CHICAGO-First, the good news: The Chicago CBD absorbed about one million square feet of office in the second quarter, according to a report by Transwestern/Delta Associates. However, where downtown is strong, the suburban office market is anemic, with negative 37,000 square feet absorbed and rents declining by almost 5%.
Corby Marx with Transwestern’s Tenant Advisory Group tells GlobeSt.com that he’s seeing three times the deal activity by mid-year 2011 from the past two-three years. “It’s a great time for tenants, as they test the waters and try to lock in current rates for long periods. The lack of new construction is adding to the recovery,” he says.
The downtown East Loop added about half of the absorption, with Groupon’s 150,000-square-foot addition at 303 E. Wacker a large part of that total. The CBD vacancy rate stands at about 12.5%, down from 14.1% a year ago, according to Marx.
He says fundamentals are improving for the downtown. Unemployment has dropped to 8.7%, with employment gains expected of up to 60,000 new jobs by next year. Rents have stabilized downtown, and even class B offices are seeing leases by smaller firms looking to trade up, or consolidation casualties forming new firms. “Those law firms that laid off dozens of attorneys, they’re not looking to retire, they’re taking out their own space.
A few notable leases occurred in the CBD during the second quarter, including Wells Fargo taking 300,000 square feet at 10 and 30 S. Wacker Dr., Bankers Life & Casualty leasing 135,000 square feet at 111 E. Wacker Dr. and Marsh taking 121,000 square feet at 540 W. Madison St. Other tenants continue to circle the tightening market, including Citadel seeking up to 400,000 square feet, Aon Insurance looking for 350,000 square feet, PricewaterhouseCoopers seeking 280,000 square feet and the AMA seeking 250,000 square feet.
Marx says suburban firms continue to look to move downtown during this downturned economy. However, the higher state income tax rate is also forcing companies to talk about leaving Illinois. Firms such as Sears Holding Corp, Caterpillar and CME Group are publicly discussing options to move their headquarters.
Vacancy in the suburbs has hit high numbers, at 17% overall and up to 22.1% in the Suburban Northwest submarket (Oakbrook, Downers Grove, Lisle and Naperville), which has seen almost 500,000 square feet of negative absorption this year. A saving grace has been that the 877,800 square feet of new construction is 84% pre-leased, mostly by build-to-suit projects such as Astellas Pharma building its US headquarters in Northbrook.
As for new construction downtown, Marx says it’s unlikely a shovel will hit the ground before December 2012. However, premium office is drying up, such as high-rise space declining by about 1.2 million square feet in the second quarter. “As the companies that took two-to-three-year leases see those end, you may see new buildings kick off,” Marx says.
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