well-capitalized suburban owners continue to answer the challenge posed by new, amenity-rich properties in Chicago's CBD. They remain focused on building improvements to attract and retain high-quality office tenants with increased amenities such as structured parking, employee wellness / fitness centers, game rooms, food service, tenant lounges, conference centers and outdoor spaces to cater to the modern work force.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
