"With the severity of the downturn we saw last year, the obvious trend is very clear," Tamara Kos, EVP for Transwestern's Midwest region, tells GlobeSt.com. "We think vacancy is going to peak at about 15% as more vacancy hits us in the near term because of lease expirations. That probably translates into rental rates and concessions."
Sublease space too increased to more than 4 million square feet during the third quarter, but according to Jones Lang LaSalle's research, the pace at which space is hitting the market has slowed. "Despite the prevalent amount of attractively priced sublease offerings, deal velocity remained below historical norms, with many tenants continuing to opt for extensions in place including short-term renewals," JLL's research report says. It showed that the CBD class A overall gross asking rate has declined by 5% since the beginning of the year, and projects that activity will increase as tenants look to take advantage of market conditions.
"People who have been sitting on the sidelines will come and do some deals in 2010 with what are historically some very attractive rental rates," Kos says. "The last year and a half, a tremendous amount of tenants have held of on making decisions about renewals, expansions or relocations because of uncertainty about their business plans. A number of tenants who had to make decisions chose to do something shorter term - 6 to 24 months - so they had flexibility in the future, and those tenants will be out in the market again in the next 12 to 18 months and this time they might make those longer term decisions."
Kos says good news about the state of the general economy has lifted tenants' spirits, and will translate to increased activity for commercial real estate. "The light at the end of the tunnel is getting clearer now, everything says we're moving out of the recession and people are getting more comfortable that things are getting better and we're not falling into an abyss," Kos says. "Companies make decisions based on whether things are going to get worse or better, and it's easier for people to make that commitment to a building for a longer term horizon when they think things are going to improve. I've noticed a very noticeable uptick in activity in Chicago's CBD since the middle of August and there's a lot of people out there looking right now, which would make me think we're heading into a period of greater activity."
Kos adds that what has made this particular recession unique from past downturns has been the lack of liquidity. "What's interesting about this particular cycle is the long period that there has been no capital to finance building development or the acquisition of buildings," Kos says. "In my career, there's never been such an extended period where there hasn't been capital available and it's disturbing that's there's been such a lock up. At some point capital markets have to go back to some kind of normalcy, and until that happens, I don't think you're going to see another major structure in CBD."
Indeed, JLL's report shows that no sales were completed in Q3, for the fourth consecutive quarter, and no deals are currently underway. The firm's Q3 research reports that that the 1.1-million-square-foot 155 N. Wacker was delivered in the third quarter at 73 percent leased. Meanwhile, only one more building - the $420 million, 1.2-million-square-foot 353 N. Clark - is expected to deliver at more than 80% leased before year's end.
"Everyone is reporting negative absorption and increased vacancy now, and that's due to the lag real estate always sees behind the rest of the economic cycle," Kos says. "Despite the lagging demand and more vacancy than we've had in the last several years, there are a lot of signs that 2010 should be a more active year and show a lot more absorption than 2009 did. We need to get through the next few quarters but I don't see it lasting through 2010."
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