CHICAGO-Even the most positive prognostications on the future of the Chicago office market predict very slow, almost flat growth for the next few years, as the region struggles to get past high unemployment and fallout from national economic pressures. Commercial real estate executives in the Chicagoland area had been ecstatic with the progresses made in the first half of the year, but following a crippling summer, third quarter reports show more of a downward trend.
Jobs, of course, are at the root of the problem. While there has been somewhat of a recovery in core markets such as New York City and Washington, DC, as well as a technology job boom in the West, total employment in the Chicago area declined 7.5% peak to trough, and has only rebounded 0.8% since hitting its low in December 2009, according to the third quarter report by MB Real Estate.
The fear is that the Chicago area is not creating enough jobs to sustain the recovery that has mounted in the Loop area, such as positive absorption and stronger leasing activity. Vacancy decreased by 0.2% from Q2 to Q3 to 15.7% in the CBD, according to the MBRE report, but lingering effects of the downturn and slow job growth are expected to cause the vacancy rate to rise 16.4% by 2013.
Danny Nikitis with MBRE tells GlobeSt.com that there’s likely to be more occupancy loss as jobs continue at a trickle. “We may be seeing a reestablishment of the baseline of normal for the office market,” he says.
However, Nikitis echoed other Chicago office experts in saying that it just doesn’t feel as gloomy as things look. Tenants are still closing transactions and brokers are still busy. Downtown firm Accenture recently announced it would be hiring an additional 500 workers, for example. “The attitude on the street is that it feels more positive than flat,” he says. It’s possible that the first half was so unexpectedly good, the drop in confidence starting the third quarter made people think things were worse than they are, he says.
Kevin Thorpe, an office researcher with Cassidy Turley, tells GlobeSt.com that investors making the push to purchase large buildings downtown shows that the city’s space must be somewhat attractive. “Equity is flowing to Chicago,” he says. “Unlike last year, investors are willing to gamble on Midwest markets like Chicago, though they’re only going after the best buildings, of course. It’s a sign that investors are getting comfortable with secondary markets.” He allows, however, that part of the reason for the investor push is the higher prices in core markets.
According to Transwestern’s third quarter office market report, annual employment growth should double from this year to 60,000 more workers per year by 2013. The company predicts the Chicago office market will improve, and rents will hold steady, provided the national economy gains traction. “Many businesses seem to have adopted the ‘slowly but surely’ motto,” according to the Transwestern report. “They have consolidated operations and restructured business models in order to survive challenges and be ready for future growth. Already, we see several sites being actively marketed.”
Not mentioned is the dismal suburban Chicago, with the overall vacancy rate falling to 16.4%. Rents in the suburbs are declining, as companies look at moves into the city, and the suburban office market experienced negative 307,000 square feet of direct absorption in the third quarter, dropping the year-to-date negative absorption total to almost 700,000 square feet.
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